03.04.23 Review

Frozen Wealth: The West lacks the legal mechanisms to utilise frozen Russian assets to help Ukraine

The Russian assets that have been frozen by Western countries are highly unlikely to be useful in rebuilding Ukraine's war-ravaged economy for quite some time. It is difficult to implement the creation of a special investment fund to aid Ukraine due to legal hurdles, as these assets cannot be expropriated under existing laws. Additionally, some experts suggest that Russia could challenge its reparation obligations in the future, due to the unstable legal procedures involved in this process. To address this issue, there needs to be an international legal mandate that can unite the global community in recognising Russia's obligations.

The European Commission has estimated that the war in Ukraine has caused damage in excess of $650 billion. It is widely agreed in the West that Russia, as the party responsible for starting the conflict, should be held accountable and compensate for these losses. As it stands, Western countries have frozen the assets of sanctioned Russian oligarchs to the tune of $58 billion, as well as assets of the Russian central bank worth $300 billion. An additional $200 billion of Russian reserves remain unaccounted for, and according to a report by the Atlantic Council, the total assets of Russian oligarchs are estimated to be worth $1 trillion.

However, as the analysts at the Atlantic Council highlight, even the frozen reserves that have been identified cannot currently be used, as this would require significant legislative changes.

The future of the Russian oligarchs’ frozen assets is currently being determined by the multilateral task force ‘Russian Elites, Proxies and Oligarchs’ (REPO), which is led by the finance and justice ministers of Western countries. The United States has initiated the process of seizing the assets of oligarchs: for example, a judge in a Manhattan federal court recently ordered the confiscation of $5.4 million from Konstantin Malofeev to be turned over to the State Department to be donated to Ukraine. Additionally, another sanctioned Russian oligarch, Viktor Vekselberg, is facing a lawsuit from the US Department of Justice task force KleptoCapture to seize six of his properties, worth $75 million.

So far, none of these cases have been resolved. In each of them, the prosecutors will have to demonstrate that the oligarchs' confiscated funds fall under ‘anti-money laundering’ legislation or can be attributed to a breach of the sanctions regime. Further, this has to be done in all REPO member states in order to actually confiscate the frozen funds. This requirement could complicate the process and result in only a small portion of the frozen amount ultimately reaching Ukraine.

The process of confiscating Russian state assets is equally challenging. On the one hand, the UN General Assembly has passed a resolution urging Russia to pay reparations for the damage inflicted on Ukraine. As a result, the state assets of the Russian Federation may remain frozen until Russia consents to settling its debts to Ukraine.

The immediate confiscation of these assets poses a significant legal challenge for both the EU and the US. According to the Atlantic Council's experts, EU regulations only allow for the confiscation of assets when there is clear evidence of a particular criminal offence. As a result, it would be necessary to establish new EU legislation to confiscate all Russian assets, and achieving a consensus among the 27 EU member states on this matter may take a long time to reach.

Legal limitations also exist for the United States. Some experts refer to the precedent set in 1992, when the US relied on the International Emergency Economic Powers Act (IEEPA) under Special Executive Order 12817, in response to Iraq's aggression towards Kuwait. This order required US financial institutions to transfer any Iraqi funds in their possession to the Federal Reserve Bank of New York in accordance with the UN Security Council's resolution, which would then be redistributed to the victims of Iraqi aggression. However, according to the Atlantic Council's analysts, this precedent is not applicable in the present scenario. In 1991, the US Congress authorised the use of military force in the Persian Gulf, in accordance with a UN Security Council resolution. This meant that the US was in a state of armed conflict with Iraq, allowing the activation of the IEEPA. However, in the case of the war in Ukraine, none of these conditions apply: the UN Security Council has not passed a relevant resolution, and the US is not at war with Russia.

According to the authors of the review, if the confiscation of Russian assets lacks undisputed legal justification, third-party nations may view this seizure as a sign of the unreliability of the United States when it comes to safeguarding other countries' reserves. This could potentially damage the status of the dollar as a global reserve currency. Additionally, in February, the UK rejected a proposal to unilaterally seize approximately $20 billion in frozen Russian state reserves that were being held in British banks.

In November, the European Commission proposed a fundamentally different approach when it comes to the issue of using frozen Russian assets to assist Ukraine. The proposal suggests transferring the assets to a specialised investment fund, and the generated income from this fund would then be sent to Kyiv. In February, the European Council's working group commenced their evaluation of this proposal. With this approach, the assets would neither be confiscated nor spent; only the generated income is used, which should amount to 5% per annum. This would enable the EU to send over $1 billion to Ukraine each month on a consistent basis.

The proposed plan is also fraught with legal disputes. Under international law, the principle of sovereign immunity shields countries from the jurisdiction of the courts of other countries. The investment scheme proposed by the European Commission may violate this principle. Further, in several EU member states, investment revenue is subject to taxation as property of the proprietor or recipient. Thus, the income from the proposed investment fund would legally remain under Russia's ownership, and its transfer to Ukraine would necessitate legal justification.

According to Eleanor Runde, an analyst at NYU School of Law’s magazine Just Security, the forceful expropriation of Russian state assets would not facilitate peace or further strategic objectives. Instead, it could offer Russia legal grounds to dispute any obligation to pay reparations to Ukraine in the future. Rather than pursuing immediate expropriation, Runde advocates for the development of a post-war legal regime that takes into account the lessons learned from the conflict and which is based in international institutions. This legal framework should outline the process and structure of Russian reparations to Ukraine while also considering the conditions of post-war Russia. Although integrating Moscow into the post-war Western world order may not be as straightforward as it was with West Germany in the 1950s, Ukraine's allies should avoid a Russia that is as marginalised and unstable as the Weimar Republic was.