Global governments remain reluctant for now to sanction Russian energy, seeking to insulate the world economy from a greater shock even as they tighten the financial grip on the country following its invasion of Ukraine.
While oil last week briefly passed $100 a barrel for the first time since 2014 and European natural gas prices jumped as much as 62%, the gains were partly reversed as the U.S. and European nations avoided sanctioning Moscow’s massive energy supplies for punishment.
They continue to resist doing so despite fresh plans to further annex President Vladimir Putin’s economy from the international monetary system. Although some Russian banks will now be excluded from the SWIFT payment messaging system, one official said the White House is looking at exemptions for transactions involving the energy sector.
The current reluctance to crack down on the source of much of Russia’s wealth reflects the fear that doing so would send energy prices surging even higher, transmitting a stagflationary mix of faster inflation and slower growth around an already fragile world economy.
The reprieve may support Putin’s under-threat economy, where commodities account for more than 10% of activity and much of the nation’s budget.
“Financial sanctions are often there as a signal of disapproval rather than a real attempt to cause pain and damage,” said John Gieve, a former U.K. government official and central banker. “Arguably that is the case now. We are not restricting energy exports because that would mean more pain for us than we are willing to bear.”
The avoidance of targeting Russian energy still may fade the longer the conflict rages and the more countries utilize alternative energy supplies. British Foreign Secretary Liz Truss said Saturday that the U.K. would support restricting Russian energy exports to Europe and that the U.K. was working with Group of Seven partners to reduce dependency on Russia.
Russia is a commodities-powerhouse, producing more than 10% of the world’s oil and natural gas, with Europe reliant on it for a third of its gas.
“Energy sanctions are certainly on the table,” White House Press Secretary Jen Psaki said on ABC’s “This Week” on Sunday. “We have not taken those off, but we also want to do that and make sure we’re minimizing the impact on the global marketplace and do it in a united way.”
The invasion-driven surge in energy prices already has economists predicting a higher and delayed peak in inflation as well as a hit to growth as consumers and companies are forced to allocate more of their budgets to fuel and heating.
Even with Russian energy being left alone, the war’s first few days have shown there’ll likely be snags maintaining a smooth flow of oil. Many buyers have backed away from buying Russian crude cargoes for fear of getting ensnared in sanctions or damaging their reputation. Urals, Russia’s most important export grade, is trading at a record discount to international benchmarks.
Many banks in Europe and China also have backed away from financing Russian commodity deals, at least in the short term, and tanker owners are reluctant to take on the risks of loading at Russian ports.
“Even if it is possible to pay counter-parties under trade contracts, payments will be in stupor in the near future due to exchange-rate volatility,” said Sofya Donets, economist at Renaissance Capital in Moscow. “For a period of uncertainty, trade will be made with great difficulty.”
But the fallout would be much worse if curbs were imposed on Russia.
The latest limits on finance are a “welcome move but insignificant to cut oil and gas flows,” said Thierry Bros, a professor at the Paris Institute of Political Studies. “We will still be in a position to pay for gas.”
In a scenario in which Europe’s gas supply was cut off, the euro-area would tumble into recession, according to Bloomberg Economics. The U.S. would suffer significantly tighter financial conditions and growth would diminish, leaving the Federal Reserve potentially having to raise interest rates in a slowing economy, the economists wrote last week.
At JPMorgan Chase & Co., economists led by Bruce Kasman estimate that a sustained shutting-off of Russian oil exports could propel the price of crude to $150 a barrel, potentially lowering global growth by 3 percentage points and raising inflation by 4 percentage points.
Still, Kasman’s team noted a nuclear agreement with Iran and the release of oil from the U.S.’s strategic reserve could offset as much as two-thirds of the shortfall from the cessation of Russian oil shipments.
Other ways of opening room to bash Russia and mitigate the aftershock include reviving coal-fired power stations and encouraging governments, including China’s, to tap their own reserves in a coordinated fashion.
As for Russia, the continued flowing of oil will likely provide some relief given the World Bank calculates commodities account for almost 70% of goods exports. About 43% of the country’s crude and condensate output is sold abroad.
The central bank’s latest projections showed the economy could grow 2%-3% this year, down from 4.7% in 2021. Inflation, though, is running at more than double its target, despite 525 basis points in interest-rate hikes since last March.
If crude prices stay around $90 this year, the country’s budget could get more than $65 billion in extra revenue, adding to the Kremlin’s financial strength, economists said recently. Oil at $100 would boost the windfall closer to $73 billion.
At Natixis SA, economist Alicia Garcia Herrero said sanctions on energy could still be in the cards.
“The West is finding ways to reduce the impact of a commercial embargo, which would include energy, but it has not found it yet,” Garcia Herrero said. “However, it is a question of time.”