Learning the real-world cost of sanctions on Russia

In the six months since Russian forces started bombarding Ukrainian cities with artillery and missile strikes, the United States and its European allies have stuck with a two-pronged strategy against Russia: provide Kyiv with the military equipment it needs to stall and potentially reverse Russian military advances on the ground, and enact a series of punishing economic sanctions to degrade Russian President Vladimir Putin’s war machine. Multiple sanctions packages have been passed in both Washington and Brussels, the latest being a July 21 measure by the European Union barring the import of Russian gold.

Russia is now the most sanctioned country on the planet — half its foreign reserves are inaccessible, more than 1,000 companies have wound down operations or exited the Russian market entirely, and export bans have grated on Russia’s defense industrial supply chain.

Yet the West is learning that those same sanctions aren’t risk-free, either to itself or to countries that have chosen to take a position of neutrality in the war.

There is a critical lesson to be learned, one we ignore at our own peril: No tool, however justified its use may be to punish an aggressor, is without its costs.

The West’s sanctions campaign against the Russian oil sector is a perfect case study. In March, President Joe Biden signed an executive order prohibiting the import of Russian crude oil into the U.S., in addition to other Russian energy sources such as coal and natural gas. More than two months later, the EU, which imported 2.2 million barrels of Russian oil per day in 2021, enacted a ban on seaborne oil deliveries from Russia, to be completed by the end of the year. (Pipeline oil was exempted due to Hungary’s opposition.) European officials immediately praised the decision as an example of the EU’s unity of purpose at a time when nextdoor Ukraine was getting hammered by Russian missile and artillery attacks.

The market, however, quickly adapted, as it often does. By seeking to take Russian barrels out of commission, the West’s sanctions inadvertently tightened a global oil market that was already struggling to keep pace with high demand. Although Brent crude oil prices are roughly on a par with levels seen in early March, prices surged to $123 a barrel about a week after the EU adopted its phased oil embargo. Predictably, this had a terrible impact on consumers, who were forced to shell out $5 for a gallon of gasoline at a time when inflation was already at its highest in decades.

Russia, meanwhile, exploited these high oil prices to the maximum extent possible. Europe-bound oil shipments were increasingly diverted to Asian buyers. China and India gladly took advantage of the situation. The price of oil was so high that Russia was able to net significant revenue, even as it offered discounts of $20 to $30 per barrel, more than making up for a closing European market.

Western policymakers are now faced with a potential calamity, largely of their own making. Energy experts are warning that oil prices could jump to as high as $200 a barrel once a European insurance ban on Russian oil tankers kicks in this December.

Washington, in coordination with its colleagues in the G-7, is now scrambling to fix a problem they, in part, encouraged. Treasury Secretary Janet Yellen is lobbying intensely for a price cap on Russian oil, which would ideally keep Russian barrels on the market, preventing a price hike, while reducing the amount of revenue Moscow would receive from those exports.

Delving into the specifics of the latest oil price scheme, however, misses the forest for the trees. The moral of the story is more straightforward and disturbing: It took a self-inflicted aggravation of global energy markets for policymakers in Washington and Brussels to remember the rules of supply and demand.

Even the West’s control of the international financial system, a significant point of leverage, can backfire if policies aren’t thought through properly. It’s a conclusion worth acknowledging on the front end of the process. The alternative is what we are witnessing today.