Sanctions are nothing new. When used correctly, they can coerce a behavior. Parents use a variant of them to correct bad behavior in kids by doing things like taking away toys. Municipalities use them to ticket citizens for things like speeding. Nations use them against one another as punishment for some action or lack of action.
The problem is, when you take away the toys, kids complain they have nothing to do, driving parents crazy to a level worse than the bad behavior. Drivers, who may have spent money at local businesses, have their money diverted to a fine. And nations still do what they feel is in their best interest, regardless of the consequences because the punishment is perceived as being less painful than whatever action they are being sanctioned over. In other words, sanctions don’t work unless the sanctioner has absolute leverage of the entity being sanctioned. Worse yet, sanctions more often than not punish the innocent.
When Russia invaded Ukraine, the US and Western Europe responded with, among other things, sanctions on Russian oil. A major component to their economy, conventional thinking was the sanctions would be devastating.
Oil accounts for roughly 60% of the cost of a gallon of gas. In January of this year, prior to sanctions, the average price for a gallon of gas in the U.S. was $3.40. That meant oil made up just over $2 of that gallon. Today, the average price for that same gallon is $5.27, a 55% increase, with over $3.15 attributable to oil. Think about that. The oil component in a gallon of gas today is roughly equal to the cost of an entire gallon of gas just seven months ago. And while some of the increase in oil prices is demand driven, the majority of that increase is on the supply side as a result of sanctions.
In the meantime, while prices moved higher, Russia increased trade with China and India, offsetting lost trade with Western Europe. Natural gas, too, has chartered a similar path. The net effect has been new markets for Russian oil and a Russian economy stronger than it was before sanctions.
The ruble is at its highest point in the last five years. China, India and Russia have never been more geopolitically aligned. Other nations have stepped in to facilitate back channel trade between Russia and countries, taking a cut in the process. But for those of us in the U.S. or Western Europe, the effect of sanctions have been higher prices at the pump and what will be higher home heating costs come winter.
The hegemony enjoyed by the U.S. is now being challenged by a bloc of countries that didn’t exist just a year ago. The RIC nations (Russia, India and China) are now a geopolitical and economic force. Western Europe is choking on higher oil and natural gas prices. And when the Nord Stream pipeline goes offline for repairs, many expect it won’t come back online, limiting natural gas supplies to a point of causing rationing and exponentially higher prices in places like Germany.
Make no mistake, the oil is still pumping at the same rate. All that has changed is the price. Because of the perceived risk of future disruption to availability, oil prices are hovering around $100 a barrel. Putin is not only still making money, he’s making more. Exxon Mobil is making more money. The entire supply side of the oil market is making money while you and I are burdened with higher costs.
Sanctions only work when you have total leverage on a counterparty. That type of leverage rarely exists in this day and age. I don’t care if it’s the Trump administration sanctioning China or the Biden administration sanctioning Russia. The net result is the same. Higher costs get passed down to those least able to afford it. The behavior that generated sanctions doesn’t change. And the ones being sanctioned often end up profiting.
Coercive Measures