Europe’s Russian energy dilemma

The debate on whether Europeans should stop buying energy from Russia in response to its war on Ukraine has largely focused on feasibility and costs. Several economists have argued that the European Union should be able to forgo Russian oil and coal, and could even survive the next winter without the Russian gas.

Due to the EU’s strategic mistakes with past energy policies, an immediate and comprehensive embargo would come at great economic cost. It would require a huge effort to secure alternative sources of energy, invest in energy infrastructure, and limit domestic consumption through partial industry shutdowns – and even this might not be enough. The economic cost could end up being greater than expected. And Germany and other countries might have to cut industrial production further, as the EU would try to supply all member states with sufficient energy (rather than just maximising any one member state’s energy supplies).

However, the debate should focus more on whether, by punishing Russia with an energy ban, the EU could achieve its foreign policy goals. While there is a clear-cut moral and strategic imperative to stop the war, the task is anything but straightforward. As Hans Morgenthau points out in Politics Among Nations: “good motives give assurance against deliberately bad policies; they do not guarantee the political success of the policies they inspire.”

Therefore, when taking this very difficult decision, it is important to consider how economic statecraft in the energy sector can help the EU achieve its foreign policy objectives. In this, there are a series of trade-offs that Europeans should consider making.

Theories of change

There are, broadly speaking, two competing theories of how the EU could use its leverage over the energy market to help end the war in Ukraine.

The first theory is that a total ban on European imports of Russian oil, coal, and gas would prompt President Vladimir Putin to order a halt to the shelling of Ukrainian cities, be it because it changes his calculus or because he simply cannot sustain the war effort due to the economic crisis at home. Putin’s capacity to finance the war in Ukraine would be drastically reduced, argue some experts. An immediate and comprehensive energy ban could even bring down his regime. From this perspective – which is shared by one of our colleagues – refusing to do so is illogical because it only prolongs the conflict. As military experts consider the next few weeks to be critical to the outcome of the war, there is no point in waiting. Europe should use its leverage now.

Perhaps that could work. But a rival theory points to the many strategic risks of an outright ban on imports of Russian energy – and to possible gaps in the assumed chain of causality in the first theory. An embargo could fail to damage Russia quickly enough to influence Putin’s strategic choices in the weeks ahead. Indeed, it is hard to imagine how this approach could quickly stop Russian tanks and bombs. Besides, truly cutting Russia off from all resources to sustain its war efforts through a suspension of energy trade with Europe is unlikely to work in the short term. The logic of war economies applies here: industries could be forced to continue production. And China could be incentivised to help out, including via black markets. Countries such as India could increase their purchases of Russian energy. Some advocates of an embargo argue that Europe’s pain would be temporary, as it could restart energy imports from Russia when the war was over. But Putin could decline to turn the tap on again once Europe decided to turn it off.

Importantly, sanctions that cut the regime’s last lifeline, or impose increasing economic pain to pressure it to change one of its core objectives, typically have less of a political effect than proponents hope – and more unintended and even adverse consequences. For instance, the Russian people could become more focused on ensuring the daily supply of products for their households. Or, for economic reasons, they could rally round the regime in a patriotic response to an all-out Western attack. The history of sanctions suggests that the targeted regime becomes more dangerous if it is in a fight to achieve one of its core goals or for its survival. The current sanctions regime already seems partly geared towards regime change, not least because it targets Putin directly. An energy embargo would make Western sanctions seem even more like an attempt at regime change, all while likely failing to prevent Putin from accessing the resources he could use to escalate militarily (such as chemical weapons or even non-strategic nuclear weapons).

Last but not least, if the EU prematurely decided to stop importing Russian gas, this could significantly weaken European economies at a time when their economic strength was key to not just standing up to Russia but also engaging in a systemic rivalry with China. The EU’s sanctions could become less sustainable if the economic effects of a sudden energy embargo on Russia sparked widespread popular discontent in Europe, or if they strengthened the position of political forces that oppose sanctions on Russia. This could threaten Europe’s delicate consensus on sanctions further down the line. If the war is set to last several months or years, it is vital to preserve European resolve and unity.

The EU should be ready to incur huge costs in response to Russia’s war on Ukraine, not least because peace and security in the union (and not just in Ukraine) are currently at stake. But the effects of the embargo would be highly uncertain, and could even be the opposite of what the West is trying to achieve. If the EU imposes an immediate and comprehensive energy embargo without changing the military situation on the ground in Ukraine, the union could find itself in an even weaker position than it is now.

This is why Europe’s thinking about an energy embargo should, according to the second theory of change, focus not on maximising economic pain for Russia but rather on using economic pain to achieve its foreign policy objectives.

Strategic objectives

There is a consensus within the EU on the need to reduce its dependence on energy imports from Russia as quickly as possible. Yet it should do so in full knowledge of the strategic consequences of whichever approach it chooses. The union should use what leverage it has at the right moment and with clear objectives.

