Can German/EU Sanction Russia Oil/Gas? Yes. A GDP Hit, But Manageable. What Price Security?

If Russia escalates, EU politicians can escalate back by banning oil/gas imports (see below).  There is economic space for sanctions escalation if the political will is there.  The impact on Russia would be immediate and likely catastrophic.

Hard logic says “take the economic hit now to secure long-term strategic security.”  You beat a bully by standing up to him.

However, like our beloved American politicians, Eu politicians don’t want to take this step because oligarchs “business leaders” don’t want to take the short-term profit hit.  That is why the EU dragged their feet on the first rounds of sanctions;  Remember Italy’s hoped for carve-out for luxury goods?  Was that fantasy idea really 2 weeks ago?.

As with the first round, EU public opinion will likely force EU leadership’s hands if Russian atrocities spark new outrage – chemical weapons, a nuclear strike, bombing another maternity hospital.  Especially as it warms up and heating becomes less of a concern.

Adam Tooze does a great review of the (German language) debate on the economic impact of sanctions on Russian Gas/Oil.

The surprise conclusion is that European oil/gas sanctions would be a manageable hit to Germany.  On par with COVID, which Germany managed pretty well.  Especially if you assume the sanctions are relatively temporary (months not years).  Covid being a good model for that sort of hit too.

It would be a short term hit because a halt of oil/gas sales likely would crater the Russian economy  Credit would evaporate internally and externally (anticipating default).  Everyone would have to pay for everything with cash up front.  Business that run on 90-days-to-pay credit (from grocery stores to big industrial) would seize up for lack of cash.  The Russian government could step in, but who in Russia is going to trust those rubles are worth anything when they are backed by…. oil and gas revenues.  I guess they could coin the gold reserves and pay with that?


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