LONDON: While Washington has been urging the EU to seize the frozen Russian funds outright, the EU Commission favours a compromise, promoting a plan that would use only the accrued profits on the assets.
When President Vladimir Putin ordered the illegal invasion of Ukraine more than two years ago, starting a war which he believed would be over in a few weeks, one of the early key measures taken by the international community was the immediate freezing of Russian assets abroad. These included a wide array of financial instruments and holdings, ranging from bank accounts, real estate properties, stocks, bonds, luxury and other assets held by Russian entities and oligarchs. Across the US, EU, Japan and Canada, the total assets amounted to the tidy sum of almost $300 billion.
The UK government has never released official figures for the total value of Russian assets held in the UK, but experts believe it totals around £18 billion worth of individual assets which have been frozen alongside around £26 billion worth of Russian central bank assets in the UK. This is a sizeable figure, but dwarfed by the 260 billion euros of Russian central bank assets frozen in the EU. Of this, approximately 190 billion euros is held at Euroclear, a central securities depository based in Brussels. Since the start of the war, these assets have generated nearly 4 billion euros in profits, and arguments are currently raging among EU nations on whether, or how these profits could be used to help Ukraine in its hour of need.
“Of course the aggressor’s funds must be used”, Bank of Latvia Governor Martins Kazaks said last month. “In plain geopolitical sense, Ukrainians need money and we need to provide the money – it’s in our common interest. The question is whether you levy taxes on your citizens or use the assets of the aggressor. If the war is long, bloody and extremely costly, at one point you will need to go into the assets,” he claimed. The three Baltic States feel most at risk from Russian expansion should Moscow win the war in Ukraine, and are therefore the keenest among EU nations to ensure that it doesn’t.
While Washington has been urging the EU to seize the frozen Russian funds outright, the EU Commission favours a compromise, promoting a plan that would use only the accrued profits on the assets. But even this compromise is criticised by the European Central Bank, which has consistently pushed back against the idea. ECB senior officials argue that such a move would run afoul of international laws guaranteeing the immunity of central bank assets held in foreign reserves and such a move could threaten the credibility of the euro. “Weaponising a currency inevitably reduces its attractiveness and encourages the emergence of an alternative,” said Bank of Italy Governor Fabio Panetta earlier this year. He was referring to China’s success in promoting the yuan as a global reserve currency, although since Panetta’s remarks, the IMF’s latest composition of foreign exchange reserves shows that the yuan’s allure as a global reserve currency is fading.
Few doubt that Ukraine is currently in urgent need of financial support. In President Zelenskyy’s office in Kyiv, officials insist they remain positive but say that Western aid, especially President Joe Biden’s long-delayed $60 billion package of support, is urgently needed. Several senior Ukrainian officers recently painted a grim picture of frontlines potentially collapsing this summer when Russia, with greater weight of numbers and a readiness to accept huge casualties, launches its expected offensive. Even worse, they expressed private fears that Ukraine’s own resolve could be weakened, with morale in the armed forces undermined by a desperate shortage of supplies. The use of Russian assets to purchase weapons could help remove such fears.
UK Foreign Secretary David Cameron supports the use of Russian assets, telling a meeting at Davos in January “At the end of the day, Russia is going to have to pay reparations for its illegal invasion, so why not spend some of the money now, rather than wait till the war is over and have all the legal wrangling about reparations?” Cameron’s words were later echoed by Rupert Skilbeck, director of REDRESS, a human rights campaign group which has petitioned the government to seize Russian assets. “The UK alone has frozen billions in Russian assets, and together with allies have made commitments to support the defence, reconstruction and recovery of Ukraine,” he said. “A substantial proportion of these funds could also transform the lives of millions of victims of human rights violations and crimes committed by Russia in Ukraine. Victims cannot wait until the war is over,” he argued.
Others urge caution, arguing that using frozen assets now would remove their leverage in any future peace negotiations, as billions of pounds sterling of frozen cash, along with treasured assets like mansions and superyachts, are a valuable card to play in any such talks. If you want to bring Putin to the negotiating table, what other tools do you have, they ask, pointing out that seizing the assets permanently would make such negotiations less likely than ever to take place.
Then there’s the rule of law. Many lawyers argue that because there is no direct legal precedent for asset seizure, countries would be entering entirely uncharted legal territory. “You do not want to start taking assets off people just because you don’t like them,” they say. “Governments that seize individual’s privately-owned assets start rewriting the basic principles that underpin most legal systems when it comes to interference with property rights,” said Anna Bradshaw, a UK lawyer.
The EU is split on the matter. Belgium has welcomed proposals to use some of the profits to help Ukraine, while Estonia is calling for the West to seize assets before the US election in November. Countries such as France and Germany remain unconvinced.
In the United States, the Republican House speaker, Mike Johnson, is attempting to rally his divided party behind the REPO (Rebuilding Economic Prosperity and Opportunity for Ukrainians) Act, which would allow President Joe Biden, working with European allies, to legally seize Russian assets and use them in supporting Ukraine. Many Republicans are adamantly against using any more American taxes to help Ukraine defend itself, preferring instead to use the money to defend the US-Mexico border. Nevertheless, as this newspaper goes to print, a rare bipartisan coalition in the US Congress is attempting to pass a $95 billion foreign aid bill containing funding for Ukraine and Israel in their wartime conflicts.
Should this attempt fail, however, the REPO Act could still offer Biden a way of side-stepping any controversy, although many leading US economists argue that the very act of seizing Russian assets would pose dangers to the US economy, as other countries, not only Russia, would see this as an act of theft, which could weaken the dollar’s status as the main global reserve currency.
The topic will be on the table at the G7 summit in Italy in June, when many delegates will argue that policymakers should stop worrying about the financial and legal ramifications of skimming proceeds from frozen Russian assets to arm Ukraine, and must instead recognise that Russian aggression poses a far greater risk to the world economy. They fear that letting the Ukrainian war effort run out of funding would embolden Russian aggression, ultimately allowing it to triumph and threaten other countries in Europe. “If our deterrence against Russia is weak and there is an attack that goes beyond Ukraine,” argues Kazaks, “it makes the West less credible. So, in terms of the international role of the dollar and the euro, seizing assets will have its repercussions, but the alternative is even worse”.
Is seizure risky? Of course. But it’s a risk worth taking.
John Dobson is a former British diplomat, who also worked in UK Prime Minister John Major’s office between 1995 and 1998. He is currently Visiting Fellow at the University of Plymouth.