Low-Energy Fridays: A Reminder Why Energy Sanctions are Key in Foreign Policy

We have officially passed a year since the start of Russia’s invasion of Ukraine. As far as international incidents go, this one is cut and dry: Russia has disingenuously accused Ukraine of having a Nazi regime in power and used this as a pretext for an invasion that would end in Ukraine’s total annexation into Russia. The United States and the West support Ukraine not just out of opposition to Russian aggression, but out of defense for the ideas of sovereignty and international peace. But supporting Ukraine has not been a costless endeavor, and it is worth remembering why energy sanctions in particular have been so important to Ukraine’s survival.

The initial salvo of sanctions against Russia focused on their currency and banking—by cutting them out of the Society for Worldwide Interbank Financial Telecommunication (SWIFT)—with the idea being that enough economic punishment would encourage Russia to forgo their war-focused ambitions. Early on the idea of sanctions against Russian energy, which at the time provided most of Europe’s natural gas and oil, was a step too far for many. Even the Biden administration hesitated to embargo Russia’s low level of energy exports to the United States, out of fear that it would further worsen already elevated energy prices at the time. In the end, both the European Union and the United States curtailed imports of Russian energy, but before those policies were adopted we at R Street pointed out that energy sanctions are critical for two reasons: 1) Russia directly funds its military activities through energy sales; and 2) energy sales are conducted in foreign currencies, meaning they have an outsized robustness to endure sanctions.

In the West, most energy companies are either publicly traded corporations or privately owned, but this is not the global norm. Energy companies abroad are typically owned and directly managed by the state. Energy exporting nations like Russia, Venezuela and Saudi Arabia can and do use their state-managed energy sales to directly fund the government. Just prior to the invasion of Ukraine, oil and gas sales accounted for 36 percent of Russia’s budget.

The effect of most sanctions, like cutting Russia out of SWIFT, is to reduce the purchasing power of the ruble, which weakens Russia’s ability to consume goods produced abroad that it is reliant upon. But the flip side is that energy is usually traded in foreign currencies (oil especially is traded in U.S. dollars), so as the ruble weakens, the relative value of oil and gas exports rises. For Russia’s domestic costs, like soldiers’ salaries or domestically produced military equipment, the perverse effect of the sanctions is that those costs fall relative to the value of exports. In other words, if the value of the ruble to the dollar falls to half, a barrel of oil export could buy twice as much Russian labor as it did before.

Europeans have paid a heavy price for these energy sanctions, but they are one of the most effective ways to impact Russia’s ability to sustain its war effort. Despite the initial success of other economic sanctions early into Russia’s invasion, the current value of the ruble is about the same as it was before sanctions, indicating that Russia’s economy has adapted to living under them. Targeting energy sales is the best and most sure way to reduce Russia’s military funding. More important, though, is that for the United States and its allies to be taken seriously on claims that it cares about international peace or human rights, those claims can’t be contingent upon prices at the pump.