“The time to act is now.” So says the Yermak-McFaul Expert Group on Russian Sanctions in a new report calling for heavier sanctions on Russian oil exports as well as a host of other measures aimed at curtailing the country’s ability to wage its war in Ukraine.
Sanction squeeze
Russia’s dependency on revenue from oil and gas export remains high “both in terms of inflows of foreign currency as well as budget revenues”, the report argues, amounting to 60% of the country’s goods exports and 40% of its government revenue over the past two years.
Existing sanctions on these products have deprived Russian government coffers of US$113bn, but “the time for additional action” has come, the group says.
The reports suggests that Russia has benefitted from an “extraordinarily supportive external environment” so far, with high oil and gas prices supporting its economy.
With a cooling of oil and gas prices over the course of 2023, however, that moment has passed. Diversification of gas suppliers in Europe has seen prices drop to levels last seen in 2021.
“The result,” the authors contend, is that “Russia’s primary gas export market is gone for good.”
“Putin’s regime now faces an entirely different macro environment where policy space is limited as a result of the $190bn decline in the current account surplus in 2023 vs 2022.
“In 2022, Russia’s record surplus protected the economy. That protection has now gone.”
Chasing shadows
As Martin Sandbu noted in his recent editorial for the FT, Western sanctions’ effects on the Russian economy are camouflaged by increased government spending on military applications. Domestic industries are suffering, however, with car manufacturing alone down a third on where it was prior to the invasion of Ukraine.
Strengthening the enforcement of the existing price cap on Russian oil could turn the screw, the sanctions working group suggests. It proposes to do this by “expanding the number of shadow tankers under sanctions”, and by “enforcing existing mandatory oil spill insurance requirements for all tankers passaging through coalition waters”.
By doing this, “we can force Russia to rely much more heavily on the mainstream fleet once again, which falls under price cap restrictions”. The working group proposes an incremental ratcheting down of the price cap will further hit Moscow’s foreign currency inflows – making waging its war more difficult.
The EU and G7 should implement a phased ban on all import of Russian liquefied natural gas (LNG), it adds, while ensuring Russia loses all access to foreign-supplied oil and gas-related services.
Boost the west?
Further sanctions may not just benefit Ukraine in its war with Russia. One Western chief executive, Boris Schucht of the largest Western supplier of uranium, Urenco, argued yesterday (12 February) that proposals for banning Russian uranium imports would give those in the nuclear supply chain greater security:
“The market is seeking higher independence and, of course, clear political guidance. So the proposed legislation in the US would be helpful.”
At present, Russia supplies close to 50% of the world’s capacity for uranium enrichment, a crucial step in the process for developing the metal into nuclear fuel. Countries including the UK and US have already committed billions towards building domestic capacity following the invasion of Ukraine.
After two years of stockpiling of resources by Western firms, the US government is now mulling what it had previously rejected: an outright ban on Russian uranium.
Schucht was at pains to emphasise that Western firms can now make up the shortfall, and that a move away from imports could even benefit Western industry:
“There are no constraints in the short term in replacing Russian materials in the western world. That is the simple message.”
