How to Do More for Ukraine
May
13, 2022OLEG USTENKO interviewed by MICHAEL R. STRAIN
Russian
President Vladimir Putin's failure to achieve a rapid victory in Ukraine has
left Ukrainians with an unwavering confidence in their own ability to win the
war – eventually. But much will depend on Western governments' own willingness
to use all of the economic-policy tools at their disposal.
On
May 6, 2022, economist Michael R. Strain of the American Enterprise Institute
spoke with Oleg Ustenko, Ukrainian President Volodymyr Zelensky’s chief
economic adviser, to discuss the international response to Russia’s war and the
situation on the ground. Speaking from an undisclosed location in Ukraine,
Ustenko makes clear that the United States and Europe could do more to end the
war, to aid in Ukraine’s reconstruction, and to ensure that Russia cannot
repeat its aggression in the future.
Michael
R. Strain: The European Commission recently issued a proposal to phase out imports of Russian crude oil
within six months and refined products by the end of 2022. That would need to
be approved by all EU member states. What’s your reaction to the proposal as it
stands?
Oleg Ustenko: The Russians are using
energy revenues to finance their military machine, so we welcome this step very
much. But it’s not enough. Russia is receiving $1 billion per day
for its energy exports. You can imagine how many missiles, weapons, and bombs
they can buy in the six months before the embargo is fully implemented.
Our
position is straightforward. We want this embargo to go into effect at once. We
don’t have an extra six months to wait while Russia continues to kill our
citizens. Under the circumstances, we believe that Europe must act immediately.
MS: US Secretary of
the Treasury Janet Yellen commented on
this issue on April 21, when she emphasized the importance of Europe reducing
its dependence on Russian energy over the medium term. But she also said: “We
need to be careful when we think about a complete European ban on, say, oil
imports.” That, she warned, “would clearly raise global oil prices,” with “a
damaging impact on Europe and other parts of the world.” She also said that
“counterintuitively, it could actually have very little negative impact on
Russia, because although Russia might export less, its price for its exports
would go up.”
Do
you have a response to that?
OU: Of course there will be costs, but only in the short run,
because there will be changes made in the medium run to reduce the burden on
Europe. These will come from two different sources. First, we should expect
that oil-producing countries – not only in the Middle East but also in Africa –
will increase output if Europe institutes a ban on Russian imports. That should
move prices down. Second, the Chinese economy is slowing, which means it will
consume less oil. That, too, will move markets toward a new equilibrium and
reduce prices.
MS: That’s the short term
and the medium term. What about over the long term?
OU: It would be a win-win situation, because everybody’s income is
going to be more predictable and their wealth more secure.
MS: But you agree that if
Europe instituted a ban on oil imports
from Russia, this would boost the price of oil and thereby help Russia in
the short run. What steps could be taken to mitigate that short-term effect?
OU: We could also deal with that situation. The marginal cost of
production for Russian oil is around $10 per barrel. Russia should be allowed
to keep $10 per barrel sold, and any amount above that should be seized
through sanctions. This money should go into a special fund for rebuilding
Ukraine.
MS: We’ve been talking about
Europe being more aggressive in restricting or banning oil imports from Russia.
What about natural gas?
OU: That issue is a little more difficult. In our view, Europe
should continue to purchase Russian gas, but the proceeds from the sale should
go into an escrow account administered by a special board. With the board’s
approval, some of the funds could go to Russia for critical imports such as
pharmaceuticals. This would leave Russia with some incentive to continue
selling natural gas to Europe, even in the face of the new sanctions. And the
board could approve greater disbursements to Russia if it withdraws from
Ukraine and stops the war.
MS: Why would Russian
natural-gas producers sell to Europe under those conditions?
OU: What else are they going to do with the gas? Maintaining their
pipelines is costly regardless of whether they are delivering gas. Either they
will comply with this regime or they can stop production forever.
MS: Who would administer the
escrow account?
OU: It should be a special board nominated by our allies: the
US and European Union countries or the European Commission. And Ukraine must be
represented on the board.
MS: Apart from more
aggressive restrictions on oil and natural-gas imports, what other economic-policy
options would you like to see Europe pursuing?
OU: We would like to see new sanctions imposed on the individuals in
power in Russia. There have been some sanctions for top-level individuals, but not
yet for their family members. All
members of Russian President Vladimir Putin’s party, United Russia, should be
cut off from Europe. They and their family members are still spending their
time in Europe, rather than enduring life in Russia. They should be stopped
from doing that, so that they have a greater incentive to put pressure on Putin
to end the war.
