Russia is one of the top three fossil fuel producers in the world, and its economy relies heavily on revenues from oil and natural gas. A full embargo on Russian energy today by the EU alone would already decrease its GDP per capita by 1,500-2,500 USD (or 10 to 25%), a significant reduction to weaken Moscow’s capacity to sustain its aggression against Ukraine.
Since Feb. 21, unprecedented sanctions have not only targeted important sectors of the Russian economy but also frozen Russian central bank reserves. The idea was to impose severe economic pain on Russia and indirectly affect its ability to sustain a prolonged war. But today, the situation has reversed, and Russia is self-sanctioning by restricting its gas supplies to the EU. Instead of reaping the revenue from the gas sale over the long term, Russia is choosing to cut the gas flow.
With the Russian ruble now trading at 55 rubles per dollar, well above where it was prior to the invasion, and Russia’s economic output not having collapsed, the initial optimism about the effectiveness of the unprecedented sanctions imposed by the United States and its allies has started to fade. Does that mean the sanctions regime has been a failure? We do not believe so.
A growing number of U.S. and European firms have chosen to voluntarily cease or suspend their operations in Russia. Are these firms’ managers deciding to divest to help Ukraine and punish Russia? Or are they divesting to help their own firms, under pressure from investors? Our results suggest the latter.
In this paper, we propose further financial sanctions to increase the cost to Russia’s invasion of Ukraine, based on further targeting two key vulnerabilities. The first targets Russia’s reliance on the U.S. Dollar and Western currencies as a reserve currency to back the Ruble. The second vulnerability is the Russian economy’s dependence on the Western financial system for a range of services.
Through this paper, the working group aims to share its expertise and provide assistance to international efforts focused on the formulation of sanctions to increase the cost to Russia and support Ukraine in the defense of its territorial integrity and national sovereignty.
The West must maintain and step up the sanctions pressure on Russia in order to persuade the Kremlin that it must end its war against Ukraine. The working group applauds the EU’s decision to impose a 6th package of sanctions to sustain pressure on the Russian economy, reducing the regime’s ability to wage war in Ukraine.
Saving oil will lower world prices, help the EU introduce the embargo, and reduce Russia’s oil revenues. Each of us can do our part!
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