In these violent times, it is topical to delve into the often-discussed question of how the revenues from natural resources enable the waging of wars and civil conflicts in many regions of the world. The most notable example, of course, is the horrifying war in Ukraine, but the flared-up violent conflict in the Middle East is another one. Sanctions have long been the default response of OECD countries to clamp down on resource revenues fuelling wars. They have had limited success, though, and by now, it is time to acknowledge that this won’t really get much better. The only effective answer may be to accelerate the global energy transition and pursue the admittedly long and bumpy road of transitioning away from fossil fuels. Shortly after World War II, President Eisenhower coined the term ‘Atoms for Peace,’ making the case for boosting the civil use of nuclear energy to produce electricity. Perhaps now is the time to broaden this motto to include renewable power and promote ‘Electrons for Peace.’

Russian oil and gas revenues financing war in Ukraine

In my recent book on the political economy of resource-rich countries, I discussed the existing literature on the link between abundant natural resources and the waging of wars [1]. Ashford (2022) sums up this debate by stating “among scholars, there is a growing consensus that petrostates are more likely than other countries to start wars” [2]. The most recent example is, of course, Russia’s invasion of Ukraine in February 2022. It is clear that Russia is only able to finance this long and costly war because of its large oil and gas revenues. Fully aware of this link, G7 and EU countries have imposed many rounds of economic sanctions and an oil price cap on Russia, with the aim of reducing its oil and gas revenues and thus undermining the main source of financing the war. So far, the results of all those sanctions have been surprisingly limited. Currently, although on a slight declining trend, Russia still exports an estimated EUR 4.2bn worth of fossil fuels per week, including to the EU [3].

Why have Russia’s oil and gas revenues held up so well? The answer is relatively straightforward. Firstly, many non-OECD countries have not implemented these G7/EU economic sanctions on Russia. This is the case for China and India in particular; they have even benefited from significant discounts on Russian imports. Secondly, the EU sanctions still allow for a number of exceptions for some countries that have been very dependent on Russian pipeline gas imports (like Austria and Slovakia), while LNG imports have not yet been covered either. After an initial strong reduction of the EU’s dependency on Russian gas imports from 45% in 2021 to 15% in 2023, we now see an uptick again in the share of Russian gas in EU imports to 20% [4]. Thirdly, Russia has been remarkably successful in circumventing and evading the sanctions in several ways, most notably by using a ‘shadow’ fleet of an estimated 400 tankers with opaque ownership [5]. According to one estimate, over half of Russian oil and products were shipped via ‘shadow’ tankers [6]. Last but not least, following a history of prudent macroeconomic management, Russia has demonstrated remarkably effective and competent economic stewardship, surprising the world with a 1.5%-point upward revision of its 2024 economic growth projection by the IMF [7].

This has enabled Russia to keep the war machine up and running, with its new government budget projecting a further boost of military expenditures. For 2025, the Russian government seems to plan an increase of defence spending by 22.6% compared to this year; defence and national security spending together will surpass 8% of GDP, accounting for 40% of all federal expenditure [8]. With such a strong focus on financing war, it is obvious that Russia has hardly invested in economic diversification other than the arms industry. The economic complexity of its export industry has declined over the last 20 years [9].

Another energy dimension of the war in Ukraine is the focus on targeting the energy infrastructure, in particular power plants and oil refineries, as this is of critical importance to fuelling the warfare machinery. It is estimated that half of the electricity sector of Ukraine has been destroyed [11]. The energy infrastructure is also the place to look for signs of a de-escalation of war efforts, as recently flagged by President Zelenskyy when he suggested a mutual agreement on ending strikes on energy infrastructures [12]. According to recent news, Ukraine and Russia have embarked on early-stage negotiations to halt energy plant strikes [13].

Iranian oil revenues fuelling Middle East conflict

Although the Middle East has traditionally been a turbulent region, the horrific terrorist attack of Hamas in Israel in October 2023 has triggered a significant escalation of violence related to long-standing conflicts, spilling over from an Israeli war against Hamas in Gaza to Hezbollah in Lebanon and the Houthis in Yemen. More recently, we have even witnessed attacks from Iran on Israel and vice versa.

There is little doubt that in this resource-rich region, the revenues of oil and gas exports are an important source of financing violent actions and quasi-warfare. According to many experts, Iran has played an outsized role in this regard. Even under the regime of the Shah, military expenditures were at a very high level and seemed to have a higher priority than economic development and diversification [14]. Since the Iranian revolution in 1979, this trend has continued, with more emphasis on international activities. For many decades, Iran has aided Hezbollah in Lebanon with goods, weapons, and money. Helped by significantly higher oil revenues, Iran is now estimated to send Hezbollah roughly $700m per year [15]. The violent actions of Hamas in Gaza and the Houthis in Yemen apparently also depend at least partly on oil shipments, weapons, and money from Iran. According to UN experts, the Houthis receive monthly fuel donations from Iran valued at $30m [16]. Hamas’ estimated budget of more than $300m is at least partly financed by Iran [17].