Moreover,
all trade with Russia must be stopped.
For example, insurers should be prohibited
from providing coverage for ships departing from Russian ports. Without
insurance, there will be no trade. Who is going to ship uninsured goods from
Russia? Finally, more could also be done to exclude Russian banks from
international payments.
MS: The US has instituted a
ban on Russian energy imports and placed some curbs on new US investment in
Russia’s energy sector. What else do you think the US should be doing to assist
Ukraine through economic policy?
OU: The US has a unique ability to convince our European allies to
move forward with a stronger sanctions regime. For example, it could push
Europe to introduce travel bans on all
members of the Russian ruling party, or to disconnect Russian banks even
more from the international financial system.
MS: The war has already
lasted longer than many observers initially thought it would. How concerned are
you about Europe and the US being able to sustain the will to incur economic
costs in the form of higher-priced energy, food, fertilizer, and other
commodities?
OU: In my view, there is no real choice. If Putin is allowed to win
in Ukraine, he will have even greater territorial ambitions in Europe. This is
already a prominent part of Russian propaganda. The Kremlin really believes
it is reconstituting a great Russian empire. If the world is willing to
capitulate in Ukraine, Russia’s ambitions will be strengthened.
WHAT
UKRAINE HAS LOST
MS: Tell me about the
economic costs of the war so far, in terms of the Ukrainian government budget
and the Ukrainian economy.
OU: In the first week of the war, we lost around $100 billion in
assets. After that, the costs increased exponentially. Our latest estimate of
losses is close to $650 billion. That refers only to assets. The total economic
cost of the war is in the realm of $1 trillion. That is an unbelievably huge
amount of money for us. Last year, Ukraine’s GDP was its highest on record,
at $200 billion. We are
talking about losses five times greater than our annual pre-war GDP. Around 50%
of our businesses have either been destroyed or have closed.
On
top of that, we are an export-oriented country. Around 40% of our GDP comes
from exports, and around 60% of our exports rely on passage through the Black
Sea. Although we still control the main ports in Ukraine, Russia controls the
Black Sea, which makes moving our goods there extremely risky.
MS: Let’s talk about
rebuilding. Yellen was also asked about using some
of Russia’s frozen central-bank reserves to help Ukraine rebuild. She responded that,
“We would carefully need to think through the consequences. … I wouldn’t want
to do so lightly and it’s something that I think our coalition and partners
would need to feel comfortable with and be supportive of.” She also said that
legislation might be required in the US to pursue this option.
OU: Her response was problematic, at least to my ears. What about
Russia’s invasion of Ukraine? Was that legal or even remotely appropriate? What
are we talking about? Her response definitely had a very negative effect on the
overall mood.
MS: Say more about that.
OU: People are expecting to be compensated for this war. To hear
that there may be a long process for deciding whether the aggressor’s frozen
reserves could be used to help Ukraine – to hear that there are questions about
its legality – is simply unacceptable to us.
Moreover,
Russian propaganda immediately seized on Yellen’s words, saying something to
the effect of: “Look, this is exactly what we were saying. There’s no way that
Ukrainians are going to be compensated for the costs of the war. No, it should
be on their own budget.” They are already driving home the message that they
are not going to pay for the damage they have inflicted on Ukraine.
A NEW
UKRAINE
MS: But even if the frozen
Russian reserves, some $300 billion, were made available, that wouldn’t be
enough to fulfill Zelensky’s recent promise to “create the best conditions for
investment in all of Europe.” What is Ukraine’s strategy for attracting
investment after the war?
OU: In a 2018 survey of US companies in Ukraine, I found that
American businesses here faced three main problems. The first was
property-rights protection. A related problem was the unreliability of the
judicial system. You need strong courts to defend property rights, and if the
courts are not operating properly, you will be reluctant to invest here. The
third problem is a consequence of the first two: corruption.
After
the war, Ukrainian society will not tolerate any of these problems any longer.
We have suffered them for decades – since independence in 1991 – but we won’t
have them after the war. Ukraine hopes to join the European Union, which means
that it must meet the requirements for membership. That starts with fixing the institutions of
property-rights protection and the court system, and ending corruption. We
are going to have a much better investment climate in the country.
MS: What changes are
you considering for your tax system?
OU: The president has tasked us to come up with ways to lower taxes
on investment significantly.
MS: Why is EU membership so
important to Ukraine?
