A Russian oil embargo would be good – a tax would be even better

The Western nations are inching towards a Russian oil embargo, propelled by the unfolding horrors in Ukraine. The French President is talking of curbs on imports. The German President has admitted his blunder over the Nord Stream 2 pipeline, while his Chancellor is preparing to face down the industrialists who are predicting the end of their financial world if they are denied Russian energy. His country is labelled “morally reprehensible” and accused of being “the financial sponsor of Russian war crimes.”

Across the West there is now a clear moral choice between maintaining our cosy lifestyle and taking the economic pain to stop the advance of a dictator who cares nothing for civilisation, human rights or peoples’ suffering.

An embargo will hurt Russia, restricting the lifeblood flow of dollars, currently running at $700m a day to finance Putin’s war machine. The fiction that sanctions would have any significant impact has been exposed. However, a tax on imports of Russian crude would be more effective, more flexible, and work with the grain of the market, rather than trying to disrupt it.

Worldwide agreement would not be necessary, since most Russian oil goes to Europe, and other users might be shamed into imposing the tax, with the proceeds paid to the International Monetary Fund to rebuild Ukraine. At present the leaky ban on oil imports shows up as a discount of around $20 a barrel for Urals crude over Brent, which gives some indication of where a tax might start, although predicting the price impact is almost impossible.

Given the extremely low cost of Russian production, the response might be to raise output to keep the dollars flowing, pushing the price down. Alternatively, the Russian president might turn down the taps and watch the price rise, believing that Russia is better equipped to bear the economic pain than the consumers of the western world. Either move would breach the existing output agreements in OPEC+, allowing Saudi Arabia a fair excuse to breach its own agreed ceiling and raise its production to prevent the price rising too far.

Unlike an embargo, the tax rate could be swiftly changed. China and India, the only other major importers outside the West and Japan, would not join in, but India at least might be persuaded to impose some lower rate on its (suddenly cheaper) Russian oil. If $20 a barrel made no impact on Putin’s policies, it could be doubled until it did.

That revenue, paid to the IMF, would accrue at over $100m a day, towards the enormous sum which will be needed to rebuild Ukraine. The money would effectively be a down payment for war reparations, while German industry, rather than threatening to shut up shop, could continue to buy the (more expensive) Russian output. Other producing nations would have an immediate fiscal incentive to try and raise output to increase their market share. The current world pariahs like Iran and Venezuela might come in from the cold.

Embargoes are hard to impose, and harder to end. This one would hand China a massive competitive advantage through a lower cost of energy, as the country bought cheap Russian oil. A tax would have a similar effect, but is far more flexible. It would be a tangible example of the cost to Russia of the destruction her forces are wreaking, measured in the billions of dollars it would raise. Now is the time.

After maximum pain

As the inflation rate careers ever-upwards, with double-figures later this year now a real possibility, it seems perverse to suggest we are near the point of maximum pain. Capital Economics’ boffins are not quite convinced, but there is some evidence to suggest that the global inflationary machine will soon start running out of fuel.

As so often, the first signs are in the US, where “there is early evidence of an easing in cyclical price pressures”, the indicators which signalled the rise last year before it reached the marketplace. Then there is the sea-change in behaviour of the leading central banks. After years of ever-looser money conditions, all are now tightening, stopping their bond-buying programmes and raising interest rates.

Monetarism is way out of fashion nowadays, but in economics, warnings from out-of-fashion indicators often come back to bite you when you least expect it. As tighter money squeezes demand, the commodity boom – exacerbated by the impact of the war in Ukraine – may prove to be short-lived. The world is not short of oil, nor of capacity to feed itself. Some metals will remain in short supply, but high prices always stimulate substitution, and metals as a whole have been miserable investments for years. Grin and bear it if you can.

Money-saving suggestion

A plaintive cry from Grant Shapps, this week’s transport secretary. He has failed to find a new chairman for HS2, the world’s most expensive railway, and is trying again. “The role has been updated to attract leaders from a wider field of sector and backgrounds” according to the job ad. It’s hardly a surprise that nobody wants to drive this rattling train. It has been a vanity project from the start, which eats money on a Johnsonian scale and will make the nation poorer.

Despite all the misery and upheavals digging the route has caused, it is still not too late for sanity to prevail. I have a money-saving suggestion for Shapps: I’ll take the job if I’m allowed to stop all work, compensate the losers and use a fraction of the savings to transform urban bus services outside London, where connectivity is desperately needed if “levelling up” is to be more than a slogan. Oh, of course. As Shapps knows, it really is only a slogan.

With fellow journalist Jonathan Ford, I have launched a podcast, A Long Time In Finance, every Friday morning. Listen on Spotify or Apple apps.