Reports of massacres of civilians in Butcha, near Kiev, unfortunately, cannot come as a surprise. In response, Emmanuel Macron said: “What happened in Butcha requires a new round of sanctions and very clear measures, so we will coordinate with our European partners, especially Germany.” He added that “on oil and coal, we should be able to move forward. We should certainly move forward on sanctions… we cannot accept this.”
But sanctions on Russian oil and coal are insufficient. It is also necessary to embargo Russian gas imports. According to the US Energy Information Agency, in 2021 74% of Russia’s natural gas exports went to European OECD members. This would represent 5% of the country’s earnings from exports.
The difference between these exports and those of oil and coal is that it is easier for Russia to change its destination than for gas, whose transport depends on inflexible infrastructure.
Adding gas to the list of embargoed products, therefore, would add to Russia’s problems. Objections to this idea are that some European countries are especially dependent on Russian gas, so for them the costs of substantially cutting imports would be enormous.
Among the most vulnerable are Germany and Italy. Germany, for example, depends on Russia for a third of its energy consumption. Furthermore, Germany received 58% of its gas from Russia in 2020, while Italy received 40%. These countries are also heavily dependent on gas: Germany’s consumption is more than double that of France, whose nuclear generation capacity is large. An embargo on gas supplies, it seems, would devastate the German economy and other vulnerable countries alike.
Recent economic research suggests, however, that this fear – while understandable – is overblown. A paper on Germany by economists headed (in alphabetical order) by Rudiger Bachmann of Notre Dame University notes that the focus should be on gas, as oil and coal are supplied in global markets.
If necessary, as the paper notes, “there is sufficient world market capacity from other oil and coal exporting countries to make up the deficit.” Russia can also transfer its exports elsewhere, although it may have to do so at a discount.
So what about the gas sanctions? In the short term, the loss of Russian gas could not be offset by imports from elsewhere. The work assumes that the result of a Russian energy embargo would be a 30% cut in gas deliveries, which represents about 8% of Germany’s total energy consumption.
The key points of the analysis are that the substitutability of gas in consumption and production is lower in the short run than in the long run, and higher in some uses than in others. With very low short-term elasticities of substitution (a pessimistic assumption), an 8% decline in oil, gas and coal consumption leads to a 1.4% drop in Gross Domestic Product – a cost of 500 to 700 euros ( around BRL 2,500 to BRL 3,500) per year for each German citizen.
With a 30% drop in gas consumption, economic losses rise to 2.2% of GDP (2.3% of gross national expenditure) or 1,000 euros per year per citizen. If we consider possible second-order macroeconomic effects, this impact could reach 3% of GDP.
There are other estimates. Research by Clemens Fuest of the Ifo Institute in Munich, presented at the Ambrosetti economic and financial forum last weekend, shows that estimates of GDP decline range between 0.2% and 6%. As he states, “we really don’t know”.
But we know that if an embargo were needed, it would be better to do so now: as the article quoted above explains, the justification “is the seasonality of gas demand. A cut in Russian gas during the summer months could be replaced by Norwegian sources and others, maintaining the industrial supply”. An early move would also “unleash the replacement and relocation dynamics that are central to reducing economic costs.”
Above all, a sweeping embargo on Russian energy imports into Europe would be a declaration of collective will in defense of the values ​​on which post-war Europe was founded against its fiercest enemy.
It is Germany’s duty to lead. Yes, it would have significant costs. But the reasons it is so vulnerable are, after all, what economist Hans-Werner Sinn rightly calls “Germany’s energy fiasco,” with the shutdown of nuclear power and over-reliance on Russia. Furthermore, even in the worst-case scenario, these costs would be modest compared to those suffered during the eurozone crisis.
It is clear that Germany and other vulnerable countries must be helped. Available gas should be treated as a European resource as far as possible. It would be a magnificent gesture if the UK joined. It will also be necessary to adopt fiscal policies that cushion the blow to vulnerable people. In addition, it is essential to build an infrastructure that offers maximum flexibility.
The long-term objective must be for Europe to be able to import from anywhere, while Russia remains dependent on European markets. The short-term objective must be to make life as difficult as possible for Putin. A superior alternative would be Harvard’s Ricardo Hausmann’s suggestion of a penal tax on Russian imports by most buyers worldwide. Unfortunately, that won’t happen.
It is possible that Putin’s demand for payment in rubles will end up cutting off supplies anyway. But that shouldn’t be necessary. Rightly or wrongly, NATO decided not to defend Ukraine militarily. The least Europeans can do is use every other tool at their disposal. They must bear and share the costs of cutting Russian energy imports. They must create an energy policy that maximizes flexibility and resilience. It’s time to act.
Translated by Luiz Roberto M. Gonçalves
I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.