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Life After Oil. What Iran’s, Iraq’s, Syria’s and Venezuela's experience tells us about the effectiveness of the embargo

Veaceslav Epureanu

The European Union finally agreed on a partial embargo on oil and oil products from Russia. Europe is going to renounce 75% of imports immediately and raise the figure to 90% by the beginning of 2023. This oil embargo is not the first one in modern history, but the results of its application remain, to put it mildly, ambiguous. No-one was able to change a political regime or foreign policy this way, but a decline in the living standards of ordinary citizens in the countries hit by the sanctions is almost inevitable.

ALL CARDS
  • How the Arabs invented the oil embargo

  • Iran: Oil for Nuclear Weapons

  • Iraq: oil for food

  • Syria: oil in exchange for ending the war

  • Venezuela: oil in exchange for a change of power

  • What is in store for Russia?

  • The embargo does not change regimes, but it hinders warfare.

  • The revolution in Russia will happen and the embargo will play its part.

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How the Arabs invented the oil embargo

Oil is the key commodity of the second half of the 20th century, which created a gigantic global market, set the trajectories for the world's largest economies and shaped the lives of billions of people. Not surprisingly, it plays a critical role in international relations and the transnational financial system.

As developed countries grew increasingly dependent on oil, the threat of supply disruptions became an increasingly tangible instrument of pressure in the hands of exporters. This was first illustrated by the Suez Crisis of 1956, when Saudi Arabia cut off oil shipments to France and Britain in retaliation for their invasion of Egypt.

At the turn of the 1960s and 1970s, the breakdown of the traditional oil market structure with stable prices and the domination of Western oil producers was accompanied by two oil embargoes.

In 1967, Arab oil exporters decided to cut oil supplies to the United States, Britain and Germany, the countries that had supported Israel in the Six-Day War. The embargo lasted only a few months and did not really affect the prices, because the organizers of the boycott did not decrease the production, so there was no deficit on the market.

In 1973, a new Arab-Israeli war led to a much more successful attempt to punish Israel's Western allies. The Arab members of the OPEC (Organization of Petroleum Exporting Countries) announced an embargo against the United States, the Netherlands, Portugal and South Africa, cut total production by 25% and raised prices (oil prices rose from $2 in 1972 to $11.6 per barrel in early 1974).

As a result, the price of gasoline soared in the U.S. and Europe, car owners lined up at gas stations and even switched to horses. Western governments had to ration motor fuel sales and impose traffic speed limits.

The embargo ran from October 1973 to March 1974, but its long-term effects are still being felt today. The «oil shock» triggered the development of alternative energy and «green» technologies, and at the same time set high oil prices for years to come. That, in turn, triggered a redistribution of capital from developed industrial countries, which had previously been consuming cheap energy resources, to developing countries – suppliers.

It seemed that OPEC had become the most powerful organization in the world and would now dictate its will to everyone else. But in fact, the colossal revenues from oil exports made the cartel members dependent on importers.

Colossal revenues from oil exports have made cartel members dependent on importers

Rich on oil rent, the elite used the proceeds to buy securities, shares and other assets on developed markets, investing in the economy of oil consumers. This is how the petrodollar «recycling» emerged, ensuring the economic prosperity of the recipient countries and the personal financial wealth of the petrocracy, tied to the stability of supply.

Since 1973, major unilateral and multilateral oil embargoes have been imposed by oil importers rather than exporters. The most typical examples include restrictions on Iran, Iraq, Syria, and Venezuela.

Iran: Oil for Nuclear Weapons

Energy sanctions against Iran have been in place with little interruption for more than 40 years. The U.S. first banned Iranian oil imports after the Islamic Revolution and the 1979 hostage-taking at the U.S. Embassy in Tehran. In the 1990s and 2000s, the range of restrictive measures expanded to a ban on investment in the oil and gas sector, equipment supplies and servicing oil traders by U.S. banks. The EU and other U.S. allies joined the sanctions.

The oil embargo was intended to limit Iran's financial ability to support terrorist groups in the Middle East and create weapons of mass destruction.

In 2016, Iran made a «nuclear deal»: it agreed to have its nuclear program placed under control in exchange for the lifting of all sanctions. But in 2018, the U.S. withdrew from the agreement, accusing the Iranians of failing to comply with the agreement.

