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It’s time to curb imports of Russian gas

Unfortunately, the reports of massacres of civilians in Bucha, near Kyiv, do not come as a surprise. In response. Emmanuel Macron argued: “What happened in Bucha requires a new round of sanctions and very clear measures, so we will coordinate with our European partners, especially Germany.” be to get ahead. We should definitely press ahead with sanctions. . . We cannot accept that.” But the sanctions against Russian oil and coal are not enough. It is also necessary to embargo the import of Russian gas.

According to the US Energy Information AgencyIn 2021, 74 percent of Russian natural gas exports went to European OECD members. That would correspond to 5 percent of Russia’s export earnings. The difference between these exports and those of oil and coal is that it is easier for Russia to shift its destination than for gas, which depends on inflexible infrastructure for transportation.

Therefore, adding gas to the list of embargoed products would add to the pain for Russia. The objections to this idea are that some European countries are particularly dependent on Russian gas and the cost to them of significantly reducing imports would therefore be huge.

Bar chart of EU gas imports by origin, 2020 (%), showing that Russia is the largest gas supplier to Europe

The countries most at risk include Germany and Italy. Germany, for example, depends on Russia for a third of its energy consumption. Also, in 2020 Germany got 58 percent of its gas from Russia, while Italy got 40 percent. These countries are also heavily dependent on gas: Germany’s consumption is more than double that of France, which has a large nuclear power plant capacity. An embargo on gas supplies would, it seems, devastate the economy of Germany and similarly vulnerable countries.

However, recent economic research suggests that this fear, while understandable, is overblown. A paper on Germany by economists led (alphabetically) by Rüdiger Bachmann of the University of Notre Dame notes that the focus should indeed be on gas, since oil and coal are supplied in global markets. If necessary, the paper says, “there is sufficient world market capacity from other oil and coal-exporting countries to make up the deficit.” Russia could also shift its exports elsewhere, although it might have to do so at a discount.

Bar chart of Russian gas exports by destination, 2020 (%), showing that Russian gas exports are highly dependent on the EU market

So what about sanctions for gas? In the short term, the loss of Russian gas could not be offset by imports from other countries. The paper assumes that the consequence of an embargo on Russian energy would be a 30 percent cut in gas supplies, equivalent to about 8 percent of total German energy consumption. The main points of the analysis are that the substitutability of gas in consumption and production is lower in the short term than in the long term and higher for some applications than others. With very low short-term substitution elasticities (a pessimistic assumption), an 8 percent drop in oil, gas and coal consumption leads to a 1.4 percent drop in gross domestic product – costing every German citizen 500 to 700 euros a year. If gas consumption falls by 30 percent, the economic losses increase to 2.2 percent of GDP (2.3 percent of gross national expenditure) or 1,000 euros per year and citizen. If one takes into account possible second-round macroeconomic effects, these impacts could reach 3 percent of GDP.

Alternative estimates exist. A survey by Clemens Fuest A report by the ifo Institute in Munich, presented at the Ambrosetti Economic and Financial Forum last weekend, shows that estimates of the fall in GDP vary between a tiny 0.2 percent and 6 percent. As he says, “We don’t really know”. But we know that if an embargo becomes necessary, it is best done now: As the paper cited above explains, the justification is “the seasonality of gas demand. A disruption in Russian gas during the summer months could be replaced by Norwegian and other sources to maintain industrial supplies.” Such an early move would also “trigger the substitution and redistribution dynamics that are central to lowering economic costs.” .

Bar chart of Russian gas imports as share of national gas consumption, 2020 (%), showing that Germany is among the countries most dependent on Russian gas

Above all, a comprehensive embargo on Russian energy imports into Europe would be a collective declaration of will in defense of the values ​​on which post-war Europe was founded against its worst enemy. It is Germany’s duty to lead. Yes, it would incur significant costs. But the reasons it’s so vulnerable are, after all, what the economist has Hans Werner Sinn rightly calls “Germany’s energy fiasco”, with the phasing out of nuclear energy and the over-dependence on Russia. Moreover, even under the worst assumptions, these costs would be modest compared to those affected by the eurozone crisis.

Of course, Germany and other vulnerable countries must be helped. The available gas should, as far as practicable, be treated as a European resource. It would be a great gesture if the UK joined. It will also be necessary to adopt fiscal policies that cushion the blow to vulnerable people. In addition, it is important to build an infrastructure that offers maximum flexibility.

Bar chart showing that the economic cost of reducing energy imports from Russia is relatively small by comparing the estimated impact on production* of restricting Russian energy imports and the peak-to-trough decline in GDP in the crisis of the Eurozone shows, both as percentages for selected countries

The long-term goal should be that Europe can import from anywhere, while Russia remains dependent on European markets. The short-term goal should be to make life as difficult as possible for Putin. A superior alternative would be Harvard’s proposal Richard Hausman a penalty tax on Russian imports by most buyers worldwide. Unfortunately, that won’t happen.

It is possible that Putin’s demand for payment in rubles will cut supplies anyway. But this should not be necessary. Rightly or wrongly, NATO decided not to defend Ukraine militarily. The least Europeans can do is use all the other tools at their disposal. They must bear and share the cost of disrupting Russian energy imports. They need to create energy policies that maximize flexibility and resilience. It’s time to act.

martin.wolf@ft.com

Follow Martin Wolf with me myFT and further Twitter

https://www.ft.com/content/2a814b44-86a5-46f4-9386-eb3747760db5 It’s time to curb imports of Russian gas

Adam Bradshaw

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