US ban on Russian oil will have limited effect

The tactical reasoning behind the US ban on Russian oil and gas imports, and a UK plan to phase out Russian oil imports by the end of the year is clear: to deprive Moscow of the foreign currency necessary to fight its war in Ukraine and close one of the few remaining gaps in the economic blockade that has been imposed on Russia. On their own, the moves are unlikely to be effective. The two countries account for only a small portion of Russia’s oil exports. The commodity is fungible and traded on global markets. Any broader embargo also needs to be part of a well-thought-out strategy.

Oil and gas revenues are vital to Moscow, making up 36 per cent of the country’s budget in 2021, although that partly reflected already-surging prices. The importance of these funds has only increased: last week, after sanctions were imposed on the central bank’s foreign exchange reserves, Russia changed its rules to allow oil and gas revenues to be used more freely to fund day-to-day expenditure.

The US imports very little oil from Russia, however; much more goes to the EU and China. With even higher global prices for the black fuel — partly thanks to the anticipation that Russian supply will, one way or another, be affected by the war — the country will still earn a substantial amount from exporting to other trade partners.

Nevertheless the impact of the US ban should not be dismissed. While it may mostly have a symbolic effect, it can raise pressure on other countries or oil companies to follow suit and cease trading with the country. Shell, the Anglo-Dutch oil major, was forced to end its operations in Russia following a public outcry over its purchase of a deeply discounted shipment. Lower or uncertain demand from refineries may lead to cuts in Russian production.

Even before the US and UK announcements, so-called self-sanctioning and consumer pressure had opened up a discount between Urals crude, the main Russian benchmark, and Brent, the international standard, but this is not yet enough to fully offset the effect of higher global prices. As an alternative to a ban, imposing a special import tariff on Russian oil could widen this discount.

Either way, restricting oil supply from the world’s second-biggest producer will hurt the west as well as Moscow. Higher oil prices will drive up already high levels of inflation and stretch consumer budgets even further. That may test solidarity with Ukraine and voters’ willingness to stick with the policy as the war continues. The US push to find extra supplies — potentially leading to partial detentes with Venezuela and Iran — may provide some relief, especially if other Opec producers can be persuaded to increase deliveries.

Russia is likely to retaliate. Alexander Novak, a deputy prime minister, warned earlier this week that Moscow could cut natural gas supplies to Europe via the Nord Stream 1 pipeline in response to western sanctions. Making good on that threat, however, would ultimately be self-defeating, further reducing Russia’s foreign exchange earnings. Gas relies much more than oil on pipeline infrastructure to deliver it. Apart from Europe, the only main purchaser of Russian gas is China, and there is limited short-term scope to increase supplies.

Public anger over the scenes of destruction in Ukraine and the harrowing stories from refugees made an escalation of sanctions inevitable. Just as inevitable is that swingeing measures such as an oil embargo will hit both sides. Western leaders need to start preparing their voters for the impact that will have on energy prices.