The Sanctions Debate is a Mess

A few days ago, I wrote a piece highlighting the energy embargo that Russia had placed on Poland and Bulgaria. Russia made clear weeks ago that they would not sell oil and gas to ‘unfriendly’ countries if they weren’t prepared to pay in roubles (which Poland and Bulgaria said they weren’t). As I noted at the time, the Russian move was clever and likely to work.

Some commentators responded to my piece that I did not understand the situation properly. In fact, they said, the embargo would not threaten Poland and Bulgaria because it only hit their gas supplies. Both countries have extensive coal-powered electricity grids and although Poland relies for almost a fifth of its electricity generation from gas, Poland is in the process of weaning itself off of Russian gas and onto alternatives, especially from Norway.

There are a few points that can be made against this argument.

1. If Poland was going to wean itself off Russian gas anyway and Bulgaria does not rely on it for much of its energy generation, then what was the point of the histrionics? Since it has spooked energy markets and caused European gas markets to spike 20% – as firms price in the possibility of a broader energy embargo – it will give rise to inflated prices in Europe and worsen the already bad inflation.
2. Poland and Bulgaria may not need the gas, but they do need petroleum. Most cars and trucks do not run on electricity and a new gas pipeline to Norway or additional coal power generation will not help motorists if Russia turns off the taps. If the two countries are willing to pay for the petroleum imports but not for the gas then, again, what was the point? They’ll still be sending Russia money.

These two points raise a much broader one. It appears to me that Poland and Bulgaria’s refusal to pay for Russian gas in roubles has one purpose in mind: to increasingly normalise a European boycott of Russian energy. If Russia does something in Ukraine that’s seen to merit a response from Europe, people will point to Poland and Bulgaria’s refusal, and we’ll be told that a boycott wouldn’t be that bad. This could have a cascade effect where Europe unwittingly commits itself to a catastrophically bad policy.

The people who push for a boycott of Russian energy are not economists. They tend to be foreign policy specialists. They view the economy as they view the theatre of battle: as a simple conflict. They hit us, we hit them – and we keep hitting each other until one of us wins. That is how foreign policy experts think. But this is simply not how the economy works. The economy is a highly complex, interconnected system. Major interventions can have unexpected consequences.

What the foreign policy people fail to understand is that if they actually convinced European leaders to boycott Russian energy, this would completely destabilise Europe. Very high inflation and even possibly hyperinflation would set in quickly as the factories and farms were plagued by rolling blackouts and the supermarket shelves emptied. People would go hungry. Hungry people would riot. Governments could fall. Unexpected forces could rise to power.

Now ask yourself: who would that situation benefit? Europe or Russia? The answer is obvious. The Russians understand this because their foreign policy establishment and their economists regularly talk. They do so because Russia has been preparing for economic warfare for almost a decade. We do not understand this, because our foreign policy experts and our economists do not talk – much like the way our epidemiologists and our economists did not talk prior to the lockdowns. And so, we are forced to try to have this debate in the public square. Let us hope that our policymakers listen and listen carefully. Otherwise, we could be facing a catastrophe.

Philip Pilkington is a macroeconomist and investment professional. You can subscribe to his Substack newsletter here.