Imposing price caps or tariffs will not work, because Russia still has the upper hand
How much does guilt cost? Ever since Vladimir Putin attacked Ukraine, Europe has financed the war by buying Russia’s oil, gas and coal. Aware of this, the Europeans are considering ways to reduce Russia’s income with price caps or tariffs. Logic points to a more controversial measure: a total embargo.
The European Union has already sent 60 billion dollars of new money to Moscow in the three months of the conflict. By December, it will have paid Russia more than the amount of the country’s foreign exchange reserves – some $150 billion – that it froze in the first days of the war.
US Treasury Secretary Janet Yellen suggested on the 17th that the EU might consider imposing import tariffs on Russian oil in combination with the phased oil embargo it is trying to put in place. Oil buyers would then have to pay more or seek alternative suppliers, Kremlin spokesman Dmitry Peskov responded the next day.
Caps or tariffs won’t work. A price ceiling would see European buyers and a few others banding together to tell Russia that they would only continue to buy oil or gas at a certain price. It is difficult to understand why Putin would agree to a deal that would look like an economic defeat.
Furthermore, a gas price cap would be difficult to enforce. Under Gazprom’s typical take-or-pay deals, European buyers, including Eni, Uniper and OMV, must pay a predefined share of the gas they sign up for. Most of these contracts expire between 2030 and 2040, and the only way to get rid of them sooner is to declare force majeure. An embargo would allow it. No price cap.
Tariffs on energy imports appear more sophisticated from an economic point of view. They suppose a tax on the final consumer, which would weigh on households and companies. The idea is that Russia would be forced to cut its prices to maintain its market share, possibly reducing the 30% export tax it applies to energy imports, economist Daniel Gros has suggested.
But classical economic reasoning ignores the fact that the tariffs being debated are not an economic tool to protect some domestic market, but rather a political weapon to inflict harm. If Russia refuses to lower prices, Europe would be back to business as usual.
The EU is spending billions to cushion the impact of the Russian energy bill on homes and businesses. Caps and tariffs would push energy prices even higher, leaving Putin in charge of the decision to cut energy ties with Europe. An embargo is the only step that makes sense.
