The damage to Putin’s regime caused by sanctions banning exported Russian oil and coal is often less drastic than is asserted in public debate. These are the findings of research currently being conducted by Dr. Marcel Thum. He is a Professor of Economics at TU Dresden and Director of the Dresden branch of the ifo Institute. “Measuring the severity of the sanctions by the lost sales revenue is misleading,” says Marcel Thum. “As long as Putin is firmly in the saddle, he won’t care whether his regime’s wealth is in international assets or raw materials in the ground.”

In response to the Russian war in Ukraine, the EU is planning a ban on imports of Russian coal. Russian oil could also be banned from being imported to Europe by the end of the year. There are talks about disallowing the import of natural gas as well. Yet how effective are such embargoes against finite resources? “The current discourse measures the severity of sanctions based on revenue. The narrative says, ‘We pay over 700 million dollars to Russia every day. If we stop accepting these resources, we will cause that amount of damage to Putin.’ But this is an economic misunderstanding.” This misunderstanding was the reason Prof. Marcel Thum decided to examine the effect of sanctions on non-renewable resources more closely.

He notes that, in general, there is no pressure to sell oil or gas immediately. In contrast to perishable crops, for example, continuing to store these resources in the ground does not pose much of an issue – they will not lose value. Delaying extraction has no financial repercussions for the owners of the resources on functional commodity and financial markets. This only changes when the sanctioned power is in a hurry to transform its resources into money because it is concerned about not having access to them in the future, perhaps because it foresees upheaval. But right now, it would not seem that Putin should be worried about losing power. Instead, other sanctions such as the freezing of Russian bank accounts in Switzerland have eliminated his possibilities for safely investing the money earned from exports for himself or his company. Prof. Marcel Thum says this means that “because Russian bank accounts have been frozen, generally speaking, it makes more sense for Putin to keep more natural resources for himself, even if he can’t be completely certain that he’ll be able to exploit them tomorrow. Therefore, combining export sanctions with the freezing of accounts is not an extremely effective punishment.”

However, mercenaries and armaments won’t accept payment in the form of oil and gas. As such, the embargoes bear the hope of revoking Russia’s liquid funds for warfare. Prof. Marcel Thum doubts that the lost revenue from oil and gas exports to the EU will lead to cash flow problems in Russia or hinder military spending. “Right now, we’re talking about a figure in the hundreds of millions that, at least until recently, was sent to Russia on a daily basis as compensation for natural resources,” he says. “Even after the account freezing, Russia has fungible assets around the world amounting to somewhere between 300 and 400 billion dollars. Even if they didn’t receive another dollar starting tomorrow, it would take a very long time for them to reach their limits in terms of liquidity.” 

Under the current circumstances, foregoing Russian oil and gas does not seem to have the desired effect nor be capable of ending the war in Ukraine. Moreover, the European economy could suffer tremendously under a Russian gas export ban, should Russia decide to turn the tables and stop supplying gas, as we have recently seen in Poland and Bulgaria. But Prof. Marcel Thum does see a glimmer of hope: “Russia wants to sell its gas, and until now, it has always supplied it in accordance with contractual agreements.”

Media inquiries:
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