31.01 Review

The Case of Three Hundred Billion: The confiscation of frozen Russian assets seems fair and rational, but it is illegal

Against the backdrop of the de facto suspension of aid to Kyiv by the EU and the US, the possibility of confiscating the Russian reserves frozen after the invasion of Ukraine has become one of the most discussed topics of recent months. Seemingly rational considerations appealing to fairness and pragmatism, however, run up against legal arguments. While the imposition of sanctions falls within the remit of national governments, i.e. it concerns issues related to the regulation of trade and capital flows, property issues do not fall within their jurisdiction. Moreover, there are no legal grounds for the confiscation of these assets in the jurisdiction of European countries where most of the assets are located. Such a step may set a precedent that undermines trust not only in the dollar and the euro as reserve currencies and the Western banking system as a whole but also in the intention of the Western coalition to uphold an order based on law rather than political expediency. Wars and frozen conflicts are now predominantly concentrated in the Global South, and such a precedent would be perceived particularly negatively there, stimulating a further factor of distrust towards the West. At the same time, the 'case of the three hundred billion' cannot be considered closed. Russia has inflicted enormous economic damage on Ukraine, which also undermines its ability to resist continued Russian aggression. In the past, reparations were usually the prerogative of the victorious countries at the end of a conflict. This arrangement is unfair, but it is not easy to find legal ways to mobilise Russian money to help Ukraine.

At the end of January, the US Senate Committee on Foreign Relations endorsed the 'Rebuilding Economic Prosperity and Opportunity for Ukrainians Act' (REPO), which is designed to help Washington seize Russian assets and allocate them for the reconstruction of Ukraine in the future. While the document is still awaiting approval by both houses of Congress and the US president, it seems particularly relevant against the backdrop of the ongoing crisis over aid disbursements to Ukraine, which has entered a new phase after Donald Trump derailed an almost agreed-upon deal between Republicans and the Biden administration. If the law comes into effect, it will establish the primary legal basis for the confiscation of assets from a country with which Washington is not at war.

However, the unprecedented nature of this measure should not deter the international community, writes Anton Moiseenko, a law professor at the Australian National University, in a commentary for the Royal United Services Institute (RUSI), summarising the arguments for and against the confiscation of approximately $300 billion in frozen sovereign Russian assets in the West. Russia's attack on Ukraine was itself an unprecedented event requiring an extraordinary response. The question now is what precedent the G7 countries and the global community as a whole intend to set: either it will be the seizure of frozen assets or a precedent of leniency towards the aggressor state. According to Moiseenko, there is no need to fear that confiscation, as many believe, will undermine the stability of the international financial system. He believes that the notion that property rights should be protected even in the case of an aggressive war and the commission of war crimes is fundamentally flawed.

Asset expropriation will not lead to the collapse of the dollar model because, essentially, it is already happening. While a number of countries around the world are already on the road to dedollarisation and will continue to move in this direction, others will not do so regardless of the fate of Russian reserves. In other words, the process of geopolitical divergence in the financial sphere is already underway, and it makes no sense to make efforts to hinder or prevent it. On the contrary, decisions should be based on this new reality. Finally, the damage inflicted on Ukraine by Russia already amounts to, according to various estimates, between $400 billion and $1 trillion, significantly exceeding the size of the reserves. These funds will be inaccessible to Russia in any case — either they will be considered as part of reparations, remain frozen, or be confiscated for future reparations.

The idea of confiscation has been gaining supporters. However, for all its perceived benefits — especially as part of future reparations, which provide additional arguments in its favour — such a move is still strongly opposed by many experts and institutions, whose voices at this stage of the dispute are likely to be decisive. Nicholas Mulder, author of a well-known book on the history of sanctions as an economic weapon, has written in a column for the Financial Times that economic reprisals against an aggressor are the prerogative of the aggrieved party, and Ukraine exercised this right by confiscating at least $880 million in Russian assets in May 2022. The Western coalition, on the other hand, is not at war with Russia, but a third party, so its claims on Russian assets will not be easy to justify. For Belgium and France, which account for about two-thirds of all frozen Russian reserves, confiscation would mean transitioning to the status of almost direct participants in the conflict, which, according to global experience, sooner or later may lead to open warfare.

As conducting analysis, the EU working group on the use of sanctioned Russian reserves did not find 'a reliable legal mechanism to confiscate frozen assets solely on the basis that they are subject to EU sanctions'. Sanctions are a tool in the hands of the executive branch to regulate trade rules and financial transactions, while property rights issues are not within their purview.

The main argument against confiscation is related to concerns about its precedent-setting nature. The number of armed conflicts in the world, including frozen conflicts, is quite high, and the temptation to consider asset confiscation by third countries (not parties to the conflict) in favour of one side or another would be enticing. For example, such claims could have been formulated regarding the assets of countries that were part of the anti-Iraq coalition 20 years ago.

Most of the recent military conflicts have unfolded in countries in the Global South, and therefore, the decision on confiscation would provoke a particularly sharp reaction from this group of countries. It would become another argument indicating that the West is willing to sacrifice legal principles for political expediency. Pragmatic countries in the global South often follow this logic, while Western countries claim to support and intend to uphold an order based on legal principles.

As a result, EU countries began to discuss what appeared to be a less risky plan to use the income from blocked assets, which could be as much as $3 billion a year, to help Ukraine. This solution has also been supported by the G7 leaders, who noted in a joint statement that 'decisive progress is needed to channel extraordinary revenues of private entities directly derived from immobilised sovereign assets of Russia to support Ukraine'. At the same time, the reserves themselves in the jurisdictions of these countries 'will remain immobilised until Russia pays for the damage it has caused to Ukraine'.

However, this plan has also been criticised by the President of the ECB, Christine Lagarde, who stated that using the profits from frozen Russian assets threatens to undermine trust in the euro as a global currency. The losses for the EU could be significantly higher than 'the few billion it will bring to Ukraine'. According to some experts, such a decision would be a big blow to the reputation of the systemically important depository Euroclear, which held €35.6 trillion in assets as of 2022. Eventually, several EU countries, including France and Germany, joined the position of the ECB and opposed the proposed plan put forward by Spain. While Madrid estimated that the plan could bring Ukraine €15-17 billion by 2027, its critics have questioned both the methodology used to calculate the amount and whether it could be transferred to Ukraine quickly enough.

Moscow, through the statements of Russia's Finance Minister Anton Siluanov and the press secretary of the Russian president Dmitry Peskov, has threatened that in response to the confiscation of Russian reserves it might seize any remaining Western assets in Russia. Before this, the EU authorities had notified some Western banks about the seriousness of this risk. However, such a threat is certainly not critical to the decision-making process. Europe, where the assets are located, as critics of the plan have rightly pointed out, bears the main risks of its negative consequences in the long term. Therefore, its implementation in the near future seems unlikely. In this context, the bill being discussed in the US Senate appears more like a political gesture, which should be interpreted in the context of the domestic political struggle around the issue of aid to Ukraine.

At the same time, the question remains open. Russia has inflicted enormous economic damage on Ukraine, which also undermines its ability to resist Russian aggression. In the past, reparations had been the prerogative of victorious countries. This needs to change, but creating a legal mechanism for unilateral reparations is not an easy task.