Using Frozen Russian Assets To Back Ukraine "Increasingly Compelling"

The issue now seems to be more about how to do it rather than whether it will be done. 

The legal arguments appear solid to the US and UK. JL 

Andrew Duehren and colleagues report in the Wall Street Journal:

The political imperative of using Russian assets to help pay the massive costs of supporting Ukraine and helping it rebuild have become increasingly compelling. The U.S. and its partners are exploring ways to use some of the $300 billion in frozen Russian central bank reserves to back loans to Ukraine. The Group of Seven democracies is now exploring several ways to confiscate the frozen Russian funds to give to Ukraine, a significant escalation against the Kremlin. British Foreign Secretary David Cameron said recently the legal arguments behind confiscating Russian assets are solid

The U.S. and its partners are exploring ways to use some of the $300 billion in frozen Russian central bank reserves to back loans to Ukraine, one of a series of ideas that Western officials are considering as they struggle to agree on a method to seize Russian funds without spooking international investors. 

With Congress blocking funding for Ukraine, there is renewed impetus in Washington to find other sources of long-term financial support. After the outbreak of war, billions of dollars in Russian foreign currency reserves, gold and government bonds were frozen across the U.S., Europe and Japan to ensure they weren’t used to fund its illegal invasion. 

Pushed by the Biden administration, the Group of Seven democracies is now exploring several ways to confiscate the frozen Russian funds to give to Ukraine, a move that would represent a significant escalation against the Kremlin and that is fraught with legal difficulties. 

G-7 officials hope to present options in time for the second anniversary of the invasion in February. But it could take at least another year before anything actually happens, some officials say. There are fissures among Western allies about how best to proceed. While the U.S. and the U.K. back the idea, other European partners, in particular Germany, worry that seizing Russian sovereign assets would backfire, dissuading countries around the world from storing their wealth in the West for fear it might get taken away. 

“The G-7 leaders asked that options be developed and the matter be studied, to the extent that there are risks that they’d be evaluated, international law issues studied and so we’re in the process of doing that, but certainly no decision has been made,” Treasury Secretary Janet Yellen said this week. 

Nonetheless, the political imperative of using Russian assets to help pay the massive costs of supporting Ukraine and helping it rebuild have become increasingly compelling, European and U.S. officials say. G-7 leaders have already said Russia must pay for the cost of the war.

The costs of both supporting and rebuilding Ukraine over the coming years will be substantial. PHOTO: KIRILL CHUBOTIN/ZUMA PRESS

Ideas under discussion range from taxing the interest payments the frozen assets generate to seizing the funds outright and transferring them to Ukraine, according to people familiar with the talks. 

Another idea is using Russian government reserves as collateral for loans to Ukraine. Under this idea, which is still at an embryonic stage, lenders would receive the Russian assets if Ukraine defaults on the loan, potentially issued by an international financial institution such as the World Bank. That could create a financial incentive for Russia to avoid destroying Ukraine’s economy and its ability to pay back its debts, the thinking goes. Another advantage: The underlying collateral could be handed back to Russia if hostilities halted and the seizure needed to be reversed. 

As with other sanctions-related initiatives since the war began, like the price cap on Russian oil, Washington’s push on confiscating assets has caused tensions with European countries, including concern about the legality of the move, the precedent it sets and how it would work practically. Europe holds the vast bulk of the frozen Russian assets, around 180 billion euros of them, equivalent to around $197 billion, in Belgian clearinghouse Euroclear.

“There is a concern among some—the U.S. Treasury, the Fed, the ECB—that if you do this you undermine the reserve status of the dollar and euro,” said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics, adding that he didn’t think confiscating assets would turn key countries away from the world’s two most liquid currencies.

 

Currently the West is spending around $100 billion a year supporting Ukraine, said Timothy Ash, an associate fellow in the Russia and Eurasia program at think tank Chatham House. The costs of both supporting and rebuilding Ukraine over the coming years will be substantial. If allies are sincere about supporting Ukraine but won’t seize Russian assets, “then where are we going to get that money from?” he says.  

A key point of contention is whether the West can seize Russian assets under international law. U.S. officials believe it would be legal to confiscate the assets, pointing to principles that allow those affected by a country’s violation of key international norms to breach the protection that central bank assets are usually guaranteed. 

Some senior European officials say they are skeptical. The U.S. and its allies aren’t at war with Russia, and Russia didn’t amass its wealth through illicit means but largely by selling oil and gas, much of which went to the West. Another concern is that seizing Russia’s assets could appear arbitrary.

 

British Foreign Secretary David Cameron said recently that the legal arguments behind confiscating Russian assets are solid. “I am pushing hard on this. The world has changed. The arguments against are not as strong as people said, and there is a legal route,” he said. 

Biden administration officials have been working with Capitol Hill to develop legislation that would authorize the seizure of Russian assets in the U.S. Cameron said that he hoped that all G-7 members would unite to seize the assets but that the U.K. and the U.S. could go it alone if needed. 

Beyond the legal questions, the Western partners are still debating the basics of any potential plan, including whether to restrict the use of the Russian money for reconstruction efforts. Giving Ukraine the Russian money to directly fund its military could prove particularly provocative to Moscow, inviting broad retaliation. 

The Kremlin said in late December it has a list of U.S. and European assets in the country it would seize in a countermeasure. 

The European Commission has already proposed a more modest plan to use proceeds—interest payments and others—from the assets, mostly held at Euroclear to support Ukraine. 

The European Central Bank has argued the plans, which could generate around €4 billion annually, may tarnish the international attraction of the euro by driving countries such as China or Gulf states to withdraw investments in euro assets for fear they could suffer a similar fate.

EU governments forced the European Commission, the EU’s executive body, to delay by months a proposal on taxing the windfall. When the proposal finally came in December, it focused only on legislation to place the profits from matured Russian assets into separate accounts at financial institutions in the bloc, leaving aside for now a separate proposal on how to use the revenue for Ukraine.  

Internal EU discussions on taxing the Russian proceeds have avoided talk of confiscating the underlying Russian assets, diplomats say. A decision by the bloc would likely need backing by all 27 governments. 

Still, U.S. officials are quietly confident they can persuade Europe to come on board with Russian asset confiscation, as they did after months of wrangling to implement a Washington-inspired price cap on Russian oil in 2022. Having every major Western economy move together would mitigate risks to the euro, the U.S. argument goes.

There are precedents. In 1990, former President George HW Bush froze some $30 billion in Iraqi and Kuwaiti assets in the U.S. following Saddam Hussein’s invasion of Kuwait, a move echoed by the U.K. and France. The U.S. took a similar step following its invasion of Iraq in 2003 while Washington froze Yugoslav assets in the U.S. during the 1990s. The assets were eventually returned.