In economic terms, an asset has value because an owner can derive future benefits from it. Some assets, such as cryptocurrencies, require a collective belief in those benefits. Others, like wine, will provide undeniable future pleasure, like the opportunity to enjoy a 1974 Château Margaux. Still others, like U.S. Treasury bonds, represent a claim on the government of the world’s strongest economy, backed by a formidable legal system.
However, to enjoy such benefits, an owner must be able to access their assets. And that is what the Central Bank of Russia is struggling with. Like any other central bank, the CBR stores reserves abroad. After Vladimir Putin’s invasion of Ukraine in 2022, the… G7 froze these assets and banned financial companies from moving them. Of the 260 billion euros in Russian assets immobilized in Japan and the West, about 191 billion euros are held at Euroclear, a clearing house in Belgium. When coupon payments on Russian assets are due or bonds are redeemed, Euroclear deposits the money in a bank account. This account now contains approximately €132 billion. Last year it earned a return of €4.4 billion, which according to the clearinghouse’s terms and conditions belongs to Euroclear.
Western policymakers are now considering whether these funds could be used to help Ukraine. Russia may one day have to compensate the country for the war damage, which the World Bank already estimates at more than $480 billion. Ukraine now needs money and weapons to push back Russia’s advances and to maintain its state and economy. At the same time, Western governments are increasingly struggling to find room in their budgets to support the war effort, and to gain legislative approval for such expenditures. On February 26, Dmytro Kuleba, Ukraine’s foreign minister, again called for Russia’s assets to be confiscated. A day later, Janet Yellen, the US Treasury Secretary, called on her colleagues to “unlock the value of those funds”. European Commission President Ursula von der Leyen wants to use the Euroclear windfall to buy military equipment for Ukraine.
How exactly could this be done? Taking someone’s property usually requires a court order, but in international law things are a little more complicated. The International Court of Justice could only rule on the case if Ukraine and Russia agree to let the country decide on reparations, which is unlikely at this point. The UN The Security Council has the ability to adopt binding resolutions, over which Russia unfortunately has a veto.
Some, including Lawrence Summers, a former US Treasury secretary, want to exercise the right of states to take so-called countermeasures. These are, by the way, unlawful acts that are sometimes permitted in response to unlawful acts. There is no doubt that Ukraine has the right to take countermeasures. How broadly the same rules apply to those who support Ukraine is more controversial. Sanctions and asset freezes fall into this category and are widely applied against Russia. Asset confiscation is not, at least not under most interpretations of international law. That’s because they are irreversible and want to punish Russia, not bring about a change in its behavior.
As Lee Buchheit, a veteran of international law, notes, the problem reflects a geographic mismatch. Ukraine has strong claims on Russia, but no frozen Russian assets it could use to settle them. The West has no claims, but it does have many assets. So the challenge is to find a way to match these assets and claims.
In a recent article, Mr. Buchheit and his co-authors suggest just such a way. They argue that the West could provide a loan to Ukraine, in return for which Ukraine could offer its claims on Russia as collateral. The West would agree to use only this collateral to repay the loan. If Russia inevitably refuses to pay, the West can seize the collateral.
Would this work? One difficulty is that an international body would still have to determine exactly how much Ukraine owes. Maybe the UN The General Assembly could call in the World Bank to analyze the figures. But this would require careful diplomacy on behalf of the West, as well as the support of France and Germany, which have so far been unimpressed by suggestions regarding creative interpretations of international law. Mr Buchheit argues that the shift in approach is not as great as it seems at first glance. The West has already gone quite far by freezing assets and making it clear that it will not return them unless reparations are paid. As he notes, “Russia will not pay reparations. Reparations are paid by the conquered to the victor, and this situation does not end when the Ukrainian flag flies over the Kremlin.” In fact, he argues, the West has already seized the assets.
A second difficulty arises for Belgium, which has access to most of the frozen Russian assets and should therefore receive most of Ukraine’s claims against Russia. The country may be reluctant to take such a central role, given the potential for retaliation. It would also be unfair to expect a country of this size to be the main provider of the initial loan to Ukraine. To overcome this difficulty, Mr. Buchheit suggests that the initial loan to Ukraine be set up in a syndicated manner with a distribution clause, which would allow lending countries to group together both in providing the money and in receiving collateral. Such an approach was used to finance emerging market governments in the 1970s and 1980s, before bond financing markets took over. As is the case today, a mechanism was needed to share risk and access to collateral.
Gold rush
But perhaps after all the debate there is no need to seize Russian assets. Indeed, the EU is already planning to introduce a windfall tax on the profits they make. If returns are siphoned off indefinitely, the difference between the seizure of assets and a windfall tax becomes smaller and smaller. In economic terms, the West already owns Russia’s assets. All that remains now is to finance Ukraine’s struggle. ■