Turning off Putin’s dollar tap

Russia is financing its invasion of Ukraine using income from crude oil. As we in the west want to stop Russia from waging war, we need to cut their oil income flow. Even if the Western world banned oil imports from Russia, it would still be able to sell it somewhere else, albeit with a lower price. A better solution is to introduce import tariff on Russian oil, writes Dr. Sanna Kurronen, chief economist at the Finnish Business and Policy Forum EVA, in her blog.

Russia is dependent on its oil income. In 2021, about a quarter of Russia’s budget revenue came from oil related taxes and duties. In December 2021, Russia sold about five million barrels of crude oil per day. With an average price of USD 100, that makes 500 million dollars flowing to Russia every day.[i] The whole free world should impose a war tariff on Russian oil to further strangle the Russian economy. That could be achieved by using an import tariff of, for example, 80 dollars per barrel.

Thus, oil refineries in the west could still buy Russian oil if they paid, in addition to the price the producer demands, an import tariff of 80 dollars. That would lead to a situation, where Russian producers should have to sell their oil for almost 80 dollars lower price than the global market price for oil is. So, Russia loses 80 dollars per barrel, whereas western countries receive those 80 dollars as tax revenue. This mechanism has been suggested by Ricardo Hausmann, a professor at the Harvard University. [ii]

Why would China pay a full price for the oil, when Russia is forced to sell, but China can buy from somewhere else as well?

The oil producers would bear the economic burden of the tariff, and the global oil price would not be significantly affected. That is because the demand for oil is very elastic, as consumers care little if at all about the origins of the oil. The buyer is ignorant of whether the oil is from the North Sea, the Gulf or from Siberia, in normal times. When an import tariff is added to the Russian oil, the buyers will buy their oil from somewhere else. Russia must lower the price of its oil if it wants to sell it.

The production on the other hand, is very inelastic in the short term. As the production cost for Russian oil is low, it is still profitable to produce oil when it is sold for 20 dollars per barrel. Thus, when the buyer is flexible and ready to get its oil from somewhere else, the tariff is almost entirely paid by the producer. The producer is ready to produce as much as it did before, even though its revenue is much lower.

Some countries will undoubtedly remain out of this tariff arrangement. For example, China might be ready to buy more oil from Russia. But why would it pay a full price for the oil, when Russia is forced to sell, but China can buy from somewhere else as well? In any case Russia will lose a big part of its oil income, and Putin’s war chest will continue to shrink.

Russia will run out of money only if we manage to turn off its continuous inflow of dollars.

References and sources

[i] https://www.iea.org/reports/russian-supplies-to-global-energy-markets/oil-market-and-russian-supply-2
[ii] https://www.dailymaverick.co.za/opinionista/2022-02-27-the-case-for-a-global-punitive-tax-on-russian-oil-and-gas/

Finnish Business and Policy Forum EVA is a pro-market think tank – Aiming to promote the long-term success of the Finnish society

EVA aims to impact current public debate through the production of informed opinions and knowledge, and by proposing reforms to political decision-makers.

Founded in 1974, EVA is a non-profit association. The members of Elinkeinoelämän valtuuskunta EVA ry (Finnish Business and Policy Forum EVA) are the Confederation of Finnish Industries (EK), the Confederation of Finnish Industry and Employers (TT) Fund, Finance Finland, the Finnish Commerce Federation, Finnish Forest Industries, and Technology Industries of Finland. EVA works in close cooperation with ETLA Economic Research.