Has the embargo worked? The Iranian economy has been struggling all these years with double-digit inflation, a devalued national currency, a shortage of imported components, and high unemployment. The effect of the sanctions (not just oil sanctions) is measured at 44% of GDP per capita. In other words, Iranians are now almost half again as poor as they could have been otherwise.

But the political stability of the ayatollah regime, despite periodic mass unrest, is not threatened. Iran's nuclear program is progressing well - according to Israeli estimates, Tehran is six months away from developing the necessary amount of weapons-grade fissile material for a nuclear bomb.

Because of sanctions, Iranians are now nearly half again as poor as they could have been otherwise

Pro-Iranian political-military movements are successful in Lebanon, Syria, Iraq and Yemen. Iran is a key external player in the military conflicts that shape the security architecture in the Middle East and is a major threat to the interests of the United States and its allies in the region.

The oil embargo itself, judging by indirect signs, is poorly observed: oil is being secretly transferred to tankers belonging to neutral countries; swap deals with non-sanctioned countries, various barter schemes and customs clearance tricks are also being used.

Iraq: oil for food

Iraq has been under international sanctions since the armed invasion of Kuwait in 1990. A UN Security Council resolution imposed a complete trade embargo, particularly on oil exports, the main source of foreign exchange for Saddam Hussein's regime.

Following the defeat of Iraqi forces in Operation Desert Storm, Iraq lost its ability to export oil on its own and to purchase necessary imported goods.

In 1995, Iraq adopted the «Oil for Food» program. Under the program the export revenues from oil sales went to special accounts under international control. Using the money to purchase imported goods required the approval of UN officials. Part of the proceeds went immediately to paying reparations to Kuwait.

During the implementation of the program, Iraq became one of the poorest countries in the world. By the early 2000s, about a third of Iraqi children suffered from malnutrition of varying severity, citizens’ living standards decreased several times over, and the central authorities were unable to maintain schools and hospitals at an appropriate level.

The stability of dictator Saddam Hussein was not affected by the economic catastrophe. Moreover, it was the comparatively better educated Iraqis, those who could have created a demand for democratic change, who suffered the most from the dramatic drop in living standards. So, they emigrated en masse or engaged in banal survival. In the 2002 renewal referendum, Hussein received 100 percent of the vote with 100 percent turnout.

The stability of dictator Saddam Hussein's position was not affected by the economic disaster

The oil-for-food program itself became a symbol of blatant corruption. Saddam Hussein and his cronies bribed foreign politicians and functionaries of international organizations and received kickbacks, earning several billion dollars, according to various estimates. Liberal Democratic Party leader Vladimir Zhirinovsky and the Russian Orthodox Church have been named as likely bribe recipients.

It took a U.S. military invasion in 2003 to bring about a regime change in Iraq. In the same year, the oil-for-food program was terminated. But the government of post-Saddam Iraq regained full control of oil revenues only in 2010. And Iraq paid $52 billion in reparations for the invasion of Kuwait only in December 2021.

Syria: oil in exchange for ending the war

The U.S. and the European Union imposed an oil embargo on Syria in 2011, at the height of the civil war between President Bashar al-Assad's troops and the armed opposition.

Until then, about 90 percent of Syria's crude oil, worth more than $4.5 billion a year, was shipped to Europe. Syrian oil production had been declining rapidly even before 2011 due to the depletion of proven fields, but just one year later, the country became a net importer of oil and petroleum products. A rather painful blow to official Damascus was softened by Iran and Russia, which arranged for oil and fuel supplies.

During the hostilities the oil industry infrastructure was severely damaged, and the oil fields were changing hands regularly. Assad's soldiers, Kurds, fighters from various jihadist movements and Russian mercenaries linked to businessman Yevgeny Prigozhin, who is close to the Kremlin, have been involved in the struggle for them.

Now about 90 percent of Syria's oil and 50 percent of its gas reserves are controlled by the Syrian Democratic Forces, a motley coalition of groups opposed to Assad and supported by the United States. Therefore, the Europeans lifted the embargo on Syrian oil imports back in 2013.

In the end, the Western oil embargo contributed more to the spread of Iranian and Russian influence in Syria, as well as to the flourishing of Syrian oil smuggling along the Turkey-Syria-Iraq border, than to any significant damage to President Assad.

Venezuela: oil in exchange for a change of power

The administration of U.S. President Donald Trump imposed an embargo on oil from Venezuela in 2019 as part of a coordinated campaign. Its goal was to secure the transfer of power from the unfriendly regime of Nicolas Maduro to opposition leader Juan Guaido, who proclaimed himself the country's legitimate president.

