SIf we compare the first four months of 2022 with those of 2021, Russian federal budget revenue increased by 34%. This rise is entirely due to the explosion in the prices of oil and gas, even though the energy sanctions were aimed on the contrary at increasing the cost of the war for Russia and at making its financing more difficult. At the same time, soaring energy prices have been very costly for Europeans.
It is therefore urgent to rethink these sanctions to make their consequences heavier for Russia and lighter for European households and businesses. Three solutions can be envisaged: embargoes, customs tariffs and price caps.
On May 30, the European Union (EU) decided to impose an embargo on imports of Russian petroleum and petroleum products which will only take effect in six to eight months. The announcement of this measure led to an immediate rise in the price of oil (about 5%), but it had been preceded by a rise since mid-May, when the embargo became more likely. The anticipation of the announcement therefore generated a windfall effect for Russia.
Since the start of the war, the likelihood of future sanctions has also pushed up gas prices: in this market, despite storage levels having returned to a normal range, prices remain around four times higher than before the war. Announcing an energy embargo without taking immediate action will therefore have had, at the time, a double paradoxical effect: it will have increased prices for Europe and inflated revenues for Russia.
The experience of recent months also shows that, under political pressure, EU governments have partially shielded households from the impact of these high prices (through rebates, tax cuts, market segmentation ). The markets are convinced of this: governments will continue to do so in the event of further disruptions. These subsidies on demand (very costly for the budget) can only push prices up.
While governments have decided that businesses need time to adjust to a future embargo, that doesn’t mean nothing can be done now. Several instruments can be implemented and they should be different for oil and for gas. A tariff on Russian oil imports (as many economists recommended early on) would have several advantages: it would reduce imports from Russia, as buyers would be better off switching to other sources, and would likely push Russia to lower its prices for EU buyers in order to remain competitive with producers not affected by this tariff.
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