Bloomberg Editorial: Hitting Putin With Energy Sanctions Isn’t Easy

President Joe Biden’s announcement that the United States will ban imports of Russian fossil fuels significantly intensifies the response to Vladimir Putin’s unprovoked war against Ukraine. The measure is justified. The United States and its allies should do everything they can to increase economic pressure, and the biggest weakness in their sanctions policy so far has been the inability to stop the flow of foreign currency to pay for Russian energy.

However, acting alone, the United States cannot do much. Unlike many of its European allies, it does not buy much energy from Russia. The throttling of Russian fossil fuel exports means Europe must curb demand and find alternative supplies, a difficult but necessary step if the new restrictions are to have the desired effect.

The current sanctions are undoubtedly taking a heavy toll. In the space of a few days, the United States and Europe came together and devised by far the most powerful financial measures ever applied to a major economy.

The ruble has collapsed and Russia’s financial system is almost closed. Moscow is resorting to capital controls and other repressive measures to contain the damage. Putin may be calculating that these costs are bearable, at least for a while, but the expected flow of hard currency for energy is a crucial part of his calculation.

Implementing this additional sanction will not be easy. Biden’s announcement pushed energy prices even higher, adding to the Federal Reserve’s challenge to control inflation. The situation in Europe is much worse. About 20% of the EU’s energy comes from gas and about 40% of it is imported from Russia.

Germany is especially dependent, not least because of its reckless rush to shut down its nuclear power plants. Although the UK has promised to follow the example of the US by banning oil imports from Russia, it will continue to buy its gas and coal. The other governments in Europe are looking for ways to reduce their own imports.

As far as possible, these plans must be accelerated, but, above all, they must be coordinated. Without a doubt, the energy market is global. If a country reduces its imports from Russia without reducing its energy demand or increasing its own production, the measure might do little good: the disruption caused by switching suppliers will impose costs on the importer, but the global balance of demand and supply will not change. and Russia will sell its energy elsewhere.

There is an additional complication: the “self-sanction” Spontaneous is already underway. Energy buyers and brokers are avoiding Russian exports due to increased financial risk, uncertainty about the sanctions that might entail, potential damage to their reputations and, no doubt, simple disgust at Russia’s conduct. This helps explain why prices have risen so sharply, highlighting the dilemma for policymakers.

To ensure that energy sanctions are effective, the United States and its allies must work together. Rising energy costs, as long as they don’t get out of control, will help reduce demand and generate new non-Russian supply.

Governments must do everything possible to strengthen both channels: in the short term, with coordinated releases of oil stocks and increased oil and gas production; and in the medium term, with additional public investment in energy efficiency and faster deployment of renewable energies.

Whenever possible, nuclear plants should be kept running, not shut down. Existing energy infrastructure needs to be adapted and new infrastructure planned so that demand can more easily shift outside of Russia.

The United States was in a position to act quickly and was right to do so. For many of its allies, an immediate ban on imports from Russia would be impossibly disruptive, but planning to reduce and then eliminate their reliance on Russian energy is entirely feasible. A credible commitment to do so would set Putin back like few things would.