Revisiting Oil Sanctions on Russia

Sanctions have become part of the Russian economic landscape since the crisis in Ukraine broke out in December 2013. They have had an impact on the Russian economy, but have yet to change the situation in Ukraine. Reports continue to emerge that the Russian government is arming and supporting insurgents in eastern Ukraine, while the political process that was supposed to help the temporary cease-fire begun in February 2015 appears to have stalled. New sanctions may therefore prove necessary, if the United States and European Union continue with their efforts to persuade Russia to contribute positively to a political solution and deter Russia from further intervention in Ukraine. One possible area for new sanctions is in the field of oil exports. Richard Nephew, a fellow at the Center on Global Energy Policy and program director for economic statecraft, sanctions and energy markets, examines the possible role that an oil export reduction strategy could play in Russia. In noting the pitfalls and complications, he argues that such a strategy could be part of the overall approach to Russia, but that both different sanctions measures and a holistic approach to Russia-Ukraine policy are necessary for any effort to be successful.

The executive summary is below and the full document can be downloaded here (PDF).

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Issue Brief: Revisiting Oil Sanctions on Russia
Richard Nephew
July 2015

This paper reviews the state of the Russian economy and the role oil exports play in it. It offers an assessment of various scenarios, based on Russian economic data, for the application of sanctions pressure on Russian oil exports. I conclude that:

It is possible to impose additional costs on Russia through the targeting of Russian oil exports, but this will not be a silver bullet against the Russian economy. Though Russia is dependent on its oil exports, so too is the stability of the international oil market, and this creates a ceiling for how much pressure can be applied against Russia’s oil exports.
However, reducing Russian oil exports by 10 to 20 percent would impose real costs on Russia. It would further diminish expected GDP growth, already hard hit by the downturn in global oil prices, and exacerbate Russia’s current recession. Combined with other steps to reduce investment in Russia, hinder activities at its oil production sites, and isolate its major financial institutions and energy companies, restricting Russian oil exports could play a valuable role in escalating the pressure on the Russian government.
Russia retains many response options that it could employ, not the least of which is the ability to switch off the taps to its natural gas exports to Europe. Russia would pay a cost for this but may be prepared to endure it. As such, the decision about whether to impose such sweeping sanctions will remain a politically difficult one for Europe. There also remains the question of whether Russia could—and would be permitted to—divert its oil supply to alternative destinations, including to East Asia.
Even if executed, additional sanctions pressure on Russia probably would not be independently sufficient to compel Russian capitulation in Ukraine, including the surrender of Crimea. As with many other instances of sanctions being employed, they should be considered an element of the Western strategy to confront Russia over its regional adventurism, not a strategy in and of themselves. Moreover, the utility of this tool needs to be balanced against the risk that an already-militant Russia will view military steps as the solution to its problems rather than the source of them.
At a minimum, it is worth beginning the exercise of planning for future reductions of Russian oil now: first, to underscore with Russia the degree of international resolve in confronting it over Ukraine; and, second, to lay the groundwork for any future such decision and to counter anticipated hostile Russian reactions.

Download and read the full document here (PDF).