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If Russia stops supplying energy to Europe, some economists predict the country's economy will contract, but not crash. Sanction-free reserves, increasing oil prices, and a functioning propaganda machine, according to these economists, will cushion the hit to Russia's economy. According to these economists, Putin's threats to cut off gas supplies to the European Union become increasingly credible. They also predict that if Europe does impose a ban on Russian oil shipments, then Russia's inhumane war likely will continue for some time.
An energy embargo, whether imposed by Russia or imposed on Putin by Europe, appears to be a death blow for the country's economy on the surface. Due to Western sanctions, Russia's GDP is expected to collapse by as much as 15% this year.
However, Putin's budget and economy may be more durable. Last year, oil and gas brought in almost $9 trillion rubles ($125 billion) in government revenue. Europe accounted for almost 40% of exports in terms of value, meaning a loss of up to $50 billion in earnings for Moscow, or 15% of the previous year's number (the budget surplus was $7 billion at the time).
Higher energy prices will mitigate the negative consequences of such an oil embargo. While rerouting gas is difficult due to a lack of pipelines, oil can be moved elsewhere. And crude oil and oil products account for three-quarters of the value of Russia's energy exports. Last year, the average oil price was around $71 per barrel; today, it is around $108. As a result, Russia could reduce oil exports by around a third without losing income. After an embargo, prices are expected to climb even more, offsetting any discount Moscow would have to offer customers.
Of course, this year's predicted 15% drop in GDP would decimate tax revenues and increase Russia's budget deficit. However, Putin's propaganda operations will help, preparing the public for difficult times. This will allow Russia to cut domestic spending, such as the $20 billion spent on healthcare last year, while maintaining its $49 billion defense budget. Putin may even allow Russia's currency to depreciate much further. This would lower the cost of purchasing the country's exports, increasing the revenue generated by them — assuming, of course, a market remains.
Finally, Putin has approximately $160 billion in reserves that are not affected by Western sanctions, excluding approximately $140 billion in gold that Washington is attempting to prevent from being converted to currency. Using those and roughly $50 billion in a previously accumulated budget surplus would buy time until oil could be transferred to others, such as India or China, for example.
As a result, these analysts believe that an energy embargo would affect Russia's economy, but not significantly impair Putin's war efforts. Accordingly, the Kremlin's threat to shut off gas supplies to the West must be taken seriously. Alternatively, if Europe does impose a ban on Russian oil shipments, then Russia's inhumane war may certainly continue for some time.
