March 3, 2022: By Oleg Ustenko, economic advisor to the president of Ukraine, and Simon Johnson, MIT. Contact: sjohnson@mit.edu. This post is taken from a one page memo, currently circulating.

Sanctions imposed in response to Russia’s invasion of Ukraine are not degrading Russian energy production capacity or putting enough pressure on Russian financial markets.

On the contrary, the price of Brent crude has risen from $80 at the end of 2021 to $90 pre-invasion and reached $113 per barrel today.

The discount on Urals crude relative to Brent has widened since the invasion, but the net price to Russian exporters has still increased by $5-10 per barrel.

IEA reports daily Russian oil export volume is steady at 5 million barrels per day, so oil revenues are up $50-100 million PER DAY since February 24^th.

Russian gas exports to Europe have not been impacted: “the export value of Russian piped gas to the EU alone amounts to USD 400 million per day”.

Total Russian energy exports are generating $1.1 billion per day according to the IEA. This has increased, not decreased, since the invasion began.

The Russian current account surplus in January 2022 was $19 billion, about 50% higher than usual for that month.

The latest sanctions created a positive terms of trade shock for Russia, with a rise in the price of its exports relative to its imports. The only way to put real pressure on Russian public finances is to buy a lot less oil and gas from Russia. Even better: stop all purchases from and payments to Russia.

Recommendations

1. The US should impose full sanctions, including secondary sanctions, on all Russian oil and gas exports. As a major exporter of refined products made from Russian oil, Belarus also needs to be sanctioned fully.
2. IEA estimates that oil production around the world can be boosted quickly. Additional world supply can add at least 3 million barrels a day if other producers are persuaded to support the US lead. To the extent Russia can sell on grey markets, this will be at a steep discount. World oil supply will remain about the same, but with significantly less revenue for the Russian government to use in destroying Ukraine and threatening the world.
3. These measures will encourage the EU to significantly reduce its use of Russian gas, both immediately and through 2022. Energy conservation and development of alternative supplies should also be pursued as a top priority, as suggested by the IEA and Bruegel (two papers). Reducing gas purchases from Russia is essential for global security and any resumption of regional stability.