Following Russia’s invasion of Ukraine, several EU countries implemented fuel tax reductions to mitigate rising transport fuel prices. However, these measures inadvertently increased Russia’s oil profits, potentially undermining EU sanctions. Empirical estimates suggest an EU-wide fuel-tax reduction of €0.20 per litre would initially boost Russian oil income by €36 million daily in the very short term (first month) – equivalent to approximately 23% of Russia’s daily military spending. Over the remainder of the first year, this benefit decreases but remains significant at around €8.4 million per day, and continues similarly at approximately €8.2 million per day thereafter. Annually, this translates to about €3 billion, roughly equivalent to 5% of Russia’s annual military expenditure.
The fuel tax cuts, although intended to assist consumers, only partially reached households, as only about 60% of the tax reduction was passed on in lower fuel prices during the first month. These cuts significantly benefited Russia, as higher EU fuel demand pushed global oil prices upward. Consequently, EU politicians should consider alternative policies such as direct monetary transfers to households. Such transfers could effectively protect citizens against fuel price hikes while substantially reducing unintended financial support to Russia.
Compared to fuel tax cuts, cash transfers to EU households yield considerably lower profits for Russia – initially about 14–15% of the tax cut scenario during the first year, and less than 3% after one year. Additionally, direct cash transfers offer greater flexibility to households, allowing recipients to allocate funds according to their specific needs rather than being limited solely to fuel expenditures.
In summary, direct cash transfers provide a superior policy alternative, significantly reducing the negative geopolitical implications associated with fuel tax cuts, better aligning with EU sanction objectives, and offering efficient economic support to citizens amid rising fuel costs.
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