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March 2, 2022updated 03 Mar 2022 11:39am

Exclusive: West must ensure total isolation of Russia to end war, says Ukraine ex-finance minister

Despite the unity of response to the invasion of Ukraine, sanctions fail to hit Russia where it really hurts – the export of oil and gas, says Natalie Jaresko. A failure to act selflessly now plays straight into Putin’s hands.

By Virginia Furness

Ukraine’s former finance minister Natalie Jaresko is pleading with the West to get even tougher on Russia. (Photo by Sergii Kharchenko/Pacific Press/LightRocket via Getty Images)
  • The West is essentially choosing short-term access to energy over Ukrainian lives.
  • All Russian trade and goods should be boycotted – this is a world event on a par with apartheid in South Africa.
  • Investors in Ukraine must put their money where their mouths are and continue with their financial commitments.

As Russian forces embark on an unprovoked attack on Ukraine’s capital Kyiv, global leaders must set aside domestic concerns and hit Russia with further sanctions on Nord Stream 1 and international trade if the economic isolation of the country has any chance of ending the unprovoked war in Ukraine, Natalie Jaresko, Ukraine’s former finance minister, tells Capital Monitor.

Sanctions imposed on Moscow are falling short because international leaders fear the impact of rising energy prices in their domestic markets, but with an invasion taking place, Jaresko is urging world leaders to make a choice between higher prices in the short term and what she calls a genocide of a people.

Western sanctions – which have so far targeted Russia’s central bank (CBR), state-owned banks and several high-profile individuals – are delivering a crushing blow to the economy. The rouble has devalued by 40%, prompting Moscow to introduce capital controls and issue a ban on the selling of Russian assets to stem the outflows as international investors look to exit the country.    

But Jaresko, who came to office as Ukraine’s finance minister shortly after the invasion of Crimea in 2014 and is credited with steering the Ukrainian economy to stability until 2016, says while CBR sanctions are particularly effective, the broader package of measures does not go nearly far enough. Sanctions should be extended, she says, to cover all state-owned banks and oil and gas companies in Russia and Belarus. This should also include Nord Stream 1, the natural gas pipeline that carries some 55 billion cubic metres of gas a year from Russia to Europe.

Last week, US President Joe Biden defended his decision to preserve access to Russian energy in order “to limit the pain the American people are feeling at the gas pump”. But this position is at best inadequate and at worst a deliberate choice to put the needs and votes of Americans above the lives of those fighting for freedom in Ukraine, Jaresko says.

“We cannot be afraid and President Biden should not be afraid of explaining to the American people that it is going to be less costly for us to right now to sanction their oil and gas companies than it will be to have to fight World War III,” she says.

Sanctions that “suit” us

While Russian oil and gas flows freely to Europe, Russia will be able to continue fighting the bloody and violent war it is waging in Ukraine, Jaresko says, funded in part by the $700m a day Western governments pay Russia for its goods – primarily oil, gas, minerals and aluminium.

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“On the one hand we’re providing [anti-aircraft] Stinger missiles and paying for that from the US budget, and on the other we’re giving them $700m a day to finance the war,” she says. “We need to stop financing the aggressor. It is only by that kind of isolation that we have a chance of ending this war.”

As a further sign of this hypocrisy, a portfolio manager at an insurance company with assets in both Ukraine and Russia pointed out that the EU is buying more gas from Russia than ever before. “We have sanctioned him in a way that still suits us, which shows we are still reliant on Russian gas,” he tells Capital Monitor.

International corporates and investors have a responsibility to take a stronger stance against Russia, Jaresko says. She praises the move by some international organisations to divest stakes in Russia – energy companies from BP to Shell, and banks HSBC and Raiffeisen, are exiting or winding down their businesses – but says a coordinated international boycott of Russian goods and services, as well as a ban on all trade with the country, is needed.

“We ought to be divesting as BP and Shell have done, as the Norwegian sovereign investment fund has done. Everyone needs to divest and, lastly, we need to boycott trade,” she says, recalling the boycott of products and businesses in South Africa during apartheid. “This is of equal stature. It’s a genocide of a people.”

Boycotting trade will also hit the country’s business elite in a way that the weakening rouble, or the individual sanctions, will not. Rouble devaluation is hurting the country’s poorest – those with rouble-based wages – but oligarchs who hold their assets in “gold, diamonds, currencies and the rest” are largely untouched.

Hard to enforce

Weakening the elite, Jaresko says, is essential to pressuring Putin, but it will not be easy. “The idea is not to hurt the Russian population, but to get the Russian population to say stop the war,” she says. “[If his elites are threatened], the isolation of the economy is the only thing that will have a chance of influencing Putin to stop.”

