Living without Russian gas

Think tank: Institute for Government

Author(s): Olly Bartrum; Gemma Tetlow

March 18, 2022

This report from UK think tank the Institute for Government looks at what the government could do to manage a possible cut-off of gas from Russia.

The sanctions imposed on Russia since its invasion of Ukraine in February have had a devastating impact on its economy. Most severe was the move to reduce the Russian central bank’s access to its foreign exchange reserves, which has limited the bank’s ability to stabilise the rouble, the value of which has fallen sharply. But Russia is still able to access a large flow of foreign currency in payment for its energy exports. Most of its energy contracts are denominated in dollars or euros and payments have increased due to the rise in energy prices over recent weeks. As a result, this trade could be providing Russia with as much as $1 billion in export earnings every day. This flow of foreign currency is being used to fund Russia’s imports and has helped stabilise the rouble. This has led many commentators and politicians to argue for Europe to cut off energy imports from Russia with immediate effect. This would be an unprecedented escalation of sanctions, though the effect of such a move would also seriously affect the EU and UK economies. To manage the impact of a potential cut-off of Russian gas, governments across Europe need to plan now. This paper sets out some of the options the UK government has to mitigate any fallout from such a move – first looking at ways to target the root of the problem, by boosting alternative sources of energy supply or reducing demand, then ways it could step in to protect households and businesses from the effects of higher prices.