Embargoing the Economics

Lipsky argues if the West were to ban Russia’s energy exports, it would drive up energy prices in a way which would benefit the Russian economy rather than hurt it. He said Russia would find other buyers for its energy, such as in China, and it would have more cash coming in, not less.

Chris Isidore, Russia’s Economy is Surprisingly Tiny. Here’s Why It Matters so Much to You, CNN (Feb. 26, 2022).

This is a deeply flawed assessment of the likely effects of an energy embargo on Russia.

If an energy-embargoed Russia were only able to trade with China, then an energy-embargoed Russia would not be able to insist that China pay the world market price for natural gas.

Russia would only be able to insist that China pay the world market price if Russia could threaten to access world natural gas markets in the event that China were to refuse to pay the world market price. But, because of the embargo, Russia would not be able to make such a threat.

Instead, an energy-embargoed Russia would negotiate with China from a position of extreme weakness, just as, for example, Britain negotiated with the United States from a position of extreme weakness during World War Two.

Due to Hitler’s capture of Europe, Britain’s only real trading partner for war materiel was the United States. We insisted on prices that nearly bankrupted Britain; she rationed food until 1950 in part to pay off her debts. This despite our being an ally with interests that were more or less aligned with Britain’s.

China and Russia are, by contrast, neighboring great power aspirants that have fought with each other in living memory. China would surely insist on very low prices for the gas, or other terms designed to weaken her latent adversary or put Russia into a position of long-term dependence on her.

No, it is not any question about efficacy vis a vis Russia that counsels against an embargo. It is the suffering that it would cause to the rest of the world.

China imports 50 billion cubic meters of natural gas per year, Russia exports 200 billion cubic meters per year, and global yearly imports by all countries are 960 billion cubic meters. It follows that, after accounting for the natural gas that would be freed up on the world market by Chinese purchase of discounted gas from Russia, the embargo would wipe out about 15% of global natural gas supply.

Someone is going to have to go without, and in the short run it would be Europeans, given that alternative sources of supply have already been contracted out to others. Closing airspace and lighting up buildings in blue and yellow is rather less costly.

The liberal internationalists who said that trade would bind powers together and so reduce conflict weren’t wrong.

But an important corollary is that you have to be willing to use the leverage that trade gives you. Threats only work if they are credible.

That means being willing to suffer.