This raises the important question of how this could have happened and still continues despite the severe economic sanctions that have been imposed on Iran for many decades, in particular by the US since 2018. The answer is very similar to what was discussed in the previous paragraph on Russia. Firstly, Iran found several ways to evade the sanctions by creating a web of front companies in the Middle East and Asia, using banks in China, Hong Kong, the Gulf and even some Western countries, many of which unwittingly handle Iranian money, as has recently been reported in surprising detail [18]. Secondly, non-OECD countries did not follow these sanctions on Iran and have been happy customers of Iranian oil, enjoying significant discounts, in particular China and India. According to one estimate, 80–90% of Iran’s oil exports are going to China [19]. Iran has become an official member of the BRICS group and is therefore much less isolated internationally than previously. Thirdly, the sanctions have not been enforced rigorously in recent years, with the aim of easing the oil market and keeping oil prices from harming the global economy. As a consequence, Iran’s oil exports have risen to roughly 1.8m barrels per day, the highest level since October 2018. The government’s oil revenues last year amounted to an estimated $53bn in 2023, up from $37bn in 2021 [20]. Oil exports represent up to 70% of Iranian government revenues [21]. The size of these oil revenues is such that Iran’s foreign operations can be sustained and financed. The main constraint is, of course, that most of these revenues are also required to meet the needs of the domestic population and economic development. There have been some signs of popular unrest in Iran [22], but from the outside, it remains hard to assess how deep this goes. Regarding economic development, it may come as a surprise that Iran’s recent economic growth performance is quite solid, as the country has even managed to improve the economic complexity of its exports in the last 20 years [23]. However, despite this relative progress in economic diversification, the contrast with some of the Gulf countries is stark and growing, in particular with Saudi Arabia. Ever since Saudi Arabia launched its Vision 2030 under the leadership of Crown Prince Mohammed Bin Salman, it has made tangible progress in economic diversification beyond oil, while also boosting large-scale renewable energy and hydrogen projects in the context of its energy transition [24]. As it was aptly put recently, the clash between Iran and Saudi Arabia centres on their respective strategic visions: Iran’s Vision 1979 and Saudi Arabia’s Vision 2030 [25].

As a consequence of the Israel-Hamas war, there have been some interruptions of Israel’s gas exports to Egypt and the prospects of Eastern Mediterranean energy projects have suffered a serious setback [26]. The Eastern Mediterranean region allegedly holds discovered and potential gas reserves comparable to those in the North Sea, including offshore Lebanon and Gaza. The eruption of the Israel-Hezbollah war may cause other disruptions of gas supply that may even affect Israel’s domestic supply. Although the government revenues from Israel’s gas exports have been on the rise, its contribution to total government revenues is still relatively modest. Meanwhile, the costs of the war are starting to negatively affect Israel’s economic growth prospects [27]. At the same time, Middle East conflicts, and in particular the recent Iran-Israel escalation, always carry the serious risk of oil price hikes or oil supply disruptions that can derail the world economy [28].

Economic sanctions and the law of diminishing returns

If we take a step back, it seems hard to avoid the conclusion that both Russia and Iran have managed to navigate the waves of economic sanctions rather skilfully over many years and even decades in Iran’s case. More importantly, they have succeeded in securing enough oil and gas revenues to keep their foreign military operations going. The US and the EU continue to consider stricter sanctions that are supposed to fix loopholes and evasions. The recent re-election of President Trump might make it less likely that the US will stay on this path in the case of Russia, while seeking to strengthen sanctions on Iran. However, looking at history, it is very doubtful this will ever succeed. Sometimes one even gets the impression that the more rounds of sanctions are added, the less impact they have: the law of diminishing returns from economics. This is the case for the same reasons discussed above; in a multipolar world, there are too many countries and market players that don’t abide by these sanctions and even benefit by pocketing large discounts on oil and gas. Even earlier history of the interwar period has demonstrated that economic sanctions are seldom effective, in particular with regard to large countries [29].

