As Russia continues its invasion of Ukraine, the United States and western allies have imposed a new round of economic sanctions. But these won’t achieve the desired effect as long as there is a carve-out for Russia’s energy sector.
Last week, the United States imposed sanctions on four large Russian banks and restricted certain Russian state-owned enterprises from raising money in international markets. On Monday, the U.S., the European Union, and the United Kingdom took an extraordinary step to sanction Russia’s central bank, the Bank of Russia, preventing it from moving assets it held abroad to stabilize Russia’s economy, or “using other government and private banks to manage central bank operations.” Additionally, the U.S. Department of Treasury prohibited Americans from doing business with Russia’s central bank, finance ministry, and Russia’s sovereign wealth fund. No country’s central bank had ever been sanctioned like this before. According to officials from the Biden administration, these latest sanctions targeting Russia’s banking and financial systems represent the West’s “biggest sanctions campaigns in the past half-century.”
Consequently, the Russian ruble tumbled more than 20 percent. At the market close on Monday, one ruble was worth less than 1 cent. The ruble’s devaluation will negatively affect Russia’s economy in many ways. It will worsen the country’s already high inflation (Russia’s inflation rate was 8.7 percent in January 2022), lower the living standard, and make it hard for Russian companies to raise capital for existing business operations or future expansion.
The ruble’s devaluation also hurts consumer confidence and may even cause a run on the bank. Nervous Russians reportedly lined up outside of banks and ATMs to get their money out, a scene the country hadn’t seen since the fall of the former Soviet Union in 1989.
In response, the Bank of Russia was forced to raise the interest rate from 9.5 percent to 20 percent and close the country’s stock market for this week. The central bank also ordered Russian companies to sell 80 percent of their foreign-currency revenue. The move was designed to stop the ruble from falling further by creating artificial supply-demand and giving the central bank access to foreign currencies such as U.S. dollars. The ruble bounced back some the next day due to these measures. As of Tuesday morning, one ruble was worth 8.6 cents.
Energy Sector Exempt
No doubt, the latest round of western sanctions has caused some damage to Russia’s economy. But they are not as effective as they could have been because Russia’s energy sector is exempted. Russia’s energy companies continue to export oil and gas worldwide, making phenomenal profit due to skyrocketing energy prices, and evade sanctions by bringing badly needed foreign currencies back to Russia.
The energy sector plays the most vital role in Russia’s economy, which is about the size of South Korea’s. Russia’s energy sector accounts for 14 percent of the country’s GDP. The country is the world’s largest natural-gas exporter and one of the main oil suppliers. Revenue from the energy sector has helped Russia accumulate $630 billion in foreign exchange reserves in recent years and contributed to more than 40 percent of the country’s federal budget.
A study by the Kiel Institute for the World Economy, a think tank based in Germany, shows that an “embargo on gas would drag Russia’s GDP down by nearly 3 percent and halting imports and exports of crude oil would result in a slump of more than 1 percent.” However, by leaving Russia’s energy sector alone, current western sanctions may knock out Russia’s GDP by only 1 percent.
Justifying the Exemption
President Biden defended the carve-out of Russian energy from sanctions as necessary “to limit the pain the American people are feeling at the gas pump.” Under his watch, gas prices have skyrocketed 60 percent, and the United States has doubled the amount of crude oil imports from Russia last year.
Although imports from Russia account for only 3 percent of overall U.S. crude oil imports in 2021, the United States is on track to become more dependent on Russia’s oil as President Biden doubles down on his war on the U.S. energy industry to advance “green energy.”
President Biden said another reason for exempting Russia’s energy sector from sanctions is to maintain the economic stability of our European allies, which are far more exposed to Russia’s energy industry due to their ongoing crusade against fossil fuels. About 30 percent of the European Union’s gas imports and 35 percent of its oil imports come from Russia.
Germany, the largest economy in the European Union, is even more vulnerable — 36 percent of its natural gas imports and close to 40 percent of its oil imports come from Russia. After Russia invaded Ukraine, Germany halted the Nord Stream 2 pipeline project to show solidarity with allies. But Germany’s move is mainly symbolic because it continues to import gas from Russia via the existing pipeline that runs through Ukraine.
Germany is also on track to phase out coal as soon as 2030 and will not extend the life of its three remaining nuclear power plants. Without Russia’s energy supply, some estimate the EU’s reserves would only allow its member nations, including Germany, to survive for three months.
Green Energy Puts Us in Weak Position
Ironically, the United States and European Union’s war on fossil fuel in their own backyard has forced them to rely on energy supplies from an adversary. Not sanctioning Russia’s energy sector neutralizes western sanctions and damages the credibility of the United States and our European allies.
How can Putin take us seriously when he gets a slap on the wrist on one hand but receives handsome payment on the other hand because we cannot live without his energy supply? How can leaders in the United States and the European Union sleep at night, knowing that Putin uses every cent we pay for every drop of oil from Russia to finance his war?
As a Wall Street Journal editorial points out, “Russia’s invasion of Ukraine is a 3 a.m. wake-up call to President Biden and America’s liberal political class: Cease your war on U.S. energy. Europe’s climate obsessions have rendered it vulnerable to Putin’s extortion, and the U.S. is in danger of repeating that tragic mistake.”
Suppose the United States and European uinon are serious about stopping Putin from committing more atrocities and ending the war on Ukraine. In that case, they must start sanctioning Russia’s energy sector immediately and hurt Putin where it hurts the most.
To alleviate economic pain back home, both the United States and the EU must halt their war on fossil fuel and free energy from ruinous policies. Without taking these steps, sanctions will not be effective, Putin has no incentive to change his behaviors, the Ukrainians will continue to suffer, and the United States and the EU look like nothing but hypocrites.