Why buy and Russian oil and gas

Headlines

This may be helpful in client conversations, as energy and Russia are hot button topics.

Detail

Many well intentioned clients ask “Why does the EU (and the world at large) persist in buying Russian oil and gas, knowing that it directly finances the invasion of Ukraine?”.

It is a perfectly reasonable question to ask, and the answers from public economists (to me) fail to break it down well enough into the mix of intent/intention, theory, and practice for a public audience.

Firstly, with sanctions, what are you trying to do?

Hurt your enemy (militarily, financial, economically etc) and not hurt yourself in the process. If that can’t be done, hurt them more than they hurt you (battle of attrition, which is how most wars that last longer than a month or two are won).

Exports are only useful to the extent that they allow you to have imports. The words are about trading with people for stuff.

You export so you can import. The dollars/euros are just how we keep track of that swapping of goods and services.

So, back to Russia.

We (the world) need the oil and gas. We offer dollars to get them. We simultaneously cease all other forms of trade with Russia. Now Russia gets the dollars, but can’t buy the pipes, valves, fittings, fixtures, chips, semis and all the other crucial bibs and bobs (bits and pieces) that are essential for their supply chains, manufacturing, domestic production facilities to keep running.

And we can absolutely see that in the data. The world is giving Russia dollars, euros, and yen that Russia cannot use. The rest of the world’s imports to Russia have collapsed.

So back to the initial point. You want to damage/restrict your enemy, without hurting yourself. Cutting off the oil would hurt the world, and cutting off the imports would hurt Russia.

And so you can avoid the former and focus on the latter.

In other words, the sanctions are working magnificently. The real wonder is how long Russia would bother sending oil and gas at all if all they receive are currencies that are worthless because they cannot be used to exchange for goods and services.

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Please note that past performance is not a reliable indicator of future performance.

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