OU: From an economic perspective, it’s extremely important, because
it means that we can be a part of the broader European production chain. We can
improve our business climate, reduce risk, and attract more investment. That
will lead to a higher quality of life for our people. In addition, I would say
that the Ukrainian people believe they’re part of Europe and want to be recognized as European.
MS: Let’s suppose the war
has ended and you’ve addressed the three historic challenges you mentioned, as
well as lowering taxes on business investment. If I’m a foreign CEO or
investor, I might still be skittish about investing in Ukraine or about
expanding business operations there. Even though Russia has been defeated, I
might be worried that it still has territorial ambitions in Ukraine. What would
the Ukrainian government say to alleviate my concerns?
OU: I would say two things. First, this is why we need to make sure
that all the sanctions we are proposing are enacted. We must ensure that Russia does not have the resources to finance its
military machine. They might still have the will; but if they don’t have
the funds, they will not be able to do so.
Second,
you are absolutely right about risk. All investors will be worried about that
for a long time. We therefore need to think about the kinds of war insurance we
can provide to each investor coming to Ukraine.
MS: So, if I lost money
because of another invasion, there would be some insurance protection for me.
Can you say more about how that might work?
OU: The funds in escrow accounts from Russian natural gas sales
could be used for this purpose. Since Russia would be able to use only some
money from these escrow accounts, there would be ample reserves. If Russia were
to invade again, investors in Ukraine could be compensated using those funds.
UNDER
THE SHADOW OF WAR
MS: Let’s look beyond
economics. You’re a Ukrainian citizen living in Ukraine in an undisclosed
location. Tell me about your experience over the last few weeks.
OU: Everything has already become routine. We know what we must do
each day. There are no differences between weekdays or weekends. What is most
difficult is that, even though we know for sure that Ukraine will win the war,
we don’t know when it will happen.
In
the meantime, we are not able to use our property. We are not leading normal
lives. We cannot go to the gym or even do normal grocery shopping. We have just
a few things to wear. We have some very basic foods – nothing special,
certainly no restaurant dining. Everything is very, very simple. This is how
everybody lives now in Ukraine.
And
this is not the worst-case scenario. Many other people have been killed, and it
hurts a lot when you hear of this news, when you talk to people and see the
evidence – the terrible photos and videos. You understand that people are
losing their lives. As for the soldiers, they are sleeping in the fields.
Everything is very painful and very difficult.
Our first desire is to
win this war. But our second desire
is to punish Putin’s regime. They must pay a price. That is the common
belief in Ukraine. Nothing should be forgiven. After everything we’ve gone
through, all the evidence we have, they must pay a price.
MS: You once told me that
you used to enjoy walking in the woods. Why can’t you still do that?
OU: Because there are mines, even in the woods. Who knows how many
years it will be until simple things like walking in the woods return to
normal. Unfortunately, that is the situation. The same is true for our maritime
sites. Mines are strewn across the Odessa region and on the Black Sea beaches.
MS: Tell me about the mood
of the Ukrainian people.
OU: Everybody is just waiting for the peace. As soon as peace comes
to our land, everything will change immediately. Our people are energized to
rebuild the country, and they have come together. We are all viewing ourselves
as one united nation. Ukrainians, Ukrainian-Russians, Ukrainian-Belarussians,
Ukrainian Jews – we all think of ourselves as one united family.
MS: You’ve always expressed
confidence that Ukraine is going to win the war. Why is that?
OU: If Putin had been able to win the war, he would have done it in
the first several days. But he failed. At this point, I doubt that even he
believes that he can win. And even if he is still under the delusion that he
can, I seriously doubt that his armed forces believe it anymore. We have seen
on the internet where Russian military personnel are discussing it. They do not
believe in their chances of victory.
As
for the spirit of the Ukrainian people, I would say it is the same as the
spirit of the Americans. Independence is part of our DNA, and the Russian way of
life – in terms of democracy, liberty, respect for other human beings – is not
acceptable to us.
Ukrainian
hearts and minds are the first and the main thing that Putin lost. Before, it
was possible to stipulate some ideas about Russian history or Russian culture;
but no longer. Now, he has lost all Russian historical or cultural claims on
Ukraine. I know many people who refuse even to watch anything related to
Russia – no Russian movies, Russian songs, Russian poetry, or Russian
literature. Putin has lost Ukrainians, which means he is going to lose the war
eventually.
MS: Former US President
George W. Bush recently described Zelensky as “the Winston Churchill of
our time.” Do you agree?
OU: Yes.
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