If economic sanctions don’t really work in undermining the use of oil and gas revenues for warfare, then what does? The most effective way is to accelerate transitioning away from fossil fuels. Only a consistent reduction in the demand for oil and gas will eventually erode the government revenues tapped for warfare in Russia and Iran. The good news is that this transition is already under way and that it has accelerated after the Russian invasion of Ukraine, as the IEA has demonstrated. This is not only the case in OECD countries, but also in large emerging economies like China and India. The transition to clean energy is increasingly driven by considerations of energy security and industrial policy. IEA’s latest World Energy Outlook states that the world is entering the Era of Electricity with renewable and nuclear power rising rapidly and taking centre stage in the energy transition. The bad news is that the road of the global energy transition will in practice be very long, with many inevitable bumps and setbacks, despite all the calls for an ‘orderly’ transition. However, as the global energy transition starts to eat away at oil and gas revenues, this may well at some point trigger a welcome rethinking of the allocation of these shrinking revenues. Even in Russia and Iran there are other important state priorities than warfare that need attending to, like health care, education and economic development and diversification. For the moment, accelerating the global energy transition appears to be the most promising avenue to pursue for the international community. Maybe it’s time to broaden President Eisenhower’s motto to ‘Electrons for Peace’. 

References

1. Noé van Hulst, From Dutch Disease to Energy Transition, 2023, freely available on https://www.ciep.energy
2. Emma Ashford, Oil, the State and War, Washington DC, 2022, p. 1.
3. Centre for Research on Energy and Clean Air (CREA), Weekly snapshot – Russian fossil fuels 7 to 13 October 2024, https://www.energyandcleanair.org
4. Javier Blas, ‘Europe Can’t Kick Its Addiction to Russian Natural Gas,’ Bloomberg, 23 October 2024.
5. Tow Wilson, ‘Inside the ‘shadow fleet’ ‘, Financial Times, 10 October 2024, p. 17.
6. September 2024 – Monthly analysis of Russian fossil fuel exports and sanctions, 11 October 2024, https://www.crea.org
7. Anastasia Stognei & Max Seddon, ‘The surprising resilience of Russia,’ Financial Times, 3-4 February 2024, p. 5.
8. Alexandra Prokopenko, ‘Russia’s budget is a blueprint for war despite the cost,’ Financial Times, 8 October 2024, p. 17.
9. https://www.eci.org
10. Politico, 30 October 2024.
11. Politico, 30 October 2024.
12. ‘Kyiv proposed mutual end to energy attacks,’ Financial Times, 23 October 2024, p. 2.
13. ‘Kyiv and Moscow in talks on halting energy plant strikes as winter looms,’ Financial Times, 30 October 2024, p. 1.
14. Gregory Brew, Petroleum and Progress in Iran: Oil, Development and the Cold War, Cambridge University Press, 2022, p. 238.
15. ‘Israel s’attaque aux finances du Hezbollah,’ Les Echos, 22 Octobre 2024, p. 9.
16. https://almasdaronline.com/articles/163320
17. Hadeel Al Sayegh, John O’Donnell & Elizabeth Howcroft, ‘Who funds Hamas? A global network of crypto, cash and charities,’ Reuters, October 16, 2023.
    
18. ‘How to defy America’, The Economist, October 19th 2024, pp. 10, 58-61.  
19.  Saeed Ghasseminejad, ‘Iran’s Oil Exports Continue to Rise’, Policy Brief, Foundation for Defense of Democracies, April 19, 2024, https://www.fdd.org/analysis/2024/04/19/irans-oil-exports-continue-to-rise/ 
20.  Energy Information Administration (EIA), Country Analysis Brief: Iran, October 2024.
21.  Jeffrey A. Sonnenfeld & Steven Tian, ‘To Prevent a Wider War in the Middle East, Choke Off Iran’s Oil Sales’, Yale Insights, Faculty Viewpoints, October 25, 2023.
22.  ACLED website, Protests in Iran, The Economist December 10th, 2022, p. 81.
23. IMF, World Economic Outlook 2024, October 2024; https://oec.world/en/profile/country/irn 
24.  Karim Sadjadpour, The New Battle for the Middle East, Foreign Affairs, November/December 2024; https://www.foreignaffairs.com/middle-east/new-battle-saudi-arabia-iran-sadjadpour 
25.  Antonia Dimou, ‘East Mediterranean Energy Projects Amid Israel-Hamas War’, Modern Diplomacy, July 24, 2024.
26.  ‘Israel: le cout exorbitant de la guerre’, Les Echos, 4 novembre 2024, p. 10.
27.  Nouriel Roubini, ‘Israel and Iran Are Likely to Escalate’, Project Syndicate, Nov 1, 2024.
28.  Nicholas Mulder, The Economic Weapon: The Rise of Sanctions as a Tool of Modern War, Yale University Press, 2022. 
29.  IEA, World Energy Outlook 2024, Paris, October 2024.