Europeans should urgently work on the following four issues in particular.

Support from Gulf states

In seeking alternative sources of energy, the EU will need to confirm whether it can rely on Gulf states – and under what conditions. It cannot impose an energy ban on Russia without being sure that it is ready for such a radical move.

Top energy producers such as Qatar, the United Arab Emirates, and Saudi Arabia should feature in the union’s short-term and long-term calculations. In the short term, Qatari gas could help protect European energy security in the event of a disruption of supplies from Russia. Saudi Arabia and the UAE could help replace Russia’s oil supplies to eastern Europe and work to lower global energy prices. Oil prices have already skyrocketed to more than $100 per barrel, and have only been kept in check by pandemic-related lockdowns in China. European consumers and firms are feeling the impact of these high prices.

Still, with a combined spare capacity of approximately 2.5m barrels per day, Saudi Arabia and the UAE could, at best, reduce the upward pressure on energy prices if they acted alone. The EU should try to persuade Gulf monarchies to bring other producers on board through their leadership of the energy sector (ideally, at the next meeting of major energy producers, on 31 March). Given Riyadh’s and Abu Dhabi’s track record of balancing between the West and Russia, this would require difficult negotiations.

On 20 March, German Energy Minister Robert Habeck began a three-day trip to Qatar and UAE that may have encouraged Gulf states to support Europe. But a visit to Saudi Arabia by European Commission Executive Vice-President Frans Timmermans and Energy Commissioner Kadri Simson would be even more helpful. Initially scheduled for the third week of March (but delayed by the war), this trip would help the EU explore the scope for cooperation with Gulf monarchies.

Diplomacy

The EU also needs to gauge how other powers would react to an energy embargo, given that sanctions are most effective when they involve many actors. It will not help if Europe and the United States stop importing Russian energy, but others do not – allowing the war in Ukraine to continue and others to gain a competitive advantage in energy markets.

China and India are especially important in this, thanks to their sheer size and their relationships with Russia. India – the world’s third-largest consumer of energy – has ramped up its shipments of Russian oil to four times the amount in the same period in 2021. At the moment, India still imports just 360,000 barrels of Russian oil per day, while the EU imports 3.5m barrels per day. But Russia would like to attract further Indian investment in its energy sector as European companies move out.

To increase its economic pressure on Russia, the EU should engage in diplomacy with not just India but also other nations. The more countries join the effort, the more legitimate and efficient the EU’s tools of economic coercion will become. This consideration is important to shaping the long-term outcomes of what is now the biggest sanctions regime ever implemented.

Strategic thinking about energy sanctions

Sanctions are more likely to induce positive behavioural change if they have a realistic objective. They can aim to contain a country such as Russia, but that is a medium- to long-term goal.

Sanctions are also often difficult to lift. Economic actors do not just go back to business as usual when their governments say they can again trade with a country like Russia. If some of the world’s largest energy producers – Iran, Venezuela, and Russia – are simultaneously under Western sanctions, this could eventually have severe effects on the EU. Therefore, it will be important for European leaders to work on many parallel issues related to sanctions on Russia, ranging from engagement with Venezuela to a compromise on the Iran nuclear deal that Gulf countries can accept. But these efforts would only be partial solutions: Iranian oil facilities are outdated due to years of sanctions and will need time to be able to produce in the quantities Europe needs to phase out Russian oil, while Venezuela’s oil exports would be destined for the US.

Given that the EU cannot entirely replace Russian energy yet, a sudden embargo may not be the best way to exert energy leverage over Russia.

Preparations for an embargo

But there is still much the EU can do. Contrary to appearances, Europe’s Russian energy dilemma is not binary. Europeans can gradually reduce imports of Russian energy in the next few months. A phased approach to energy sanctions on Russia would be more effective than a rushed embargo and would help preserve European unity.

In the meantime, the EU also needs to prepare to implement a sudden and comprehensive energy embargo in case the security situation deteriorates further (due to, for example, threats to NATO territory). However, if this is not the case, a phased oil embargo this year would be more within the EU’s reach.

EU member states should collaborate on preparations for both scenarios. The EU should work with its international partners to ensure that it can survive without Russian oil, coal, and gas soon. In this sense, it is useful that some member states – notably Poland and Finland – are already pressuring the rest of the EU to act.

This is all the more necessary because Europeans are not fully in control of further energy trade between Europe and Russia. For the moment, Putin may prefer to keep the gas – and the euros and roubles – flowing. But Europe should be prepared for a halt in energy imports from Russia because Putin could try to use this leverage to divide Europeans in their response to the war. Hopefully, by then, if he indeed chooses to test their resolve, Europeans will be in a position to let him saw off the branch he sits on.