Venezuela's oil production had been declining for years due to constant domestic political and economic crises, including the one caused by the earlier U.S. sanctions. But in 2020 it reached a historic low of 300,000 barrels per day (the coronavirus pandemic also played a role). By comparison, the country had been producing nearly 1.5 million barrels per day in 2018.

As in the case of Saddam Hussein-era Iraq, the sanctions caused horrendous damage in Venezuela: hyperinflation, a GDP decline rate of 20-30% per year, exploding crime rates, shortages of basic necessities in stores, with 96% of households living below the poverty line, and nearly 6 million refugees. And just as it happened in Iraq, the socio-economic upheaval did not lead to a change of power.

Sanctions caused horrendous damage in Venezuela, but did not lead to a change of power

After Russia's attack on Ukraine, the U.S. administration considered easing sanctions on Venezuela, thereby maintaining the global balance of oil supply and demand in anticipation of Russia's export restrictions. In early June, the U.S. allowed Venezuelan oil exports to Europe for the first time in recent years.

But oil production in Venezuela was already recovering due to favorable price conditions and cunning mechanisms to bypass U.S. sanctions. In particular, Venezuelan oil reaches the world market with the help of intermediaries from Iran and Russia, operating via a network of front companies that change the names of oil tankers, disable navigation transponders and transship oil on the high seas.

What is in store for Russia?

Russia is the world's third largest oil producer (after Saudi Arabia and the U.S.), the second largest crude oil exporter (after Saudi Arabia) and the largest exporter of oil and petroleum products.

In 2021, the EU imported €71 billion worth of oil and oil products from Russia. Since February 24, 2022, when Russian troops attacked Ukraine, Europeans have paid nearly €65 billion for fossil fuels from Russia, spending most of it, €31 billion in more than four months, on oil.

At the last meeting of the EU leaders, an agreement was reached to ban imports of Russian energy products by sea (75% of the total volume) while temporarily allowing supplies through the Druzhba pipeline. It is planned to give up 90% of Russian oil and oil products by early 2023.

Europe accounted for nearly 50% of Russia’s total oil exports. It will be difficult to reorient the oil streams to new markets (in fact, only the Asia-Pacific region remains), because the sanctions also apply to the insurance of oil cargoes, and the throughput capacity of the existing railway and pipeline routes to the east is low.

India, China and other Asian buyers are traditionally oriented toward Middle Eastern suppliers and will agree to deal with Russian oil fraught with risks only if large discounts are offered. Those discounts have already reached 30-40%.

Russian economists Sergei Guriev and Oleg Itskhoki argue that a European embargo on Russian oil and gas is the surest way to deprive the Kremlin of financial resources and thus stop the war in Ukraine. Once the embargo takes full effect Russia's losses are estimated at $25 billion to $60 billion a year.

Once the oil embargo takes full effect Russia's losses are estimated at $25 billion to $60 billion a year

At the current exchange rate, losses will thus range from 1.5 trillion to 3.5 trillion rubles. For comparison, the total revenue of the Russian budget in 2022 is 25 trillion rubles. At the same time, due to rising world prices, oil and gas revenues of the Russian budget are only increasing: from January to May, they increased by 45% in annual terms – from 3.1 trillion to 5.6 trillion rubles.

Under the circumstances, it is doubtful that in the short term the announced parameters of the EU oil embargo will help to undermine the Kremlin's ability to wage war and destabilize the situation in the world. To all appearances, it is well understood in the West, which is why better options are being discussed: from protective tariffs on Russian oil to a compulsory oil price «cap».

The embargo does not change regimes, but it hinders warfare.

Oleg Itzhoki, economist, professor at the University of California at Los Angeles (UCLA)

It must be understood that oil embargoes do not lead to regime changes. The aim is quite different. Russia has received $100 billion from the export of energy resources since the start of the war - almost twice as much as during the same period last year. This is due to the fact that oil and gas prices are higher now and that there was increased demand due to the fact that European countries were trying to fill their storage facilities for the future. But the income amounted to nearly 60% of the Russian budget, while in normal years the income from energy exports was just under 40%. The fact is that other sources of income have shrunk.

