Russia's Oil Woes Offer West Window to Hurt Putin, Zelensky Adviser Says

Kyiv is urging its Western partners to tighten sanctions on Russia as Moscow struggles with falling oil export revenues, a key source of wealth for the Kremlin that has helped underwrite President Vladimir Putin's costly and unremitting war in Ukraine.

Oleg Ustenko, an economic adviser to President Volodymyr Zelensky, told Newsweek that Kyiv and its backers in the West "have to make sure that the regime in the Kremlin doesn't have cash...More sanctions are required."

This week could prove pivotal for Ukraine. Key NATO backers will converge at the American Ramstein air base in Germany on Friday for the latest meeting of the Ukraine Defense Contact Group; a collection of representatives of more than 50 nations set up to discuss and plan military aid being sent to Ukraine.

Kyiv's representatives are primarily hoping that partners will agree to send German-made Leopard 2 main battle tanks, of which there are hundreds spread across multiple European nations.

But elsewhere, Ustenko stressed that the sanctions battle is not yet won despite indications that the Russian economy is struggling under international measures. He urged European Union partners in particular to continue work on what would be the 10th package of bloc sanctions and close loopholes in previous rounds of restrictions.

Cut the cap

The early success of the EU-G7 price cap on Russian crude oil imports—supported by an EU embargo on all Russian crude transport by sea which came into effect on December 5—should encourage further action, Ustenko said.

"The sanctions related to the price cap on oil were really very important, very powerful, despite the fact that Russians were saying: 'We don't care, we will not sell at that price cap price.' But in my view, they were bluffing. The market shows that it was indeed the case."

The $60 per barrel cap is chipping away at Moscow's lucrative oil earnings, costing the Kremlin around $172 million every day, according to a report published this month by Finland's independent Centre for Research on Energy and Clean Air.

Russian Finance Minister Anton Siluanov said last month that the oil price cap—which Putin has dismissed as "stupid"—might mean Russia's budget deficit will be deeper than the 2 percent projected for 2023.

Moscow threatened to cut all oil supply to any nations endorsing the price cap. But recent reports show that Russia, the world's third biggest oil producer, is selling some of its flagship Urals crude well below the $60 per barrel cap, for example to India.

Officials reviewing the cap every two months should take recent developments as a sign that Moscow can accept a lower price, Ustenko said.

"They're prepared to sell their oil even at low prices compared with the $60 per barrel price cap, significantly lower prices," Ustenko said. "Our position is unchanged. We believe the price cap should go down to the level of marginal production cost, which is between $20 and $40 per barrel."

Targeting oil products

A separate EU ban on all Russian oil products—for example diesel, kerosene, and fuel oil—will come into force on February 5. Reuters this week cited a senior Russian source with knowledge of the country's economic outlook, who said Moscow expects a significant impact on its oil product exports and production from next month.

A price cap on oil products has not yet been agreed, but is under discussion.

Russia's overall crude exports grew in 2022 and so far in January, but are projected to fall this year due to the coming embargo and additional price cap, Reuters reported.

"We expect new positive movements in terms of imposing a price cap for oil products," Ustenko said, adding that tight restrictions on such products is "extremely important" for Kyiv. "This is what we are really pushing very hard," he said.

Combined, the measures on Russia's oil exports "are the most powerful tools I would say we can use now to make sure that Russians are not going to have cash in their hands to finance all these escalations and aggressions against us."

Russia is facing a difficult overall economic picture. Putin said this week that the economy is likely to have shrunk by around 2.5 percent in 2022, less than many predictions.

But Russia's monthly budget deficit hit a record $56 billion in December 2022, according to Bloomberg, bringing the country's annual shortfall to some $48 billion.

More than 1,000 major corporations have curtailed operations in or fled Russia since February 24, according to the Yale School of Management, driven by mounting Western sanctions and fearing reputational damage from maintaining operations within the country.

Corporate flight is denying Moscow access to vital technological imports, though indigenous suppliers, smuggling, and sanctions evasion can go some way to filling the shortfall. Some of Russia's most advanced weapons, for example, rely on Western components that are increasingly hard to come by.

The EU's ninth package of sanctions was approved in mid-December. The nations traditionally most aggressive on the Russian issue—including Poland and Lithuania—are now pushing for a 10th set of measures.

Ustenko said Kyiv has clear priorities. "Every single thing related to their nuclear energy; an embargo on nuclear energy," is among them, he said. "We just do not need to repeat those mistakes which we've made before."

"Everything related to their banking sector. We would like to see more of their banks under sanctions to make sure that they do not have any routes to receive funds and to work globally. This is very important."

"Some loopholes which appeared from previous packages also have to be eliminated. And of course, as usual, individual sanctions are really very important."

Newsweek has contacted the Russian Foreign Ministry to request comment.