As soon as the Russian-Ukrainian war broke out in February 2022, the United States and the European Union moved to ban transactions with the Russian central bank and the Russian Ministry of Finance, freezing an estimated $300 billion of Russian sovereign assets in the West. Over nearly two years, the West has regularly taken several measures aimed at expanding its support for Ukraine, arming it with advanced tanks, long-range missiles, cluster munitions, and fighter jets. However, with increasing political pressures and ongoing discussions in the West about the negative impacts of extensive Western support for Ukraine on Western economies, recent months have seen extensive discussions and debates among Western leaders on how to handle the frozen Russian assets in Belgium and other European cities. It is expected that G7 leaders will issue a statement on the matter at their meeting on the second anniversary of the Russian-Ukrainian war in late February 2024.
Potential Decisions
Current indicators suggest the possibility of a new and different approach by the West regarding the frozen Russian assets in Western financial systems since the beginning of the Ukrainian war. The dimensions of the debate on how Western countries will handle the frozen Russian assets during 2024 can be outlined as follows:
Utilizing Russian Assets to Support Kyiv:
At the start of the war, the G7 countries and their allies froze the reserves of the Russian central bank deposited in their jurisdictions, a move that significantly and effectively deprived Russia of access to those assets. Recently, several calls have emerged in the West to seize the frozen Russian assets and grant them to Ukraine, either for its reconstruction or even to support the war effort against Russian forces. It is noted that the majority of the frozen Russian reserves since the start of Moscow’s war on Ukraine are in the European Union. In this context, there is a proposal from the European Commission targeting 180 billion euros of frozen assets specifically held at Euroclear in Belgium, a clearinghouse that acts as a custodian for Russian reserves. Consequently, European Commission President Ursula von der Leyen emphasized that the revenues from frozen Russian assets should fund the long-term reconstruction process in Ukraine, which the World Bank estimates at around $411 billion.
Confiscating Assets of Sanctioned Russian Individuals and Transferring Them to Ukraine:
Discussions are currently underway about confiscating the assets of sanctioned Russian individuals and subsequently transferring their funds to Ukraine. Both Canada, the United States, and the European Union have mechanisms that actually allow for the confiscation of sanctioned Russians’ assets, although there has been no practical application of this mechanism so far. However, 2024 may see the activation of such mechanisms to support Ukraine.
Developing Mechanisms for Confiscating Russian Assets:
Reports indicate that the Biden administration is actively pressuring European countries to develop plans for potential confiscations by February 2024, specifically on the second anniversary of the Ukrainian war. There seems to be European readiness to sign onto a strategy regarding the matter. This is evident in the requests made in Germany to confiscate more than 720 million euros, equivalent to £624 million, from a bank account in Frankfurt owned by a Russian financial institution. In this context, Western governments are likely to resort to expanding obstructive sanctions, which are a routine part of restrictive measures against Russia. This includes adding more and more Russian individuals and legal entities to the sanction lists, potentially freezing their assets in the jurisdictions of the sanction-imposing countries and banning dealings with them. It is noted that the European Union has so far sanctioned 335 legal entities and 1,645 individuals in connection with the Ukrainian-Russian conflict, excluding assets subject to sanctions under the “50% rule.”
Exploiting Revenues from Russian Sovereign Assets:
Another form of confiscation is using the income derived from Russian sovereign assets within the jurisdiction of the initiating countries and transferring it to Ukraine to partially relieve the burden of assistance on the European Union and its members. However, there are doubts about the legality of this measure, which may hinder its implementation.
Divergent Western Positions on Freezing Russian Assets:
Western countries have markedly divergent positions on the mechanism for freezing Russian assets. In recent weeks, the G7 countries, represented by Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, have intensified discussions on the possibility of seizing financial assets owned by the Russian government in Western countries and then using them to support the war effort in Ukraine or finance its reconstruction. The United Kingdom, which has frozen nearly $23 billion in assets, had previously introduced new legislation in June 2023 to enable the continuation of sanctions on Russia until Moscow pays reparations to Ukraine and to establish other mechanisms for utilizing frozen Russian assets and donating them for Ukraine’s reconstruction. Despite this, seizing frozen Russian assets faces much criticism within Europe. The European Central Bank (ECB) warned in June 2023 about the repercussions of using interest income from frozen assets, as it could lead to diversifying reserves away from euro-denominated assets and increasing funding costs for European sovereign entities. Additionally, it might prompt other central banks to “turn their backs” on the euro, especially if the European Union acts unilaterally without the other G7 countries. France, Germany, and Italy remain highly cautious of this step, fearing potential retaliatory actions from Russia that they may not withstand.
