In recent weeks, some leaks suggested that the U.S. believes the dangers to the European financial system are greatly exaggerated (Joseph Stiglitz in his contribution to the Project Syndicate argues that if there were an increased anxiety among the emerging economies caused by the freezing of Russian assets, they had already pulled out of Western financial instruments in 2022 not awaiting for years the confiscation decision) and it would like to take on the Russian funds declaring the Western powers became the victims of the Russian aggression alongside Ukraine.
I would argue that these reasons look misleading and may cause serious consequences for the Western powers – even I agree that the concerns about the fate of the European financial system might be too elevated. Nevertheless, there are at least four obstacles that may prevent this scheme from being deployed.
First, it should be noted that while freezing of foreign assets has been regular practice in the time of war, the confiscations were not. The best example is provided by both Iraqi occupation of Kuwait in 1990 and the subsequent Gulf War when a special Compensation Commission was set up six months after the hostilities ended. This Commission has examined more than 2.6 million claims amounting to almost $350 billion and decided to award close to 1.5 million of them in an overall sum of $52 billion which was finally repaid in February of 2022. I deeply respect Ukraine’s assessment of the damage caused by the Russian forces of around $1 trillion but I would admit that, considering the above figures, there is a huge risk to seize $300 billion in Russian assets without being in possession of some comprehensive proof of damage. But even this does not look like the most important obstacle.
Second, such an act will completely change the relationships between the West and Russia. It’s quite natural not only to freeze but also to seize and confiscate assets taken in times of war from your enemy: it correlates to the Prize Law, which dates to the 18th century. The problem, however, is that the Western powers continuously insist they aren’t at war with Russia, so the ancient rule doesn’t apply. Some experts warn that in the case of confiscation, the Russian authorities would retaliate and nationalize Western assets in Russia – but I believe it’s not a huge problem since most of them were already taken over by the Kremlin in a move which I use to call ‘the greatest robbery of all times’. So the issue is not so much in numbers but in the fact that such a move in fact declares West’s war on Russia as considered by the customary law.
Third, there is another important issue – i.e. the reason for such a confiscation. It seems that the main argument submitted insists the funds can be confiscated because the Western powers are also the victims of Russia’s actions, but it looks inappropriate. Since we do not have any better reference point than the Gulf War, I would remind that the losses the Europeans and the Americans suffered, were caused not by Russian bombardments, or strikes but by the decisions voluntarily taken by their governments which provided support to Ukraine (and all the reparations that were repaid by Iraq, went to Kuwait, and not to the nations that defeated Iraq spending for this cause billions of dollars). So, it would be very tricky task to take the money as if you had suffered, and then suddenly to release the whole sum to Ukraine (because if the West wants just to cover its own expenditures associated with the assistance to Ukraine, including loans it has provided to Kyiv, $300 billion would greatly outstrip this amount that has been already spent).
Fourth, if the Europeans confiscate Russian assets claiming they suffered losses from Russia’s actions, it would be reasonable to compensate not the money that went to Ukraine, but rather the funds that the European companies and citizens had unwillingly and unexpectedly lost due to the nationalization that was initiated by theKremlin which I use to call ‘the greatest robbery of all times’ – but if it happens, Ukraine gets nothing since thedirect losses exceed $100 billion, and the lost profits amount to $160-200 billion atop of this.
To summarize, I would say: even if one puts the widespread concerns about the fragility of the European financial system aside, there are two major problems preventing the scheme from succeeding: on the one hand, for seizing these funds, the NATO nations should recognize they are at war with Russia (so this status has somehow changed since February 2022); and, on the other hand, they should either admit all the decisions to help Ukraine were made spontaneously and arbitrary, or to put the interests of the Western investors whose assets were nationalized by the Russians, ahead of the interests of Ukraine. In any case international law thus becomes fractured with some powers considering it lawfully to punish others for aggression those undertake against third parties, while others refrain from it.
What would I propose in the case the Western world faces? To my mind, the G7 had made a good first step when it declared that the freeze of Russia’s reserves will not end till Russia pays reparations to Ukraine. If there is a need to use these funds prior to the end of the war, I would suggest establishing an international fund for Ukraine’s restoration to which Ukraine, the G7 powers, and all other countries where the Russian funds are deposited, may become parties. This fund may get government guarantees from all G7 nations and be declared the sole operator of the forthcoming Russian reparation payments – instead of Ukraine as a sovereign nation. As the great powers back the fund, it will be considered as at least AA+ borrower, and the banks that currently hold the Russian frozen assets, simply lend to it the sums equaling these assets at the interest rate corresponding to one they are obliged to pay to the Russian Central bank (since the war started before both Fed and ECB begun to raise rates, this interest shouldn’t exceed 1 percent per annum).
Formally, there will be no connections at all between the Russian money and the loans provided to the fund: the Russian government will have nothing to complain about as the correlation between the amount of loans granted and the Russian funds frozen may be considered as a pure coincidence. If after the war the Russian authorities decide to pay the reparations, these will flow to the fund and it will repay them to the banks involved while the great powers announce the end of the freeze allowing to release the money back to the Russian Central bank – I would say it will look like a pure accounting scheme being approved by all parties (even the real money may not move: all the needed transactions made be done in seconds). If Russia decides not to pay, the loans might be extended for decades till inflation nullifies their amounts. The proposed scheme needs some efforts to be implemented, but it seems free from unintended consequences the currently debated confiscation would have.
To finalize, I would add that I’m a long-time opponent of Putin’s regime and was designated a ‘foreign agent’ by the Russian ‘Ministry of Justice’ – so I have no intentions to benefit the Kremlin but wish only to prevent the demolition of global financial rules and international law.
Vladislav Inozemtsev, Special Advisor to MEMRI’s Russian Media Studies Project, is Founder and Director of Moscow-based Center for Post-Industrial Studies.