There is no doubt that those revenues directly or indirectly support the country's ability to conduct an aggressive foreign policy. In this situation, the oil embargo looks more than justified, even compared to the other cases. If we compare it to the Iranian oil embargo, it was imposed to limit Iran's ability to develop nuclear weapons. For how long has Iran been saying they wanted to destroy Israel? And yet no direct military action has been taken against Israel, only direct funding of hostile political-military movements.

If Europe does not buy half of the oil and gas they bought before, it will significantly reduce Russia's revenues. First of all, it is important to limit Russian budget revenues so that it would be impossible for Russia to finance the war at the same rate. In this sense, the sanctions do work. And although it is possible to circumvent them, the sanctions make it much harder to sell on alternative markets. Already, Russian oil in other markets is being sold at a discount. In addition, it is difficult to find markets where oil can be sold in the same volumes. It has to be transported, and transportation costs more.

It is important to limit Russian budget revenues so that it would be impossible for Russia to finance the war at the same rate

The theory of sanctions works in such a way that at the very moment the war began, the maximum possible sanctions should have been imposed. We have actually seen something like this - for example, the freezing of reserves. But European countries did not go to the trouble of restricting energy purchases. The proper approach is the maximum sanctions in the beginning, implying a return to the negotiating table when the war stops. This has not happened.

Export sanctions greatly affect the negotiating position of the affected countries. The war will end in negotiations at some point in any case, and it is extremely important what positions the sides will have at that point, how they will be prepared to stop the hostilities. Apparently, we are several months away from that, but the actual timeframe will strongly depend on how much economic pressure will be brought to bear on Russia.

Estimates by European experts suggest that Europe could give up both Russian oil and gas, albeit at significant costs. We are talking about the loss of 2-3% of GDP, yet it is possible. There will be a shortage of gas, but not of oil – we'll just have to buy it at a higher price. Then it will be a question of how the European countries will be able to cooperate and ensure that there is no energy shortage.

It is important that Europe is ready for both oil and gas being shut off if it’s done unilaterally by Russia. Another thing is that for political reasons it does not want to initiate the refusal. Refusing to buy Russian oil and gas is an active political decision that has to be made. So we’ve reached a stalemate. And from all appearances, the war has lasted longer than it would have lasted if those sanctions had been adopted in the first week of the war.

The revolution in Russia will happen and the embargo will play its part.

George Derluguian, historical macrosociologist and professor at New York University in Abu Dhabi, UAE

Today a huge and unprecedented experiment is underway. The 1973 oil embargo was imposed by producers acting blindly under the pressure of the highly emotional political situation at the time. No one then imagined that a momentary and seemingly declarative measure by some organization called OPEC would bring the world economy down causing a protracted crisis.

The oil embargoes previously imposed on Iran, Iraq, Syria and Venezuela were not successful. Although there had been much larger embargoes in the past, such as the ones against Hitler's Germany and Japan during World War II. Dictatorships apparently do not collapse due to embargoes precisely because they brutally dictate to their subjects the conditions of their lives. But embargoes can also dictate to dictatorships their own retaliatory moves, which are sometimes suicidal. The threat of the engines of tanks and planes stopping was one of the main reasons Hitler sent the Wehrmacht not to Moscow but to the Volga and the Caucasus in 1942. The same goes for Japanese kamikazes.

The extent to which the oil embargo can cause serious economic damage depends on political will. Tracking and punishment mechanisms are an achievable task for modern states.

The extent to which the oil embargo can cause serious economic damage depends on political will

There is a view that the super profits from oil exports are in some way correlated with the degree of aggressiveness of non-democratic political regimes. There is a correlation, but, as always, only a partial one. In Iran, they joke that oil should be banned in Islamic states, just like alcohol. It is not so much a temptation of easy wealth, as the fact that with a natural rent the ruling elite have no particular reason to take into account the opinion of their own subjects in matters of war. The parliamentary regimes in Western countries were once created as mechanisms for balancing the burdens of wars and taxes.

The revolution in Russia will happen one way or another - from above, from below, or, as is often the case, first from above and then from below. The embargo will play the role in impoverishing the masses and increasing the confusion of the elites. It will be according to Lenin: the lower classes will not want to live like that, the upper classes will be unable to do anything about it. Back in January 1917 the political émigré Lenin, as is well known, did not expect to live to see another revolution in Russia. As before, so today, the moment the system breaks is unpredictable. But objectively it is being prepared as a course of history and political struggle.


Written in association with Sofia Presnyakova

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