Oil Embargo in Russia: A Recap
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Jolin Che, Publicity Executive
On 24 February 2022, Russia launched a full-scale invasion of Ukraine, escalating the war that started in 2014 (World Economic Forum, 2023).
The invasion has sparked extensive global apprehension and garnered widespread condemnation from numerous nations, prompting them to affirm their commitment to supporting Ukraine by curtailing Russia’s earnings that are used to spearhead their invasion and attacks on the country (World Economic Forum, 2023). This includes the enforcement of an oil embargo, which rendered Russia unable to export oil to various countries.
Below are some implementations made to restrict Russia’s earnings from its oil exports:
From 5 February 2022, the European Union (EU), which consists of 28 countries, and the United Kingdom (UK) decided to end imports of Russian oil brought in by sea and ban any refined oil products that will come in from then (BBC, 2023).
On 8 March 2022, President Biden declared a ban on the importation of petroleum, coal, and natural gas from Russia into the United States (U.S.) (Hack, 2022).
Given that Russia stands as one of the world's major exporters of this crucial global commodity (Thapar et al., 2022), the abrupt reduction in oil exports could potentially precipitate an oil shortage across the international stage.
Anadolu / Getty
How does this impact Russia and the rest of the world?
Needless to say, Russia’s economy is severely affected by the embargo, especially since energy represents over 30% of Russia’s Gross Domestic Product (GDP), with 75% of it being contributed by oil (Thapar et al., 2022). Hence, it will be extremely hard for Russia to redirect this large surplus of oil to other countries after having lost one-third of its oil demands (Rühl, 2022). With that, there was a 32% decrease in Russian oil revenues in December 2022 (Centre for Research on Energy and Clean Air, 2023). Furthermore, their economy shrank, as evidenced by the 2.1% drop in the Russian GDP in 2022 (Aljazeera, 2023).
On the other hand, with the heavy reliance on Russia’s supply of oil in the past, this oil embargo has negatively impacted a multitude of other nations, which can also be explained by the already undersupplied oil market before the intensification of the war (Young, 2022).
For instance, Russia was the third-leading petroleum provider for the U.S., which accounted for up to 8% of U.S. total petroleum imports (U.S. Energy Information Administration, 2023). Furthermore, Russia supplied 24.9% of the European Union’s fuel. Hence, with further restrictions on oil from Russia, many countries are facing a shortage of oil, and are struggling to find alternative supplies (Thapar et al., 2022).
Furthermore, with the demand for oil exceeding its supply, consumers must compete for the limited quantity available, causing upward pressure on its prices. As such, global oil prices have surged by approximately 60% since the start of 2022, the highest levels since 2008 (Khan & Kelly, 2022).
Moreover, this causes inflation, as the price increase of oil also raises the cost of production and transportation for goods and services that rely on oil, which ultimately leads to higher prices for consumers (Ivanova, 2022). For instance, an upsurge in oil prices directly amplifies the production costs of oil-derived products like gasoline, diesel fuel, heating oil, and plastics (Lioudis, 2022). This ultimately causes consumers from around the world to suffer, possibly “even more than Putin” (Ivanova, 2022).
Adding on, the combination of inflation and reduced trade can lead to a situation of stagflation in the global economy. Stagflation occurs when there is a combination of stagnant economic growth, high unemployment, and high inflation. In the current scenario, disruptions to the global supply chain of oil and other goods, along with rising prices, can lead to a slowdown in economic growth, and higher prices for goods and services.
Stagflation is considered to be a highly problematic economic situation because it presents policymakers with a difficult dilemma (Rasure, 2023). The usual tools that are used to address economic problems, such as monetary and fiscal policies, are not completely effective in dealing with stagflation. This is because policies that are designed to boost economic growth, such as reducing interest rates or increasing government spending, can also worsen inflation, while policies that are designed to control inflation, such as raising interest rates or reducing government spending, can also worsen economic growth.
In fact, the International Monetary Fund (IMF) forecasts that global economic growth will slow down by 2.7% in 2023, partly contributed by the disruptions of the global supply chain of oil (World Economic Outlook, 2022).
Hence, with the ongoing oil embargo on Russia creating a negative domino effect on the global economy, this raises concerns as to whether the oil ban had been a good choice.
Jurong Refinery in Singapore. ExxonMobil.
Will this affect Singapore too?
Singapore may not be directly impacted by the oil embargo, as a significant portion of its oil imports originates from China (Trading Economics, 2023), and the country has not imposed restrictions on oil imports from Russia (Low, 2023).
However, we should not forget that oil plays a critical role in various industries, including but not limited to transportation, manufacturing, and agriculture. For instance, transportation accounts for around 60% of global oil consumption (International Energy Agency, 2021), and more than 6,000 products are made from petroleum, including fuels, chemicals, and plastics (Rossen, 2022).
This means that there will be increased costs of production in various industries around the world, causing consumers to bear the brunt of paying for goods at a higher price, as mentioned earlier. This impact can be particularly pronounced in Singapore, especially since we are heavily reliant on imports for many essential goods. As the cost of transportation and production rises globally (McFarlane, 2022), the prices of imported goods in Singapore are likely to increase as well. This can lead to higher costs for food, energy, and other essential goods, which can disproportionately affect lower-income households and those on fixed incomes.
For instance, food manufacturers are currently dealing with unprecedentedly high wheat futures prices, as the oil plays a part in the production and transportation of wheat. This necessitates the procurement of wheat from countries other than Russia such as Canada, Australia, and the U.S. at increased prices. This situation may hence also cause an increase in food prices in Singapore (Allen, 2022).
Additionally, the escalation in energy costs is projected to persist, with local transportation companies such as ComfortDelGro and Grab announcing temporary charges to offset rising fuel expenses (Allen, 2022).
Is it the right choice?
With that being said, if the sanctions imposed on Russia cause significant economic challenges to the rest of the world, is it really worth the battle?
Well, many countries are trying out other ways to reduce the economic turmoil, including reducing the reliance on oil by shifting towards other renewable sources of energy (Strasburg & Dvorak, 2022). For instance, the UK is planning to “increase investments in solar projects and offshore wind power” (Strasburg & Dvorak, 2022), and the U.S. “plans to boost liquefied natural gas shipments to Europe” (Pop et al., 2022) to focus more on “decarbonizing while providing reliable energy that doesn’t depend on foreign adversaries” (Energy.gov, 2022).
More importantly, it seems that many countries prioritized supporting Ukraine's sovereignty and territorial integrity, as up to 41 countries have pledged to provide military, financial, and humanitarian aid to Ukraine as of 2023 (Kiel Institute for the World Economy, 2023).
While economic downfalls are temporary, it is crucial to remember that political conflicts can have significant and severe humanitarian and geopolitical consequences, and supporting vulnerable nations is essential to ensuring stability and security in the international community.
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