The seizure of Russian assets will make the global financial transaction system subservient to international political currents.
“The seizure of the Russian assets will make the international financial transaction system untrustworthy and subservient to global political currents. Russia is already holding Western countries responsible for initiating and prolonging the war. Adding another dimension to the war will expand it to a new level, limiting the possibility of a diplomatic solution.”
The Western bloc, including more than two dozen countries, is fighting a proxy war against Russia by providing weaponry and strategic, financial and logistical support to Ukraine. It has also attempted to destabilize Russia’s financial situation through economic, financial and trade sanctions. In March 2022, the European Union (EU), Japan and the Group of Seven (G7) froze some 300 billion euros ($323 billion) of Russian central bank assets to retaliate against Moscow’s invasion of Ukraine.
Now, they have initiated a new battle by subtly seizing frozen Russian assets. The US and other G7 countries have agreed to provide Ukraine with a $50-billion loan to help it acquire weapons and begin rebuilding damaged infrastructure. The loan will be repaid in about 30 years, using the interest earned on frozen Russian assets.
The rationale for utilizing the interest income earned from Russian assets is based on the international legal doctrine of reprisals. However, this doctrine is truly applicable when a state inflicts harm on another, and the injured and specially affected party can undertake proportional counter-measures against the offender. Ukraine, being directly involved in the war, rightly exercised this right and seized about $880 million in Russian-owned property and businesses within its borders in May 2022. Surprisingly, this doctrine is also being applied by the parties that are not directly affected by the Russian invasion in Ukraine. It weakens the rules-based order that Western governments claim to be defending all the time.
This measure had been taken under duress as Western leaders are fearing difficulties in future funding to Ukraine and seeking alternative solutions.
The G7 nations and their allies are convinced that the Western aid to Ukraine is morally, legally and strategically urgent. But the foreign aid to fund the Ukraine war has remained politically entangled for a long time in both the EU and American politics. The EU leaders met a few times in 2023 to secure additional funding for Ukraine. In December 2023, Hungarian Prime Minister Viktor Orban vetoed the proposal of 50-billion euro ($54 billion) aid to Ukraine. Since then, the EU has been attempting to bring Hungary in line with this issue. In February this year, Hungary finally agreed to the proposal after a coordinated, behind-the-scenes pressure created by other member countries. Hungary holds the rotating presidency of the Council of EU this year and Viktor Orban may create hurdles in future funding to Ukraine.
The US also faced a political challenge for further funding as House Republicans insisted on new border security policies that President Biden was unwilling to support, creating a political stalemate. Biden’s proposal to provide $61.5 billion to Ukraine was passed in April after months of hard-right resistance.
Ukraine faces significant threats to its ability to continue its fight and is now losing ground. The US has vehemently proposed the one-time seizure of the total Russian assets parked in the EU and the US to finance the war. But most of the frozen Russian assets are in the Brussels-based depository Euroclear and other European financial institutions. However, the European allies did not agree to this and chose an alternative approach that they suppose is milder. But it is essentially an indirect seizure.
Undoubtedly, this measure will lock Russian assets for 30 years. But it will not affect Russia economically in a significant way. Russia has had a substantial current account as well as trade surplus in the last three years that has helped it to replenish a substantial portion of the frozen assets. Sacrificing the interest on the assets parked outside will have insignificant additional effects. But it will have a profound impact on the global financial system and diplomacy.
Biden did release the frozen Iranian assets in exchange for five US hostages in September last year. Likewise, the unlocked Russia’s frozen assets could have been potentially utilized as a bargaining tool during negotiations to end the war. But that negotiating leverage is almost gone now. Even if the frozen assets are used as a bargaining chip, Russia will demand back the interest earned from the frozen assets, and who will pay that? Even if Russia gets $300 billion after 30 years, its present value is just $50 billion (as calculated by using the economics tool ‘time value of money’ assuming 6 per cent discount rate and annual compounding).
In 2023, Ukrainian Ambassador to Canada Yuliya Kovaliv, while hailing the proposed legislation for seizing foreign assets, in a message to the Canadian Institute for the Administration of Justice’s annual conference in Ottawa, wrote, “You need to remember, most of these assets are corrupt assets, are assets of Russian oligarchs that got their huge fortune by being close to the Putin regime, by using the taxpayers’ money for their personal interests or the interests of their companies.”
The US and its allies agreed with this narrative and acted in a veiled manner to acquire Russian companies’ assets (along with state assets), holding them responsible for Putin’s actions. Similarly, Russia can acquire public and private property belonging to its opponent states and their citizens as a countermeasure.
The US and its allies are trying to end the war by exerting economic pressure on Russia. The policy is to destabilize Russia through economic and financial sanctions along with the continuous arming of Ukraine, virtually giving a go-away to diplomacy to contain the war. Economist Jeffrey Sachs puts it like this: “There has been a complete collapse of the diplomacy between US and Russia — instead of focusing on the policy, Biden focuses on personal vis-à-vis President Vladimir Putin. Recently, he referred to President Putin as ‘a crazy SOB’.” In the press conference following the NATO summit in Washington, Biden described Putin “a murderous madman on the march”.
The seizure of the Russian assets will make the international financial transaction system untrustworthy and subservient to global political currents. Russia is already holding Western countries responsible for initiating and prolonging the war. Adding another dimension to the war will expand it to a new level, limiting the possibility of a diplomatic solution.
(The author is Ex-Professor, University of Northern British Columbia)