The flow of forgone revenues of an oil or gas exporter turns out to be a poor and conceptually flawed indicator of the damage imposed on the embargoed country.
This is because extracting and selling oil or gas is not mainly value creation, but rather an asset swap, in which the exporting country converts the sales value of deposits into financial assets. Under ideal conditions (perfect financial markets, no transaction costs, secure property rights), the damage imposed on the sanctioned country is zero.
The picture changes if the sanctioned country is ruled by an autocrat who is embezzling the oil and gas revenues. Since his political future is uncertain, the latter has an incentive to sell the raw materials as quickly as possible and pocket the revenues. Kai A. Konrad and Marcel Thum examine the case where the autocrat invests his revenues in long-term financial assets, for example, depositing them in a Swiss bank account. Whether or not an embargo then harms the autocrat depends on the likelihood of him retaining his political power after the embargo as well as on the likelihood that he will be able to access assets from international financial safe havens even after his demission. The damage to the autocrat is more severe if the prospect of assets parked in international safe havens is larger than the prospect of future revenues from resource extraction.
Published: Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2022-05.