Tuesday, 30 September 2014

How to stop aggression

The Russian military invasion of Ukraine has paid off. The Crimea is now part of Russia. Some Eastern regions of Ukraine also risk becoming incorporated into Russia in the near future. Where will this end?
Putin knows that the West is not willing to send soldiers to Ukraine to defend the sovereignty of that country. This gives him a strategic advantage over the West. In addition, it gives him an incentive to continue his aggressive and expansionary policies.  We should therefore not be surprised that new aggressive moves will be initiated elsewhere (in the Baltic countries for example where large Russian minorities live).
Up to now the West has reacted in a feeble way. Financial assets of important Russian individuals have been blocked. Russian companies are prevented from borrowing in financial markets or from transferring assets. These things hurt but insufficiently so. Putin will not be stopped by the West’s half-baked sanctions that have little impact on the Russians economy.
In order to stop aggression a policy must be implemented that will really hurt the Russian economy. This policy can only work if it hurts the Russian revenues from exporting oil and gas. How can this be done without hurting the West?
Today, imports of Russian crude oil account for 34% of total EU imports of crude oil. For gas this percentage is 32%. So we are very dependent on Russia for our energy imports. What about the Russian dependence on us?
The export of crude oil from Russia to the EU now accounts for 84% of total Russian oil exports; the percentage for gas is 80%. Those exports are of great importance for Russia and for the Russian budget. In fact the sales of Russian oil and gas to the EU provide for more than half of all Russian government revenue. Thus it can be said that Russia is more dependent on its exports to the EU than the EU is dependent on Russian oil and gas imports. That creates an opportunity to put pressure on Russia in order to increase the economic cost of aggression.
Here's what I would do if I were European policymaker. I would impose a tax on oil and gas from Russia. Such a tax would have the following effects. First, EU importers would have to pay more for Russian oil and gas and would therefore look for alternative sources of supply. This would reduce the demand for Russian oil and gas. Since the EU is a very big player this effect would be big also. Second, and this follows immediately from the first effect, Russia would have to lower the price of its oil and gas so as to find other buyers in the world. This would create an important shortfall in Russian government revenues, reducing the capacity of Russia to wage wars.
One may object here that this tax would also hurt us because it would raise the price the EU consumers would have to pay for oil and gas. This is not the case, however. The import tax generates revenues for the EU-governments. These revenues could be used to compensate the EU-consumers. Alternatively, they could be used to promote policies aiming at making us less dependent on fossil fuel. Whatever we chose to do with the tax revenue, we would not be harmed by it.
This is an application of what economists call an “optimal tariff”. By the very fact that we are more important for Russia than the other way around, we can exploit our strong economic power and impose an import tax that maximizes our welfare and reduces Russia’s. We should do just that.
Some will argue that Russia could retaliate by stopping the export of oil and gas to the EU. My contention is that Russia would not do this. Such a retaliation would lead a decline of government revenues of more than 50% leading to a paralysis of the Russian government. It would hurt Russia much more than it would hurt the EU.
The European Union has the economic power to confront and to stop Russian aggression. It must use this power.


  1. Oil and Gas taxes on Russian export to EU will hurt the poor people of Russia who are against the war(about 95%) and supporters of the peace-movement.
    Oilprices are already down 10% and hurt those people.
    The Baltic countries and Poland are alreday independent from Moskow. Putin has lost another 80% of Ukraine. He cannot make another Chechenian war in Europe without losing oilexport. That is why he is not in Kiev now.

  2. This article is a bunch of crap. The west refuses to give all Ukrainian regions the right to a referendum because they know the outcome. Chances are most regions bordering Russia would leave Ukraine. This is why the west is afraid of allowing democracy in the East. I guess if you are pro-Russian, no democracy for you. The moment you lap dance for the west - you can have all the referendums you can swallow.

  3. It is not the responsibility of the West to worry about the poor people of the Russian Federation. It is the responsibility of the Russian government.

    What about the poor people of Ukraine and the Donbass who have been misplaced and shelled by both sides because of the proxy war by the Russian Federation.

  4. This tax would be a powerful and peaceful way to confront Russian aggression. Putin and his KGB friends are intent on restoring Russia’s domination of central Europe which it lost in 1989 when the Berlin Wall fell. Hitler-like, Putin pushes lies, deceptions and militarism to promote Russian nationalism. His government controls the Russian mass media, and the Russian people, unlike their Ukrainian brothers, are unlikely to risk blood in the street to bring down the tyrant. So Russia must be contained until sanity returns there. The West cannot do that by military means as in the Cold War when Europe and America held the line by force of arms for 45 years. Europe has disarmed and Putin is cynically counting on that weakness. Europe must instead use peaceful, economic warfare, which can be at least as powerful as an army if properly deployed. Russia has benefited hugely from Western technology and open markets. It is only fitting that it be contained by denying it that technology and closing free access to a key energy market. That is what the proposed tax would do - induce peaceful, ruinous reduction in Russia’s gas revenues until Russia withdraws from lands it has invaded.

  5. This is a very sensible suggestion but it is more likely that we will get a Merkel-Putin Pact exchanging recognition of Russia's Ukrainian annexations with the restoration of Kaliningrad and Pommeria to Germany and cheap Russian gas and oil for German Mercedes and capital goods.

    See (not entirely satirically) http://silverberg-on-meltdown-economics.blogspot.com/2014/04/happy-days-are-here-again-or-who-says.html