In the wake of Russia’s invasion of Ukraine, Western nations have been exploring various strategies to curb Russia’s oil revenue, a critical source of funding for its military operations. A recent study by Henrik Wachtmeister, Johan Gars, and Daniel Spiro delves into the potential impacts of two key policies: an export-quantity restriction and a forced discount on Russian oil. Their findings offer a nuanced perspective on how these measures could reshape the global oil market and their broader geopolitical implications.
The researchers constructed a quantifiable model of the global oil market to assess the effects of these policies. Their analysis reveals that a 20% export-quantity restriction could lead to significant short-term losses for Russia, amounting to $62 million per day, or 1.2% of its GDP. This figure represents 32% of Russia’s military spending. In the long run, as new investments become unprofitable, these losses could double to $100 million per day, equating to 2% of GDP and 56% of military spending. These substantial losses underscore the potential effectiveness of quantity restrictions in curbing Russia’s financial capabilities.
However, the study also explores the impact of a 20% forced discount on Russian oil, which could yield even more severe consequences for Russia. The researchers estimate that such a discount could result in daily losses of $152 million, or 3.1% of GDP, which is equivalent to 85% of Russia’s military spending. This policy would impose a heavier burden on Russia while potentially benefiting oil-importing nations. By redistributing oil rents from Russia to importers, a price discount could enhance economic surplus for importers, making it a potentially more advantageous strategy compared to quantity restrictions.
The study highlights that the duration of these restrictions plays a crucial role in their effectiveness. If the restrictions are expected to last long-term, the economic burden on oil importers decreases, further tilting the balance in favor of a price discount. The researchers conclude that both policies, at various levels, impose larger relative losses on Russia than on oil importers, measured as a share of GDP. This suggests that a price discount on Russian oil could be a powerful tool in limiting Russia’s financial resources while mitigating the economic impact on importing countries.
However, the study also acknowledges a critical caveat: Russia might choose not to export oil at the discounted price, effectively turning a price discount into a de facto supply restriction. This scenario underscores the complexity of implementing such policies and the need for careful consideration of Russia’s potential responses.
The findings of Wachtmeister, Gars, and Spiro provide valuable insights into the potential strategies for limiting Russia’s oil revenue. By offering a detailed analysis of the economic and geopolitical implications, their research contributes to the ongoing debate on effective measures to curb Russia’s financial resources and support for its military operations. As Western nations continue to navigate the complexities of this geopolitical landscape, the case for a price discount on Russian oil emerges as a compelling option, one that could significantly impact the global oil market and the broader dynamics of international relations. Read the original research paper here.