An immediate EU-wide embargo on Russian oil and gas imports would send economic shockwaves throughout Europe and cause at least £70bn of damage to the British economy, chancellor Rishi Sunak has told colleagues.
His warning comes after prime minister Boris Johnson urged western allies to follow the lead of the UK and US and ban imports of Russian hydrocarbons.
Last week, US president Joe Biden issued an executive order to prevent imports of Russian oil and gas as part of the west’s broader package of sanctions against Moscow in the wake of its invasion of Ukraine.
At the same time, the UK announced it would cut all Russian oil imports to zero by the end of the year but has yet to make its position clear on Russian gas.
The EU did not follow suit and instead unveiled a plan to cut Russian gas imports by two-thirds within a year. But last week, more than 100 MEPs signed a letter calling for an EU ban to kick in immediately, despite the huge dependence of countries including Germany on Russian imports.
Moscow supplies 40 per cent of the bloc’s gas and a quarter of its crude oil. In contrast, the UK and US are much less dependent on Russia with oil imports accounting for 8 per cent of total British imports.
Sunak told colleagues at a meeting of the cabinet last week that an immediate total EU ban would tip economies across Europe into recession, including the UK, according to officials. He estimated it would result in a hit of between £70bn and £75bn to the British economy “straightaway” — the equivalent of about 3 per cent of gross domestic product.
The European Central Bank has estimated that just a 10 per cent drop in gas supplies to the eurozone would cut output by 0.7 per cent of GDP, making an outright ban highly damaging.
The chancellor is already struggling to address a looming cost-of-living crisis — including inflation and higher prices for food and petrol — with rising energy prices alone set to impose a £38bn burden on households by the end of the year.
Asked about Sunak’s comments, the Treasury said it was already spending billions to help households with their energy bills and would continue to “monitor the impacts that Putin’s invasion of Ukraine is having on the cost of living here.”
Sunak’s warning underlines that there is some relief in the Treasury that the EU is holding back from an all-out boycott of Russian oil and gas, despite Johnson and other senior ministers urging the bloc to do so.
Olaf Scholz, the German chancellor, has said he would rather apply “sustainable” pressure on Moscow to avoid too big a cost for consumers. EconPol Europe, a think-tank, has predicted that Germany would suffer a 3 per cent decline in GDP — with “major economic slumps and upheaval” — if energy imports from Russia were abruptly halted.
Frans Timmermans, vice-president of the European Commission, said it would be possible to replace two-thirds of Russian imports this year — equivalent to 100bn cubic meters — with a total phaseout by 2030.
Kallum Pickering, senior economist at Berenberg Bank, said a European embargo on Russian oil was “a key tail risk to our [forecasts] for the next few months”.
For advanced economies such as the UK, he said: “If Russian oil supplies to global markets — 11 per cent of the total — are cut in a major way, the resulting global supply shock would likely lead to a deeper near-term hit followed by a much slower recovery thereafter.”
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Source: Financial Times