Interview on oil sanctions: "Russia's economy will sink to the level of North Korea"

EU oil sanctions are hitting the Kremlin hard. New customers like China dictate low prices. The situation is so catastrophic because President Putin failed to prepare Russia’s economy for the future, says Michael Rochlitz, professor of economics at the University of Bremen, in an interview with ntv.de.

ntv.de: Russian crude oil has not been allowed to be imported into the European Union by tanker since December, and since February the embargo has also applied to refinery products such as diesel. How badly do these sanctions affect the Russian economy?

Michael Rochlitz: With the EU, Russia had one of the most important buyers for crude oil, but also for refined products. It will now be gone for a few years, maybe even forever. The Kremlin must try to find other buyers. That’s not that easy. You have to divert the oil for transport and rebuild the infrastructure. In addition, Russia is now dependent on new buyers and is therefore in a weak negotiating position. The more buyers you have, the better you can play them off against each other. Russia can no longer do that.

India and China, for example, are new customers for Russian oil. But business with them isn’t smooth, is it?

China and India know how to negotiate. As a result, Russian crude oil prices have fallen below the $50 per barrel level. Due to the low prices, there is no money in the Russian household. It will be difficult to efficiently export the same amount of oil in the future. China now uses its own supertankers to import additional Russian crude. This also strengthens China’s negotiating position. In the long term, Russia would probably have to build another large pipeline to China because the existing one is at capacity.

What are the consequences of this dependence on oil sales for the Russian economy?

Like many other oil and resource countries, Russia needs to diversify its economy. We see that in other big oil nations, in Saudi Arabia or the United Arab Emirates. These countries are trying to use the resources they now have to become independent of oil and gas in the medium term. In autocratically governed states on the Gulf, people have actually thought about how we can rebuild our countries in a sustainable way so that they remain competitive in the long term. This debate did not take place in Russia. Now the country has no other economic pillars apart from energy exports. In addition, many highly qualified specialists who could have pushed ahead with the restructuring of the economy have left the country.

Does that mean the oil embargo hit the Russian economy hard, but not as hard as President Putin’s wrong decisions?

The embargo has a short-term effect, so the Kremlin has less money in its budget. The problem in the medium and long term is that Putin has taken away Russia’s economic future. There is no plan, no strategy, and no way to prepare this country for the future. The sanctions on the export of high-tech products to Russia are also important in this context. China, Europe and the USA are in strong competition in the field of future technologies. Russia has closed this door to itself. In the long term, the Russian economy will therefore no longer be at eye level with China or the USA, but will sink to the level of North Korea, Cuba or Venezuela.

So Putin has to stick with selling oil. He still has the option of curbing the subsidy in order to drive up the prices. will this work

In the short term, there is a possibility, but the shortage of resources is a gamble. The Kremlin risks losing revenue because other oil exporters have to play along. But they could also increase their output. This can lead to the Russian market collapsing because customers won’t come back. It’s an uncertain supplier anyway due to the war and sanctions.

Could the demand for Russian oil still increase in the future, for example due to the end of the zero-Covid policy in China?

It could be that there will be more demand when the Chinese economic engine starts up again. Perhaps then also somewhat higher prices are paid. But Russia has become very dependent on China. Not only in terms of exports, but also in terms of imports. In addition to consumer goods, technology goods have to be imported from China. Therefore, China can dictate lower prices for Russian oil exports. Russia’s situation is a bit similar to North Korea’s. Without China, North Korea would probably not exist as a state. The Chinese import raw materials from North Korea and supply the country with cheap consumer goods. They are trying to do the same with Russia. It has become the big neighbor that they are good at manipulating because it is no longer dangerous.

Reports of loopholes in the embargo are piling up. Accordingly, Russia supplies oil to India or Saudi Arabia, these countries refine it and then export it to the EU as diesel. Is that correct?

Yes, this is currently being discussed. But that’s still speculation at the moment. It would be possible for India or Saudi Arabia to step in and refine oil. If so, the question arises: how will the EU react? If it takes the embargo seriously, it tries to impose secondary sanctions on India and Saudi Arabia. Or Europe and the USA will clearly say that we don’t buy this oil because it comes from Russia. As things stand now, I’d say you wouldn’t play the game. However, it would take a few weeks for sanctions to close this loophole.

Where is the Kremlin saving now that it has less money at its disposal?

Putin will try to channel the remaining resources towards the military in order to be able to continue the war. Salaries in Russia will then no longer be increased or even reduced, social benefits will no longer be adjusted or reduced. Russia is struggling with high inflation. People are getting paid less and less. One can speak of a regression in the quality of life. Streets and houses are no longer renovated. After a while, this can develop into the devaluation of an entire society, an entire country.

How bleak is the forecast for the Russian economy?

Russia’s economy has been stagnant since 2012, when Putin returned to the presidency. There was this period during Medvedev’s presidency between 2008 and 2011. At that time it was recognized that the model had to change. Attempts have been made to protect entrepreneurs and invest in future technologies. However, this short recovery phase was over in 2012 when Putin returned to the presidency. Per capita income today is at the level of 2008. Since Putin has been back in office, the bottom line has been zero percent growth.

Lea Verstl spoke to Michael Rochlitz.