Zelenskyy adviser: Global ban on Russian oil would end Putin's attacks

A top economic adviser to Ukrainian President Volodymyr Zelenskyy is calling on the world to make a sacrifice and endure potentially higher gas prices in the near term to help thwart Russia’s military invasion and save lives.

Oleg Ustenko, a Harvard graduate and Brandeis University Ph.D. economist, on Monday echoed Zelenskyy's call for a global ban on Russian oil imports, led by the U.S., which he says would soon bring Vladimir Putin’s military campaign to a grinding halt.

Without much-needed revenue from oil and gas — which is responsible for an outsize share of Russia’s revenue — the government would quickly begin to run large deficits that it won’t be able to finance, Ustenko said, thanks to Western sanctions that have largely disconnected the country from global financial markets. Eventually, Putin would run out of money to finance his military campaign and be forced to stand down, he said.

“I know that it’s going to be costly for everybody,” Ustenko said in an interview. “But the price we are paying here in Ukraine is with our lives, with the lives of our people, with our destroyed cities, with our destroyed villages, with raped women and killed kids. For all our people who are hidden underground like we are in the Middle Ages.”

“We are already paying the price,” he added.

Ustenko, who spoke from an undisclosed location near the center of Kyiv, said the initial price shock wouldn't be significant over the medium term as the market adjusted to the changes and other countries ramped up production.

U.S. Secretary of State Antony Blinken said the Biden administration is having conversations with European allies about a possible ban on Russian oil imports and exploring ways to ensure they can maintain global energy supplies. Congressional trade leaders said Monday they plan to pursue bipartisan legislation that would ban Russian energy imports to the U.S. and suspend normal trade relations with Russia, days after Zelenskyy pleaded with lawmakers to ratchet up the pressure on the Kremlin.

But German Chancellor Olaf Scholz pushed back on the idea of an energy ban in Europe.

"At the moment, Europe's supply of energy for heat generation, mobility, power supply and industry cannot be secured in any other way,” Scholz said in a statement. “It is therefore of essential importance for the provision of public services and the daily lives of our citizens."

The U.S. and its allies have moved in lockstep since the invasion to impose financial and trade penalties on Russia, but they have deliberately avoided steps that might disrupt energy supplies in Europe. Scholz’s comments suggest that while some U.S. officials may be warming to the idea, Europe — which relies much more on Russian energy — is not yet sold.

Ustenko says that shouldn’t stop the U.S. from moving ahead.

Russian oil only accounts for about 9 percent of U.S. imports and about 3 percent of its total oil supplies, so an American ban alone wouldn’t make much difference. He argued that U.S. officials should go a step further, imposing secondary sanctions that prohibit any financial firm doing business in dollars from facilitating Russian oil purchases anywhere in the world.

Rising oil prices have been a boon for Russia. But an oil import ban combined with secondary sanctions could force the country to sell oil at a steep discount, dramatically reducing revenue, Ustenko said.

He said he understands the domestic economic and political considerations facing the Biden administration. He even referred to the president's State of the Union address on March 1 and his assertion that fighting inflation is his number one priority.

“But when he was delivering his speech, the circumstances were a little bit different,” Ustenko said. “Now the whole world has been changed.”

Russian forces have continued their advance into Ukraine’s cities and villages, as Western allies scramble to provide military support, and 1.5 million of Ukraine’s roughly 40 million people have fled to neighboring countries. Attempts at ceasefire negotiations have repeatedly broken down, amid reports of Russian shelling targeting civilians.

Ustenko said the U.S. should continue to play the lead role in pushing sanctions further.

“The price is going to be high at the very beginning,” he said. “It’s going to be a correction, and the price is going to be much lower in the medium-term. In the long run, it’s going to be only benefits for the whole world, and it’s not just economic benefits.”

In the U.S., higher oil prices could exacerbate already elevated inflation, increasing the risk that price pressures become more entrenched and harder for policymakers to rein in.

The potential for an oil price shock hasn’t yet translated to higher long-term inflation expectations, a key indicator that higher inflation is at risk of becoming entrenched. But Deutsche Bank analysts in a note Monday said an oil price shock driven by supply constraints could spill over to higher inflation expectations in the coming months.

What are the economic implications for Russia? Putin could soon see the country’s deficit expand dramatically, and with no ability to borrow from Western financial markets.

"They will not be equipped financially to continue war with Ukraine, and eventually they will need to stop it," Ustenko said.

The central bank may try to finance the budget shortfalls by printing money, which will push up inflation and stir up discontent among Russian people, he added.

As for Ukraine, Ustenko said he expects the country will experience a huge decline in its economic output, even if the war stopped immediately. About half of all Ukrainian businesses are not operating now, he said.

Now is also the prime time for the country’s massive agriculture sector to complete its spring work, but fields are empty as many of its agriculture regions face Russian occupation. Ukraine is the world’s fifth-biggest supplier of wheat.

“It means that not only us but the whole world is going to face new challenges in terms of ensuring global food security,” he said, especially poor nations for whom a food price spike would be especially devastating.