Debate Over the Legality of Using Frozen Russian Assets:
The debate is growing in the West over the legality of employing frozen Russian assets to support Ukraine, regardless of the method. While the United States seeks ways to justify the confiscation of the frozen Russian central bank assets in the financial system and use them to fund Kyiv, legal experts warn that this represents a significant departure from the West’s usual practice and involves substantial legal risks. The Russian central bank assets are protected under customary international law. Any potential actions regarding transferring these assets or their revenues to support Kyiv could have profound effects on the financial system. However, proponents argue that this step can be justified under international law as a fair remedy to compel Russia to compensate Ukraine for war damages.
Counter-Reactions
If the West expands its confiscation of Russian assets and broadens its sanctions on Moscow, it is likely to face violent reactions from Russia. This idea can be explored through the following points:
Russia Confiscating American and European Assets: In the context of Western threats to transfer seized Russian assets to Ukraine to support it in the war, Russia has warned that it has a list of American and European assets that it will confiscate if G7 leaders decide to confiscate the $300 billion (equivalent to £236 billion) of Russian central bank reserves frozen after Moscow launched its military operation in Ukraine in February 2022. It is noteworthy that Putin issued a decree in April 2023 allowing the state to temporarily control the assets of foreign companies in Russia, in a clear retaliatory response to the freezing of Russian assets abroad. Since then, Russia has targeted some companies that halted their operations in Moscow, including the beverage company Carlsberg Group and the French food company Danone. Russia may expand in this direction during 2024 if it sees Western escalation regarding its frozen assets.
Questioning Western Commitment to International Law: Russia might use the confiscation of its frozen assets as a pretext to highlight the dangers of the West’s action, branding it as “theft” and a violation of international law, undermining reserve currencies, the global financial system, and the global economy. Confiscating Russian assets for Ukraine could create significant legal issues, as it sets a legal precedent that could undermine the international economic system.
Cutting Diplomatic Relations with Many Western Countries: The Kremlin has threatened Europe and the United States with severe consequences, including cutting diplomatic relations, if the frozen Russian assets held abroad are used to assist Ukraine’s budget and war effort. According to Russian Deputy Foreign Minister Sergey Ryabkov, seizing Russian assets could motivate cutting relations with the West and potentially lead to further military escalation, including the deployment of short- and medium-range missiles in Europe or the Asia-Pacific region. Despite the currently lowest level of US-Russia relations since the fall of the Soviet Union, some prisoner exchange talks have continued, meaning that cutting diplomatic relations between Russia and the West would be a serious escalation with significant pressures that cannot be overlooked as a Russian leverage mechanism on the West.
Potential Undermining of Western Currencies as Stores of Value: Policymakers assume that seizing Russian assets might undermine Western currencies as stores of value if G7 leaders and their partners do not coordinate well to seize Russian central bank assets as effectively as they did in freezing them. In this context, the ECB has previously expressed concerns about the plan to use revenues from frozen Russian assets, warning that it could cause instability in the euro. However, if G7 leaders succeed in coordinating the seizure process effectively, it could deprive Russian capital of any safe havens to escape to. Instead of weakening the global financial system, such a move could showcase Western power against Russia.
Other Countries’ Reluctance to Deposit Reserves in Western Banking Systems: There are claims that seizing frozen Russian assets in the West and transferring them to Ukraine might deter other countries from depositing their reserves in Western banking systems, fearing a similar scenario if they have disputes with the West or their governments pursue policies that the West disapproves of. This action might also lead other major international powers, like China, to lose trust in Western financial repositories, considering them unsafe, potentially leading to a broad sell-off of US Treasury bonds and stocks they hold, negatively impacting the US economy. Therefore, generating a sense of panic among non-Western governments about the seizure of Russian assets, fearing the scenario might repeat with them, could negatively impact Western interests primarily.
Low Feasibility
Overall, there are counter-trends to confiscating Russian assets as a form of Western punishment and pressure
on Russia. This idea is promoted based on several arguments, claiming that seizing the assets will not inflict any additional harm on Russia beyond what has already been caused by the freezing. Thus, the effectiveness of confiscation as a pressure tool on Russia diminishes over time, making it economically unnecessary. According to this view, it is unlikely that seizing reserves that have been unavailable to Russia for nearly two years will force Putin to end his war. Furthermore, Russia’s current account surplus in 2022, which reached $227 billion, has already compensated for a significant portion of the losses from the initial freezing. Thus, according to this perspective, the confiscation does not exert any additional meaningful economic pressure.
Additionally, another counter-trend argues that the military and economic aid provided by the United States and the European Union to Ukraine has exceeded $100 billion annually, making it “unfair” – according to this perspective – to respond to Russia’s actions with illegal measures such as using the confiscated Russian assets to support Ukraine. Such behavior would blur the lines between war and peace, alienating many countries outside the sanctions coalition and potentially dismantling a fundamental building block of the world the West claims to defend: adherence to international law, even if the goal is to repel aggression against Ukraine, according to this view.
