An alternative to the embargo

This punitive measure could quickly bring Russia’s economy to its knees. With the renunciation of Russian energy imports, there is hope that Putin will give in. After all, 40 percent of Russian state revenues come from oil and gas exports, with almost 30 percent coming from oil supplies. As is well known, a delivery stop could also lead to noticeable economic and social upheavals in the buyer countries.

This dilemma has led to an increasingly acrimonious debate pitting the deadly tragedy in Ukraine against the sustainability of sanctions. What remains is a perplexed western public, a Ukrainian president vehemently demanding solidarity – and a quarreling economic guild.

One thing is clear: Which further sanctions are recommended depends on numerous, also non-economic factors.

A final assessment is a matter for politicians

We cannot make a final assessment of this – that is the task of politics. However, the discussion about a Western oil and gas embargo should be freed from its unnecessary narrowing. Because Putin’s fiscal space can be reduced in a way that the West could ideally even benefit from. First of all, you have to be clear: a total embargo is de facto a prohibitively high import tax on Russian gas and oil.

On the other hand, doing nothing in terms of economic policy would be tantamount to a zero tax. However, if politicians only look at these two poles, they unnecessarily restrict their room for maneuver. An import tax that falls between these extremes would not be a bad compromise. It would be suitable for curbing the disadvantages of the two extreme policies and at the same time unfolding their advantages in important areas.

A levy somewhere between zero and prohibitive has at least three economic effects as a result. Firstly, purchase prices for customers may increase and delivery volumes decrease. Second, Russia’s profit is reduced. And thirdly, revenues are generated for the West that would otherwise have flowed into Russia’s treasury, at least in part.

Russia would lose revenue to the West

The size of these effects depends on the extent to which suppliers and buyers can avoid price changes. If, for example, the gas or oil flows through a pipeline and only very expensive or limited transport alternatives are available, after the introduction of an import tax the supplier can only switch his energy exports to other countries without a tax to a limited extent. It is also likely to be difficult for gas or oil suppliers to pass on the economic burden of the levy to their customers in the form of higher prices if they have alternative sources of supply.

There is therefore much to suggest that if the levy were designed in a clever, targeted manner, Russia would lose revenue to the West – without the West having to do without Russian energy entirely. In response to an import tax, Putin could threaten to take countermeasures and, for example, limit or even stop energy exports – in other words, turn off the much-cited “gas tap”. To do this, however, he would have to be willing and, in view of the high current economic losses, able to forego substantial income.

Incidentally, such and other retaliatory measures by Moscow are of course also conceivable as a response to other sanctions. The West can improve its position in this strategic game if it prepares with all its might for a possible embargo. This makes him less vulnerable to retaliation and at the same time limits the possible negative effects of an import tax. In addition, the largest possible international demand cartel should be aimed for, which jointly agrees on a lower limit for the fee.

The import tax can be adjusted depending on the situation

The larger the cartel, the more effective and credible the levy. Each country would still be free to enforce a full embargo, i.e. to impose an import tax of 100 percent. However, more buyer countries would probably be willing to join the cartel if medium-sized levies are also welcome.

The import tax has another strategic advantage: it can be continuously adapted to the current situation, as a kind of “flexible response” to Putin’s violence against the Ukrainian civilian population, to possible concessions on the part of Russia, or to the increasing independence of western energy supplies.

The possibility of stepless scaling gives the West the chance not to have to rely on Russia’s willingness to escalate or the resilience of its own economy against energy shocks to have been correctly assessed in advance.

The instrument of the import tax also offers advantages from a moral point of view: the money to be paid by Russia could flow into a trust fund that can help to finance the reconstruction of Ukraine after the war and, at least if there is hope for democratization there, also that economic reconstruction in Russia.

The trust fund would thus be suitable for at least partially defusing the moral dilemma of this war, which is threatening the European peace order – an armed conflict to which the West is reacting with tough sanctions, but in which it has good reasons not to directly intervene militarily.

We should be under no illusions: the introduction of a Western import tax on Russian oil and gas will pose hurdles. But even serious engagement with this sanctions instrument, for example within the framework of the seven most important industrialized countries (G7), would probably be followed very closely in the Kremlin.

The authors: Ottmar Edenhofer is Professor of Economics of Climate Change at the Technical University of Berlin, Director of the Potsdam Institute for Climate Impact Research and the Mercator Research Institute on Global Commons and Climate Change.

Axel Ockenfels is Professor of Economics at the University of Cologne and spokesman for the Center of Excellence for Social and Economic Behavior. He deals with market design, climate policy, pandemic control and other current strategic challenges.

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