Monday, November 24, 2014

Sanctions on the Installment Plan

WARSAW – Western leaders remain undecided about their next steps in trying to stop Russia’s aggression toward Ukraine. But one thing has become abundantly clear: their timid efforts so far – personal sanctions, an embargo on weapons exports, and the temporary suspension of Russia’s G-8 membership – have proved to be far from adequate to convince Russian President Vladimir Putin to back down.

Fortunately, there is a simple solution: a European Union embargo on imports of Russian raw materials, especially oil and gas. Just how manageable would an import embargo be?

There are, of course, good reasons why the EU has not taken this step already. Europe depends on Russian energy supplies, and European banks and businesses are highly exposed to Russia. But, with a carefully calibrated strategy, damage to Europe’s economy could be avoided.

More to the point, Europe does not really have a choice. As Putin’s desire to establish himself in Russian history as an imperial aggrandizer – alongside Ivan the Terrible, Catherine the Great, and Lenin – becomes increasingly apparent, so does the need for decisive action from the EU. Indeed, unless Putin is stopped, his appetite is likely to become even more voracious, turning toward the Baltic States, Moldova, or Central Asia – with increasingly serious consequences for European security.

Unlike the weak strategy that the EU has been pursuing so far, an embargo on Russian oil and gas would put real pressure on Russia. Energy accounts for 70% of Russia’s export earnings and half of its budget revenue – money that is used to finance the military, nationalist state-owned media, cyber wars, the fifth column in Ukraine and other countries, and the lavish lifestyles of the country’s elites, including Putin.

Given Europe’s dependence on Russian energy supplies, imports could not be cut off all at once. Instead, the embargo should be introduced incrementally.

The first step would be to subject all purchases of Russian fuel to import quotas, a well-tested tool in the EU, where it is often used for imports of agricultural products from third countries. In the embargo’s first year, companies importing Russian energy would be required to obtain licenses for the amount that they have imported to date.

Each subsequent year, the import quota would be reduced by 5%, so that the EU’s total annual imports of Russian energy would be reduced by half within a decade. This approach would enable European economies to adjust gradually to the new conditions, while giving them time to search for new energy sources, improve conservation, and reduce consumption.

The prospect of such a drastic reduction in its export revenues would be sobering for the Kremlin, especially given the difficulty of finding alternative markets. The Chinese, for example, are already driving a hard bargain; the knowledge that Russia has no other option would give them even more leverage in negotiations.

The EU, for its part, can survive the impact of an embargo. Russia accounts for some 30% of the EU’s total imports of raw materials and roughly 20% of its gas and oil. But it accounts for only 12% of the EU’s overall energy consumption, meaning that, over the next ten years, the EU would have to supplement only about 6% of the energy it consumes. That is a small price to pay to dampen Russia’s imperial ambitions and thus enhance European security.

The problem is that the cost would not be shared equally across Europe, owing to EU member states’ different levels of dependence on Russian energy. Indeed, some countries – such as the Baltic states, Poland, and Slovakia – have long-term commitments with Russia, and thus would need more time to meet the requirements of the embargo.

Fortunately, this problem, too, can be resolved. Once the EU issues the import quotas, companies should be allowed to trade them, allowing them to optimize the adaptation process.

Moreover, the EU should work to improve the flow of energy supplies across its internal borders, helping member states closer to Russia to compensate for the losses incurred by higher fuel prices. Meanwhile, European countries should intensify efforts to diversify their energy supplies, which should include higher imports from allies like the United States and a significant increase in renewable energy’s share of consumption.

Decreasing imports of Russian energy would prove far more damaging for Russia than it would for the EU. Indeed, it is the easiest and probably the most effective way to force Russia to comply with international norms – and no one would have to fire a single shot.

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    1. CommentedVelko Simeonov

      LoL this a very "ingenious" scheme :) And what are the russians going to do in the meantime, apparently nothing according to the author, which is obviously an incredibly stupid assumption. If that plan goes forward the russian are going to use the time, build a pipeline to China and then we would not need quotas as there will likely be nog gas left over for sale to the europeans. So what are we going to then Marcin, back in the stone age. I still can not beleive how pathetic the EU political elite is. What is even worse is that fact that thy are apparently firmly convinced that other leaders are as incompetent and inimaginative as them.


    2. CommentedJim Nail

      An interesting idea but poorly thought out and much too slow. A 5% annual reduction in total fuel imports would inevitably focus on oil and coal imports, since these are easy for Europe to source elsewhere but of course equally easy for Russia to sell elsewhere. Hence to have any teeth at all the concept would have to separate gas from other fuels and license each separately. But even so the slow proposed rate of reduction would require a period of 15 years to cut imports from Russia in half. This slow and stately trend would presumably bring price growth of at least the same amount, leaving Russia completely unfazed and in fact better off in net terms (same revenue for less gas). Moreover it would provide both incentive and plenty of time for Russia to build its long-threatened pipelines to China. Let's not forget also that the degree of sacrifice we are talking about for Europe is almost ludicrously small. If gas imports from Russia are about 6% of total European fuel requirements, a 5% reduction per year amounts to only 0.3% less fuel overall. This is all Europe can do to dissuade a newly militaristic Russia from adventures in the region? Really?

    3. CommentedRachel Green

      While, this is a good idea in theory, I can't help but think we're talking about two different timelines. You mention that following this plan, the EU's total annual imports of Russian energy would be reduced by half within a decade. But I think Putin's gameplan is a bit more accelerated; sure, he could (and should) stragetize for ten years out, but I think Putin wants to achieve his goals of annexations in 5-7 years.