The Risks of Funding Ukraine Through Russia’s Frozen Assets on the International System
In response to the sanctions imposed on Russia due to its military intervention in Ukraine, the G7 and the European Union announced in February 2022 the freezing of approximately €300 billion ($325 billion) in Russian central bank reserves. Recently, there has been an escalation following the G7 and EU’s decision in June 2024 to use the interest generated from these frozen Russian assets to support a $50 billion loan to Kyiv, aiding its defense against Moscow. On July 26, European Commission President Ursula von der Leyen announced that the EU would transfer €1.5 billion ($1.63 billion) from the proceeds of these frozen Russian assets to Ukraine. Moscow has repeatedly threatened to respond to any use of its frozen assets to fund Kyiv.
Freezing Russian Assets
After Russia invaded Ukraine, the West imposed a series of economic sanctions on Moscow, including freezing Russian assets owned by the Russian central bank abroad, which amount to around €300 billion, roughly half of Russia’s foreign assets. These assets are mainly held in G20 countries.
Western countries, particularly members of the G7 and the European Union, froze Russian central bank assets in the form of cash and securities. The largest share, about €191 billion ($208 billion), was blocked or frozen on the Euroclear platform in Belgium (a financial services company specializing in securities transactions and custody). France froze around €19 billion ($21 billion), and Germany about €210 million. Switzerland and the UK, outside the EU, announced the freezing of Russian assets worth a combined $30.2 billion.
Additionally, the funds of sanctioned individuals were also frozen. For example, in Germany, the combined economic resources of individuals and the frozen Russian central bank assets are estimated at €4.1 billion ($4.5 billion), in Switzerland at 17.6 billion Swiss francs (about $20 billion), and in the UK at £22.7 billion ($29 billion), with estimates by “The Guardian” putting the figure at £25 billion ($32 billion). The United States has frozen assets worth around $5 billion, and Canada about $328 million. These Russian assets were frozen based on the domestic laws of the countries imposing the sanctions.
Recently, in the context of G7 and EU support for Ukraine, there has been growing advocacy for utilizing these Russian assets to finance the war effort, either by confiscating the assets themselves to fund Kyiv or by keeping them frozen and using their returns for funding. The G7 and the EU have already announced the use of returns from these frozen assets to fund the Ukrainian war effort, with the countries agreeing to keep these assets in their central banks. The G7 will grant loans to Kyiv, which will be repaid using the returns generated by the frozen Russian assets, estimated to be between €3 to €5 billion annually.
It is worth noting that most of the frozen Russian assets are held in European banks after President Vladimir Putin withdrew a significant portion of Russian assets from American banks in 2018 due to economic sanctions imposed on Moscow at that time.
Serious Consequences
There are significant implications of confiscating Russian frozen assets in the West or using the interest generated by these assets to fund Ukraine, including:
Undermining the Global Financial System: The confiscation or freezing of Russian assets and the proposal to use them or even their returns is a dangerous precedent that undermines the reliability of the global financial system, regardless of the intentions behind it, whether military support for Ukraine or funding its reconstruction after the war ends. Using Russian assets or their returns involves a range of economic and political consequences, potentially undermining the legitimacy of the existing financial system and the principles of private property rights. Most countries, if not all, have financial reserves in the United States and EU countries, so if these reserves are subjected to political disputes or used as a tool for economic sanctions—not only frozen but also confiscated and their returns seized—it could ultimately undermine the legitimacy of this system, using the Russian case as a legal precedent. There was already a precedent in 2003 when the United States seized Iraqi reserves to fund reconstruction after the fall of Saddam Hussein’s regime, although the seized funds were much less than the size of the currently frozen Russian assets. European Central Bank President Christine Lagarde warned in April that the potential confiscation of Russian assets for Kyiv could threaten the international system and raise many questions. She stated that using frozen Russian assets to fund military aid to Ukraine might violate international law, which these countries demand Moscow respect, and could fragment the global financial system, raising concerns about politically exploiting the current system.
Violation of International Law: Generally, international law is supposed to protect states and officials from enforcement actions against their property without their consent. Thus, one of the most critical questions regarding the confiscation of Russian assets or benefiting from their returns is the legality of such actions or, in other words, their consistency with international law principles. Although the West justifies such escalation by claiming it would curb Russia’s military operation and lead to an end to the war in Ukraine, or in another justification, Russia bears a moral responsibility to fund Ukraine’s reconstruction after the devastation it caused. However, all these arguments do not constitute a strong justification for this deliberate breach of international law. In other words, while international law may allow the temporary freezing of Russian assets as part of imposing economic sanctions, confiscation or using the returns is another matter that these countries have not found a legal basis for. This could lead to a loss of confidence in the international system and the fairness of its laws.
Impact on Euro and Dollar as Reserve Currencies: Despite the G7’s direction to confiscate Russian assets, this approach faces significant opposition within Europe. For example, in June 2023, the European Central Bank warned of the consequences of using the returns from frozen Russian assets, as this could lead to countries diversifying their reserves away from euro-denominated and US dollar-denominated assets.
Limits of Effectiveness
The main question that arises is the effectiveness of confiscating Russian assets or even using their returns in curbing the Russian war in Ukraine. Many experts believe this is unlikely. The potential damage to the Russian economy has already occurred with the freezing decision, so the effectiveness of confiscation as an economic pressure tool on Russia will diminish over time. Additionally, the Russian economy has shown considerable resilience against successive economic sanctions.
In response to the threat of confiscating Russian assets, Moscow has hinted at its ability to retaliate by freezing foreign investors’ funds in Russia, estimated at over $500 billion. According to several financial experts, Moscow’s response to confiscating or using its frozen assets in the EU could lead to the bankruptcy of Euroclear, the main European depositary institution. The Russian Central Bank could confiscate €33 billion in Euroclear assets within Russian jurisdiction and file lawsuits to seize its assets in other countries.
In April 2023, Putin issued a decree allowing the temporary control of foreign companies’ assets in his country in response to the freezing of Russian assets. On May 23, 2024, Putin signed a decree to confiscate American assets in response to the US House of Representatives’ vote in April to seize frozen Russian assets.
In conclusion, as the Russian war in Ukraine drags on and the cost of supporting Kyiv rises for Western countries, they sought to devise a way to continue supporting Kyiv militarily without bearing further costs. This was done by exploiting the Russian assets frozen at the beginning of the war. However, this move remains fraught with many risks. On one hand, it poses a clear threat to the reliability of the international system at a critical time. The global economic system, after successive crises, is already at a crossroads and on the path to change. Thus, confiscating or using the returns from frozen funds could lead to a shift in this system, not in favor of the West.
On the other hand, even if the possibility of implementing such confiscation is accepted, its short-term effectiveness is questionable. The Russian economy, after more than two years of Western economic sanctions following the outbreak of the Ukrainian war, is still capable of achieving economic growth and opening channels to markets and trading partners. In other words, confiscation, whether of assets or their returns, will not exert the expected new pressure on the Russian economy. Finally, Western countries still have a long way to go in finding a legal framework that allows them to confiscate Russian assets and their returns without violating international law or affecting its credibility.
