Explainer: Russia's economy - the oil trap

Russia's economy is supposed to be tanking with harsh sanctions and oil embargoes designed to bring economic pain and punish Vladimir Putin for his invasion of Ukraine.

But while those measures have had an impact, Russia's economy has been doing surprisingly well.

And one economist believes taxing Russian oil, instead of banning it, is the answer.

Caitlin McGee explains.

When Russian tanks rolled into Ukraine, Western nations wanted to make it pay for its actions. Literally.

The US, European Union and other outraged nations cobbled together a package of economic sanctions, cut off its banking system and targeted oligarchs all with the hope of trying to drive Russia towards economic collapse and stop Russia's President Putin from being able to finance his war.

At first - it worked.

Its currency tanked, big multinational companies started pulling out and Russia defaulted on its first payment of sovereign debt in a century.

It was supposed to be a marker for the country's quick descent into becoming an economic outcast, but now the Ruble is at its pre-war high and Russia has become the world's top oil exporter, even knocking Saudi Arabia off its perch.

So what happened?

There are a bunch of reasons why, but the main one is - oil.

In the first 100 days of the war, Russia earned US$98 billion according to the Centre on Research for Clean Energy and Air.

EU nations bought most of that, even though they're trying to wean themselves off Russian energy, they're still allowing pipeline deliveries.

Andrei Ilas is from the Centre for Research on Clean Air and Energy - a think-tank based out of Helsinki that tracks the flow of Russian oil.

"Up to half their budget revenues are coming from taxes they're imposing on the export of fossil fuels out of Russia... we've seen in the past three months that actually both streams of revenue are declining but maybe not at the pace that we would want," he told Breakfast.

There are other buyers outside the EU too. China started importing a lot more Russian energy in May, with daily imports jumping to 1.1 million barrels a day - that's up from 800,000 barrels per day in the same period last year, according to Reuters.

India is also buying up big time.

After purchasing very little Russian oil at the start of the year, India's imports started to increase in May, jumping from 5% to 27%, according to CREA.

And that matters because there are concerns the Russian oil it's buying is being sent back to Europe, in a kind of backdoor arrangement.

There's no doubt sanctions have had an impact, and the Russian economy - like a lot of others right now - is facing a recession.

Ilas says revenues from fossil fuels have started to dip in June. Russia sold 14% less oil than it did in May.

But a potential recession might not be as deep as some forecasters expected.

So what does the west do to help Ukraine now?

One man who thinks he has the answer is Harvard Economist Ricardo Hausmann.

He told the World Economic Forum that Western nations need to tax Russian oil, rather than banning it.

"To prevent Russia from being able to wage war, we need to prevent them from having the resources to do so. And the most efficient way to do that, the smartest way to do that is not to stop buying Russian oil but to tax Russian oil," he said.

Hausmann says the EU's attempts to wean itself off Russian oil aren't working and instead the bloc's tactics are pushing up the price of oil around the world.

"It's something that might help Europe in the long-run but it's not helping Ukrainians right now; it's helping the Russians right now".

He says taxing Russian oil instead of banning it will hurt Russia more economically in the long-run.

"You might say well the price of oil is high enough, won't a tax make it even higher? And the truth is that it wouldn't because Russian oil would have to compete with say Saudi or Iraqi oil that's coming from elsewhere," Hausmann said.

He adds that because the oil from those other countries isn't being taxed, then the price of Russian oil after tax would have to equal the price of other oils without tax.

That means once that tax is paid then whatever Russia keeps is a smaller amount.

"If you tax Russian oil enough, not to stop Russia from selling oil to you, then nothing happens to the international price of oil, Russia becomes poorer and you become richer.

"So the tax is just a smart way to sanction Russia," he said.

Hausmann also argues that an embargo is not an effective way to harm Russia because even if their production goes down, he says the price of oil then goes up and they sell what they have at a higher price. That then compensates for a bit of the loss in sales volume.

Russia sells most of its oil to Europe via pipelines which is considered a cheap method of transport.

But exporting to China and India requires ships and ports.

"If you want to make it harder for Russia to move its oil, you can sanction shipping companies and tell insurance companies not to insure Russian cargo and that makes it harder for Russia to move its oil," he said.

The type of crude oil that Russia produces also plays a part as it tends to be described as "heavy and sour" which means it has a lot of sulphur and needs special refineries to be processed. And those refineries are in the West, Hausmann said.

"If Russia is going to sell its oil to other refineries, it would have to sell them at a deeper discount," he said.