The personal oil and gas embargo balance sheet in our family has been extremely manageable so far. For example, I am not able to get rid of the parents’ taxi. My argument that Munich really isn’t the Bronx and that it’s easy to take a bike and bus at night – “we used to do it that way too” – is regularly met with “as a man, you don’t know anything!”.
In order to increase motivation and make possible savings more vivid, I have therefore started to convert our petrol and gas consumption into ammunition for Putin’s army. Although that is a self-deception that we all succumb to. Much of our “sanctioning” follows a moral impulse to which I am also subject.
As an economist and game theorist, I ask myself, when looking objectively, what kind of chain reactions our measures trigger on markets and – particularly interesting from a game theory perspective – how Putin would react to various measures. This is the only way we can assess which sanctions ultimately have the desired effect and which, on the other hand, are even counterproductive.
The Russian defense industry is largely self-sufficient. There is only a bottleneck for high-tech components. However, these components, such as computer chips, are mostly only required for more modern weapon systems.
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More conventional systems require mainly raw materials, energy, manpower and armament factories – and these are available in sufficient quantities in Russia. Our energy imports therefore have no direct short-term financing effect on the Russian war machine. Conversely, this also means that we do not need an import freeze for oil and gas.
Overall, Russia exports just a little less oil, gas and coal than before the war, but has significantly higher export surpluses. This is due to the functioning part of the sanctions, namely the export bans to Russia, to which European and American companies are subject. Coupled with the isolation of Russian banks, this has led to a halving of Russian imports.
Figuratively speaking, euro and dollar bills from the sale of oil and gas are piled up in the cellars of Russian banks, without Russia being able to do anything with the foreign exchange. A country that has to supply an army in action at the same time delivers more to other countries than it receives in real terms. If we managed to maintain this state of affairs, it would strangle the Russian economy in the long run and force Putin to the negotiating table as desired.
Marcus Schreiber is a founding partner and chief executive officer at TWS Partners. He has many years of experience in strategic purchasing and broad industry know-how. His focus is on strategic purchasing, applied industrial economics and market design. He also supports companies in applying game theory knowledge in complex procurement decisions.
But Russia’s foreign exchange earnings are also bubbling up because it’s currently exporting less, but at significantly higher prices. Economically speaking, the price effect overcompensates the quantity effect. The volume effect has to do with the fact that the sanctions have not significantly reduced the West’s demand for fossil fuels, but only shifted it. There is a run on oil and gas coming from non-Russian sources. This excess demand for energy sources from other countries is leading to rising prices on the world market, which is pulling Russian energy exports more expensive – although there is less demand for them themselves.
The West has taken on the role of coordinator of a functioning Opec
It’s usually the goal of cartels like OPEC (including its collaborating partners, which includes Russia) to artificially tighten supply in order to achieve higher prices. This is not so easy to orchestrate, because individual cartel members repeatedly deviate to their own advantage and produce more than agreed with the cartel members, which in turn counteracts the goal of higher prices.
Completely unintentionally, the West has now taken on the role of coordinator of a functioning OPEC with its sanctions. The West is gradually reducing demand for volumes from Russia while shifting them to non-Russian sources. Prices are rising and it is no wonder that the dominant OPEC member Saudi Arabia is not willing to increase its own production.
>> Also read here: Opec plus makes a U-turn and now wants to produce more oil – oil prices fall
Still, thinking in terms of cartel logic is the right approach. Cartels typically “punish” members who deviate from agreements made. Cartels can only try to remain stable through this threatening consequence. The reverse applies to the West: it must reward those who deviate from OPEC who increase production volumes over the long term.
The formula for permanently successful energy sanctions against Russia is therefore very simple in principle. Our demand reduction in the west plus the increases in production from non-Russian sources must together be significantly higher than the reductions in production from Russia. Adhering to this “formula” is much more important than implementing the sanctions as quickly as possible.
Additional production by some OPEC members is necessary
Of course it would also be nice if we reduced our demand as quickly as possible by actively doing without and using regenerative energies, but that is a truism. More exciting is the question of how we can animate some OPEC members to significantly increase production in order to achieve oversupply on the “non-Russian market”. Only then will Russia really feel the volume and price effects.
>> Also read here: Why the EU’s oil embargo against Russia could come to nothing
In order to achieve this, you can offer a higher price to a few suppliers, i.e. the current world market price plus X. In a first step, the delta would have to be subsidized by the state. However, this could be brought back through higher taxes on oil and gas, because at the same time all consumers would benefit from the falling prices in the resulting oversupply.
But it would be even more exciting if the West organized a kind of tender among the oil and gas producing countries. Hopefully in 25 years we in the West will have reached the end of the fossil age. This is already causing major headaches for oil and gas producers, even if the bargaining power is still clearly theirs in the short term.
A change in the time horizon from the next two to three years to a time horizon of 25 years, on the other hand, massively changes the dynamics in the negotiations with the producers of oil and gas. The question of which suppliers we should phase out of the markets first after Russia and who last, in the event of future falling demand, creates an incredible negotiating lever that we should use now.
Incidentally, Federal Minister Habeck is currently gaining experience with the sanctions efforts, which can also be infinitely valuable when it comes to climate protection. It is not the superficial action that determines the success of our measures, but the secondary effects on the markets. Most of the time we have to take care of the back doors first in order to be successful at the front door.
More: Russia’s revenge – Europe is not prepared for a possible gas supply freeze