In my FT column this week, which went online last Sunday, I argued for a policy of financial shock and awe against Russian president Vladimir Putin, with massive immediate sanctions rather than a gradual scaling up of measures. By the time it appeared in print on Monday morning, half of it felt outdated. The west’s unity around imposing sanctions on Russia for its invasion of Ukraine, and the scale of those sanctions, have been astonishing. Here is the FT’s overview of the sanctions decided as of Monday — but remember this is a moving target.The scale of financial sanctions will have effects far beyond finance. The Russian middle class will soon find itself unable to buy many consumer goods they have come to take for granted. They may find it virtually impossible to fly anywhere — even domestic aviation may be curtailed as sanctions cut Russian airlines off from everything from leased aircraft to engine servicing manuals.But we can do more. How could sanctions be tightened? Most simply, existing sanctions — asset freezes and travel bans, exclusions from the Swift interbank messaging system or a ban on correspondence banking relationships, restrictions on transactions with Russian institutions including the central banks, and export controls — can all be extended to more people, companies and sectors. This could be necessary even just to keep the sanctions pressure where it is intended to be, as there inevitably turn out to be loopholes that need plugging.The big question, however, is whether to end the exemption from financial sanctions for energy sales, in particular oil and gas. Note that current sanctions are already complicating such trading; some western utilities are voluntarily boycotting Russian oil, and a Russian oil producer has apparently experienced three failed tenders.But an official oil and gas embargo would be a sanction of an entirely different order. As I wrote in my column, this is not a technical decision about financial plumbing but a political decision about whether to do without Russian-produced energy commodities in the first place. And this is, above all, a question the EU needs to answer. (Everything that follows applies to the US too. But while the US imports some Russian oil — a small but not insignificant 7 per cent of its total oil imports — Europe is much more reliant on Russian energy imports, on which more below.)There are a few who argue that Europe should go “cold turkey” on Russian gas imports. Many more think that an oil and gas embargo is not just very costly for Europe, but strategically ill-timed because some sanctions powder should be kept dry. I think that is a mistake. The west, and especially the EU, should expand sanctions to the energy trade, and do so now. Here are five reasons why.First, this is the moment of maximum impact. A large amount of Russia’s official foreign reserves have been frozen. But as long as oil, gas and other commodity exports keep flowing out, Moscow will get hard currency — and you can bet it will not make the same mistake twice. It will quickly ensure that its export earnings are paid and kept in a form beyond the reach of western governments. Before the pandemic, Russia’s total exports exceeded $400bn, with roughly half of that being energy exports. With energy prices much higher today, Putin’s regime could easily be receiving a billion dollars in energy export earnings for every day it bombs Ukrainian homes. Stopping these earnings now, when much of the financial war chest has been disabled and before there is time to build up a new one, will both maximise the impact of such a move and reduce any circumvention of sanctions already imposed.Second, it is better for the west to be the one inflicting the blow, at the time of its own choosing and preparation. Europe’s Russian energy links amount to a mutual vulnerability: either side can hurt the other by cutting off flows of cash or gas, at the cost of hurting itself. There is no doubt the gas weapon is one Putin will use again when he sees fit. Russia has interrupted gas flows several times for geopolitical gain in the past two decades. And this winter’s energy price crisis was in part caused by Moscow. In what in hindsight seems likely to have been part of weakening western preparedness ahead of invading Ukraine, Russia’s gas deliveries to Europe were about one-third lower than earlier levels, as Matthew Klein’s newsletter demonstrates. And surprise, surprise: “Storage sites owned or controlled by Gazprom had particularly low storage levels at the start of the heating season,” according to the International Energy Agency.If the west does not take the hit now of cutting off energy links, it will remain vulnerable to Putin’s threat to do so at the point that most favours him.Third, within the next year at least, this is the moment the west can free itself from this dependency at the least level of self-damage. Spring is coming, and with it lower heating demand. It is possible to run down stored reserves and there would be time to find alternative sources to refill the stores by next winter. Politically, too, the horror of Putin’s war makes this the easiest time to build political support for the higher energy prices that will prevail. Fourth, it is do-able, if difficult, to go cold turkey. In terms of oil, Europe gets a third of its oil imports from Russia, according to the IEA, but holds stockpiles equivalent to four to five months’ worth of net imports. Its natural gas stores, in contrast, cover less than a month’s worth of net imports. But even that is perhaps two months’ worth of imports from Russia. And there has been a lot of good number-crunching in recent weeks about the possibility of coping without Russian gas. An analysis from Algebris Investments suggests 62 per cent of the energy can be substituted from other sources of gas and postponing the phaseout of nuclear power in Germany. A report from Bruegel, the highly influential Brussels think-tank, shows that the gap can realistically be met with a combination of energy efficiency measures, a rapid rollout of some renewable energy generation and temporarily increasing coal- and oil-fired power output. And fifth, this is the best chance of toppling Putin. Autocracies are brittle things: hard but liable to snap. His power is based on a mix of fear, greed, apathy and each individual’s belief that opposing him is futile because nobody else does. If Putin does lose power, it will only have been because he could no longer offer the elite enough wealth to keep them on board, because the Russian middle class is plunged back into 1980s-style Soviet deprivation, and because the fear lifted when his departure suddenly no longer seemed unimaginable. For all these reasons, this is the right moment to throw everything we have at Putin and his regime. The illusion that “proportionality” and “gradualism” are the right way to impose sanctions on Moscow simply gives succour to an autocratic aggressor. Cutting off the Kremlin’s energy lifeline will take a big policymaking effort: to look for substitutes, to connect up Europe’s gas pipelines and electricity grids, to manage gas purchases and storage in common, and to compensate those countries and groups that are most vulnerable to the consequences. But above all it takes political work: to prepare people and businesses for high energy prices and possible disruption, and to build the political support for the inevitable disruptions, as the sacrifice we must all make to fight for peace and freedom in Europe. Reassuringly, there are signs of this happening. It is, in any case, overdue. If Europe had weaned itself off Russian gas before the current war, it would have been freer to inflict greater sanctions damage now. Klein explains very well the dereliction of duty: “Europeans can and should be blamed for becoming even more reliant on Russian fossil fuel exports since the 2014 invasion of Ukraine.” Let us not make the same mistake twice.Other readablesHere’s a useful rule of thumb for those who, like me, are trying to figure out the energy relations between the EU and Russia and being tripped up by the various units in which gas volumes are measured: by energy content, 1bn cubic metres (1bcm) of natural gas is roughly the same as 10 terawatt-hours, and a little less than 1mn tonnes of oil equivalent. If you can just get your zeroes right, you shouldn’t go wrong as you convert. (Don’t ask about British thermal unit; here is a more complete conversion table).Inequality between US companies — in terms of their productivity, and how much they pay their workers — has long been on the increase, as Free Lunch has previously covered. Now new research finds that the same trends are at work in the UK economy.Numbers newsThe Federal Reserve seems determined to go ahead with monetary policy tightening. Robin Brooks of the Institute of International Finance writes in the FT that the European Central Bank may instead postpone monetary normalisation. More