While the EU, UK, US, Switzerland and Monaco have introduced sanctions on a number of individuals, enforcing them will be extremely difficult. The “great majority” of assets and so-called ‘dirty money’ hidden in shell companies will escape under the radar, Jaresko says. As such, removing the visa and travel privileges of these people should be a next step.

Jaresko was in office when in 2014 the EU froze the assets of ex-Ukrainian president Viktor Yanukovych, who fled the country to Russia and in 2019 was handed a 13-year sentence for treason, which he has not served. She says the cost of such effort is high and the outcome is uncertain. Yanukovych was charged with opening the door to Russia’s annexation of Crimea and the conflict in eastern Ukraine, which has culminated in the current war.

“I went through this in 2014 when we said we were going to look for the Yanukovych assets,” she says. “Everybody was helping us but the only Yanukovych assets that were ever actually frozen were in a Ukrainian bank. Everything else was hidden in wrappers, like [UK] Prime Minister [Boris] Johnson said, it’s like a matryoshka doll.

“If [the asset] is not in the person’s name and you sanction the person, you can’t take it even though you know it is there. It is a very long, costly process,” she says.

Jaresko say the UK and US’s failure to set tighter laws on beneficial ownership makes them in part, culpable for the war.

“This is our unique contribution to this crisis, this war,” she says. “The United States and UK have to stop allowing for these shell ownerships of assets without seeing through the beneficial ownership. The single most important long-term thing that can come out of this [war] is putting an end to it.”

Financial support

As for international financial support, Jaresko says multilateral development banks will have a key role in supporting the balance of payments and the rebuilding of the country.

The National Bank of Ukraine has introduced restrictions to maintain the stability of the hryvnia, which was trading at around Hrv29.25 to the dollar on 2 March. The country has $29.1bn of FX reserves, but as Jaresko points out, talking about the resilience of the economy feels reductive when it is impossible to say what the economy might look like tomorrow.

“The second-largest city with a population of 1.4 million is being decimated. It’s hard to talk about an economy when you don’t know what will be left at the end of the day,” she says. “They bombed to smithereens one of the ports yesterday, so we have no access to ports for exports right now.”

The heads of the World Bank, International Monetary Fund, the EU climate bank the European Investment Bank (EIB), and the European Bank for Reconstruction and Development (EBRD) have condemned Russia’s actions and expressed horror at the violence and loss of life unfolding in Ukraine.

The EBRD has said it is voting on the immediate suspension of Russia and Belarus from its membership, with president Odile Renaud-Basso tweeting on 1 March that the package of support measures could include liquidity support for the private and public sectors, and municipalities affected by an influx of refugees.

The EIB has said it will urgently mobilise further financial support. It has invested more than €7b in the public and private sectors in the country and has been instrumental in helping rebuild Ukraine since 2014. It has financed more than 200 pieces of infrastructure there, making the EU bank one of the top investors in the country. 

Speaking to Capital Monitor, a senior representative from the EIB says the bank is horrified by the loss of life and that it is “heartbreaking” to see the destruction of so much of the infrastructure the bank has financed there.

The question remains whether the EIB’s commercial partners and other private sector investors will remain as committed to the country. Jaresko is calling on investors to make stronger statements of support.

“We need them to put their money where their mouth is,” she says. “From my perspective on ESG principles, it’s not only about boycotting and divesting on the Russian side but it’s about committing to your existing requirements.” The remark echoes Capital Monitor‘s position on this issue.

Payment under pressure

On Tuesday Ukraine made a $300m Eurobond repayment to investors, an important statement about the country’s willingness to repay its debt at a time of extreme adversity.

One bondholder told Capital Monitor Ukraine should ask for a moratorium on its debt but that he remains willing to support the country as long as a pro-Western leadership is in place. You would not want to be seen supporting a pro-Putin puppet government, he says, adding that the event of restructuring under a pro-Russian government would probably see the debt wiped out to zero.

On Tuesday, Ukraine issued Hrv1.8bn of hryvnia bonds to support the war effort. Part of the Ministry of Finance’s usual schedule of auctions, the deal was run by a brave staff working from home. The two-month and one-year paper garnered plenty of international interest, Alla Danylchuk, investor relations at the Ministry of Finance in Kyiv, tells Capital Monitor.

“It was extreme conditions to hold this – we’re all working remotely,” she says. “We’ve had a lot of interest from international investors. I ask people to support us, to believe in our victory.”

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