The export sanctions for oil and coal from Russia harm Putin's regime much less than is often claimed in the public debate. This is the result of current research by Marcel Thum. He is a professor of economics at the TU Dresden and head of the Dresden branch of the ifo Institute. "Measuring the severity of the sanctions in terms of lost sales revenue is misleading," says Marcel Thum. "As long as Putin is firmly in the saddle, he doesn't really care whether his regime holds wealth in the form of international investments or commodities in the ground."

As a reaction to the Russian war in Ukraine, the EU is planning to stop imports of Russian coal, and Russian oil may no longer be allowed to be exported to Europe towards the end of the year. An import stop for natural gas is also under discussion. But how effective is such an embargo on exhaustible resources anyway? “In the current discussion, the severity of the sanctions is measured by the proceeds. The narrative is always: 'We pay Russia over $700 million every day. If we stop buying the raw materials, we will harm Putin by the same amount.' That is an economic misunderstanding." This misunderstanding prompted Prof. Marcel Thum to take a closer look at the effect of sanctions on exhaustible resources.

He notes that there is generally no pressure to sell oil or gas immediately. In contrast to e.g. perishable crops, these resources can be stored relatively easily in the ground without losing their value. If the raw material and financial markets work well, delayed extraction does not cause any financial damage to the raw material owners. This only changes when the sanctioned ruler is in a hurry to monetize his resources because he fears that he will no longer be able to access them in the future, perhaps because he sees a coup coming. Now it doesn't look as if Putin has to fear losing power. Instead, with other sanctions, e.g. the freezing of Russian accounts in Switzerland, he was deprived of opportunities to invest the money gained through the exports safely for himself and those around him. According to Prof. Marcel Thum, this means that “because of the freezing of Russian accounts, it tends to be better for Putin to keep more natural resources for himself, even if he cannot be one hundred percent sure that he can still exploit them tomorrow. So the export sanctions and the account freeze clash in terms of the penalty's effectiveness.”

But mercenaries and war equipment cannot be paid for in oil and gas. The hope of being able to deprive Russia of the liquid funds for warfare is also based on the embargoes. Prof. Marcel Thum doubts that the lack of income from exporting oil and gas to the EU would lead to liquidity problems in Russia and prevent military spending: "We are currently talking about a three-digit million amount that, at least until recently, was sent to Russia every day as a Compensation for raw materials went. Russia, even after the asset freeze, has $300-400 billion in internationally fungible assets. Even if they don’t get any more dollars from tomorrow – it will be a long time before they hit a liquidity limit.”

So, given the current circumstances, giving up Russian oil and gas does not appear to be able to have the hoped-for effect of ending the war in Ukraine. At the same time, the European economy could suffer massively from a Russian gas export ban should Russia reverse the situation and stop gas supplies, as recently happened in Poland and Bulgaria. But at least here Prof. Marcel Thum sees a ray of hope: "Russia also wants to sell its gas and have always delivered according to the contracts so far."

Contac:
Prof. Marcel Thum
Chair of Economics, esp. Public Economics
Tel.: +49 351 463-33867

Konrad, Kai A. and Thum, Marcel, Elusive Effects of Oil and Gas Export Embargoes (March 28, 2022). Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2022-05, Available at SSRN: https://ssrn.com/abstract=4068130 or http://dx.doi.org/10.2139/ssrn.4068130