Vol. 376, Issue 6592, Pages 469
Oil and gas exports represent Russia’s key geopolitical strength, as well as its major source of hard currency revenues (1–3). At current prices, these are estimated at around US$1 billion per day (4), representing an important lifeline for an economy under heavy financial sanctions in response to Russian President Vladimir Putin’s invasion of Ukraine. The European Union (EU) buys 75% of Russian gas exports and 50% of Russian oil exports (5). An EU embargo on Russia would substantially undermine Putin’s geopolitical and economic positions. However, given a full embargo’s potential impacts on the EU, securing the approval of all EU countries is difficult. To limit Russia’s oil and gas revenues while keeping up the flows, the EU should instead introduce a tariff on Russian oil and gas imports. The tariff can be adapted to the economic and political dynamics of the conflicts. A tariff ’s effect on domestic prices depends on the relative elasticities of supply and demand—i.e., on whether sellers and buyers have relatively better alternatives. The more inelastic the supply (e.g., because Russian exports cannot be diverted) and the more elastic the demand (e.g., because the EU can replace Russian supplies), the more of the tariff will be paid by the supplier (6). Russian oil and gas exports to Europe are inelastic in the medium term because infrastructural bottlenecks prevent a substantial redirection to Asia. The EU therefore has a real chance to ensure that tariff revenues are mostly paid by Russia. To improve its position, the EU needs to increase its demand elasticity. This can be done by incentivizing a reduction of oil and gas demand in Europe and by increasing the use of all available alternative energy resources. By implementing a bold energy strategy, Europe can credibly threaten to cut Russia’s oil and gas revenue while minimizing the domestic economic consequences of a tariff.
Hausmann, Ricardo, Agata Loskot-Strachota, Axel Ockenfels, Ulrich Schetter, Simone Tagliapietra, Guntram Wolff, and Georg Zachmann. "How to weaken Russian oil and gas strength." Science 376.6592 (April 2022): 469.