Western sanctions on Russia are working, an energy embargo is now costly

Western sanctions on Russia are working, a power embargo is now a costly confusion

Editors’ note: This column is part of the Vox debate on the economic consequences of war.

Russia is a major energy exporter in the world, including the West. From the first day of Russia’s aggression in Ukraine, it is said that Russia pays one billion euros a day (Fate 2022), Western economies are effectively paying for Putin’s war (Guardian 2022). Western sanctions on Russian power were immediately called for, despite the necessary adjustments (European Parliament 2022). After tough negotiations, the path to EU sanctions has now been agreed, but with the opt-out for Hungary (Financial times 2022).

Who can lose more by stopping Russia’s energy exports? At a time when Putin’s war has been going on longer than anyone expected, the argument that it is being paid for outside of Russia’s export earnings suggests that Russia must be desperate to secure its place in the world energy market. Meanwhile, most Western powers are working hard to impose sanctions on Russia’s exports. They are also spending considerable political capital in an effort to bring backsliders to the line, especially Hungary.

Yet Russia does not seem so desperate. Rather, the Russian government has set vague financial conditions for Western buyers, such as paying in rubles (Brussels Times 2022), and has already cut off gas supplies to Poland, Bulgaria and Finland (BBC News 2022).

It seems that both sides are considering Russian exports as their own weapons. NATO threatens Russia to stop buying, Russia threatens to stop selling NATO.

If you find this confusing, you have paid attention. Many Western commentators have fallen victim to an old commercialist error – that the strength of an economy is measured by its ability to attract gold from others through its export trade.

What is the underlying information?

First, Russia has a large and growing export surplus. Economist (2022) puts last year’s trade surplus at 5 7.5 of Russia’s GDP. This year, it is expected to rise to 15% of last year’s GDP (this year’s GDP will be an unknown small amount, perhaps 10% or 20%, pushing the trade surplus further).

The reason for Russia’s growing export surplus is that while exports are stagnant, imports from a wide range of Russian trading partners are plummeting – halfway through before the war began. Why? There are two possibilities. One is that Western sanctions on Russian imports are working. The other is the flight of capital – holders of the ruble balance are converting them into Western currencies, causing the ruble’s exchange rate to fall sharply and import prices to rise for Russian consumers. In a short time, it doesn’t matter.

Cited by an expert Economist Russia’s growing trade surplus finds it “disappointing.” Although sanctions on Russian imports may take effect, it seems we are still buying Russian energy exports at the same level as before. We are still paying the price for Putin’s war – or so it is said.

To understand what the real meaning of Russia’s growing trade surplus is, it is necessary to keep in mind that the flow of money is a replica of the flow of real wealth. As money flows into Russian hands, real wealth flows differently. If Russia’s trade surplus is 15% (or more) of its GDP this year, then in terms of the actual resources produced, Russia is sending the same proportion of its domestic products abroad for use by foreigners.

How important is it to finance Putin’s war? It is often said that GDP is a measure of a country’s war power, and it is accurate – almost. But when the shooting starts, there is no war with GDP. They are fighting using the actual resources available. For this purpose, exports are not available. What is available is not exported domestically, Plus import.

The concept of a national account of the resources available to a war-torn country is not GDP but ‘domestic exploitation’ – gross domestic product, Including net import costs.

As a unit, Russia’s trade surplus of 7.5 units left 92.5 percent for domestic exploitation, including last year’s percentage points of GDP. This year, exploitation GDP (say 20) and trade surplus (7.5) growth will result in a decrease of 27.5. A one-fifth GDP decline leads to a one-third exploitation decline.

Two things follow. One is that Russia is exporting one-seventh of its national income to the rest of the work, weakening its war effort, not strengthening it. Two, Russia’s exports “do not pay the price for Putin’s war.” They are paying for something, but they are not. What they are paying is depositing a passive foreign currency balance. This currency can be held by private citizens of the state (within Russia) or abroad (in case of capital flight). However, if they cannot be used to import resources into Russia, they are No. Paying for Putin’s war.

A reality check is available. In World War II, the Allies blockaded Germany to prevent the import and export of resources. In both wars, Germany responded by confiscating assets from its occupied territories, just as today Russia is accused of stealing grain and other valuables from Ukraine. Indeed, the plan to occupy the eastern part of Germany during World War II was designed in anticipation of the Allied blockade of German foreign trade. It is estimated that net imports from Germany’s wartime empire accounted for more than a quarter of Germany’s war effort (Cleman 2019). Net ImportNot net export!

This calculation is the only concern Volume The wealth Quality The issue of wealth is also important. Despite efforts to replace imports, Russia remains dependent on imported microchips and machinery and vehicle components and maintenance services (Shagina 2020). They are now needed to repatriate weapons after Russia lost basic military equipment. Using force sanctions to prevent Russia from getting them is like putting pressure on a piece of string. More direct ways, which are already working, are to approve Russia’s trade loans and imports, and the self-approval of Western companies that no longer want to do or do business with Russia.

What is the effect?

First, Western sanctions are working. They are working either directly (reducing Russian imports) or indirectly (causing capital flight). Russia’s economy is growing at an alarming rate, according to real estate estimates.

Second, Russia’s potential retaliation would be to reduce exports by cutting off energy supplies to the West. The rationale for this is not only the loss of the Western economy, but also the redirect of capital and labor from the energy sector to the Russian battlefield.

It is wise for the western countries to prepare for this. An effective way to do this is to impose a tax on the purchase of Russian energy, which reflects the risks associated with continued dependence (Storm 2022). But it is also wise to make sure that when the pinch comes, the blame for the disruption lies with Russia.

Fourth, not only in Hungary, but in all possible Western countries – under pressure from those reluctant to give up Russian power before the need arises, we are unnecessarily spending NATO’s political capital (and sympathy for Ukraine) where national and social divisions are widening. Putin depends on progress.

Finally, is there a risk of allowing Russia to impose monetary obligations on the Western economy accumulated from the sale of energy? Yes, but as long as there are restrictions on Russian imports and financial institutions, these risks are long-term. The outcome in the long run will determine the outcome of Putin’s war, which is now being decided.

Moving the focus away from Russia’s energy exports is not an argument for doing anything. Rather, it is an argument for choosing a more efficient instrument than a less efficient instrument. Focusing on Ukraine’s immediate military needs, it is important for everyone to do what is needed to help Ukraine win the war now. We should not be distracted by concerns about the far-reaching financial impact of continuing to purchase and pay for Russian power as long as we can – using cash that Russia cannot currently spend.


BBC News (2022), “Russia cut off gas supplies to Finland”, 21 May.

European Parliament (2022), “MEPs demand complete ban on Russian imports of oil, coal, nuclear fuel and gas”, press release, 7 April.

Financial times (2022), “EU leaders agree to ban most Russian oil imports”, 30 May.

Fate (2022), “How Europe is trying to free itself from Russia’s 1 1 billion energy habit every day”, 9 March.

Klemann, H (2019), “Exploitation and Destruction in Nazi-Occupied Europe”, VoxEU.org, 11 September.

Shagina, M (2020), “Drifting East: Russia’s Import Substitution and Its Pivot to Asia”, Center for Eastern European Studies Working Paper No. 3.

Sturm, J (2022), “Easy Economy of Tariffs on Russian Energy Imports”, VoxEU.org, 13 April.

Brussels Times (2022), “Russia demands payment for gas in rubles: what does that mean?”, 2 April.

Economist (2022), “Russia on track for record trade surplus”, 13 May.

Guardian (2022), “Russian gas and oil purchases fund Putin’s war, top EU official says”, 9 March.

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