Frozen RU assets - needs must

Frozen Russian assets - where are we now?

Some of us have been arguing now for more than 18 months that the $300 billion plus of Russia central bank monies “immobilised” in Western jurisdictions should be formally frozen, seized and allocated to Ukraine both to compensate it for the immense damage done by Russia to Ukraine but also now to give it a chance of being able to fund the war, to secure victory, and subsequent peace/reconstruction. For much of this time it has appeared as if we have been banging our heads against a brick wall, but something seems to have changed in recent weeks/months, as a number of G7 countries (the UK, the US and Canada, in particular) appear to have changed their positions and are now arguing in support of seizing the assets and allocating them to Ukraine. Reports suggest that the U.S. Treasury will present a paper at the G7 summit at the end of February with proposals as to how to facilitate the freezing and seizing of these assets and their allocation to Ukraine. We understand that the G7 is still split on the issue, with Germany, and perhaps France and Italy opposed.

Why the sudden change of view in the US, the UK and Canada? 

Needs must, simple as that.

The penny, or kopeck, has dropped, at least amongst some G7 states, that the immense financial costs of supporting Ukraine both in the war ($100 billion a year on the current trajectory) and peace (likely $50 billion a year in recovery and reconstruction costs) is no longer sustainable given the political mix in Western liberal market democracies. One only has to look now at the travails of securing US Congressional backing for the $61bn Ukraine financing bill, and Hungarian et al opposition for the Euro50 billion EU support package for Ukraine for the period 2024-2027, to understand the harsh reality. And the US financing package only takes US funding for Ukraine up to the US presidential election. What happens if Trump wins the US election in November, and takes office in 2025? Likely US financing for Ukraine will stop? Will Europe step up to cover the likely loss of US funding for Ukraine under Trump - unclear, I would say even unlikely. So what then?

Well one of the achievements of the Western alliance over the near two years since Russia’s invasion of Ukraine has been that it has helped fill Ukraine’s budget and external financing gaps and to a lesser degree it’s needs for military supplies. In war Ukraine has been running a budget deficit of close to 20% of GDP, equivalent to roughly $40 billion a year. Military supplies make the latter total out to close to $100 billion a year. But Western financing of the budget has ensured that Ukraine has not had to resort to the printing presses. Without this macro stability would have been under threat - risks of devaluation, hyperinflation, and economic collapse. Workers wages, pensions, state sector salaries have been paid and macro stability has also ensured that the economy has functioned relatively well. It has been one less headache for Ukrainian leaders to worry over. Money has had value, banks have worked, rational economic decisions involving optimal resource allocation have ensued. Take the Western financing away and the the opposite happens. Not only will Western arms supplies slow, but macro instability will jeopardise the domestic Ukrainian war effort. Economic collapse is possible, which will raise the odds of a Russian victory. 

What does a Russian victory means for the West?

Well, likely it means Russian tanks up close to more of NATO’s borders. Likely more Russian expansion, perhaps into the Baltics states - it will force much higher NATO defence spending, perhaps up to nearer the Cold War era levels of nearer to 3% of GDP - add another $100 billion annually at least onto Western defence spending. But it also likely means a huge outward migration of Ukrainian population West - think tens of millions of people. Imagine the destabilising impact of that on the politics of Europe, already deeply divided by migration. More populism, more social and political unrest, more spending, perhaps even risks of new wars in Europe. For instance could we see leaders like Victor Orban in Hungary exploit such instability to push for a Greater Hungary strategy with consequences then for neighbours such as Serbia, Romania, Slovakia and even Poland? 

The risks and costs of a Ukrainian defeat are huge but need imagining. What are the implications if we do not fund Ukraine now? I would argue real and significant risks to European security and stability and much higher longer term spending as a result. 

I think the realisation is finally dawning in some Western capitals of the real challenges in financing Ukraine from the tax payer pot - which is finite in a cost of living crisis - and the dire consequences if we don’t.

Now those arguing against freezing and using Russian assets to fund Ukraine raise various arguments as to why we should not do this, but they do not provide realistic alternatives. 

Yes, the EU seems set to agree on a proposal for using taxes on the dividends on immobilised Russian assets - in Euroclear et al - for Ukraine. But at best these taxes will generate $3-4 billion in annual revenues which unfortunately do not touch the sides when we think of the $50-100 billion annual financing needs of Ukraine. I have argued that one solution is to be more innovative in how these immobilised assets are invested - perhaps in a portfolio of EM investments targeted to generate 10% returns a year, or even invested in recovery or restitution bonds issued by Ukraine. The latter would solve the property rights argument used by opponents (as the underlying assets would formally remain the property of Russia until a final settlement and reparations are agreed) and would cover Ukraine’s financing needs. But blank faces in Brussels, Berlin and Paris. Unlike Putin, our leaders too often cannot think outside the box.

So what about the arguments against using immobilised/frozen Russian assets for Ukraine? 

They are various, but let me put some of those to bed.

First - the reserve currency argument, that seizing Russian assets would see a loss of confidence in the rule of law in the West, and see other authoritarian states pull resources out of Western jurisdictions. 

Herein I would argue that in immobilising the assets already the message has been sent to similar authoritarian regimes that their assets might not be that safe in Western juridications. I think going from immobilising to seizing to allocation to Ukraine is incrementally not much of a change. Indeed, Western governments have already spelled it out that Russia is never getting these only “immobilised” as yet, assets back. I would then argue that if they were going to move the assets they may well have done so already upon the move to immobilise. We have not seen much evidence of this. Indeed, the reality is that countries such as China or Saudi Arabia with huge FX reserve buffers have limited alternatives to Western reserve currencies. Partly this is because they don’t trust each other that much. Is India going to put its reserves in Chinese CNY, or vice a versa, given the security tensions between these two? Chinese CNY into Russian rubles given longer term tensions in the Far East. I just don’t see it. Indeed, I would counter by arguing that the seizing and allocation of Russian assets to Ukraine actually sends a positive signal to these states that they should not follow the Russian example of waging war, imparting war crimes or genocide or they risk their assets being frozen. Surely that is a good thing. As a result they may well be less likely to take similar actions.

With some irony I noted the comment last week by the head of the Italian central bank, and an ECB board member, hinting that the euro was somehow sacrosanct, and hinting I think that going after immobilised Russian assets would risk this. He suggested that the strength or credility of the euro has been a critical weapon in the West’s armoury against Russia. Sorry, the front line has been provided by the thousands of brave Ukrainians who are putting their lives on the line for European values. The euro is some way back in Europe’s defences. But if we don’t provide those same brave Ukrainian soldiers with finance, there won’t be peace, security, stability and prosperity in Europe. Good luck then with the credibility of the Euro, it might have Putin’s head on it. Central bankers should focus on fighting inflation (on which they have had a dreadful track record in recent years), not national security. And this is a core national security issue. They should not have a veto.

Second, that seizing Russian assets somehow undermines the rule of law in the West. Cynically - slap my wrist - where was this mythical Western rule of law when the funds from a clearly corrupt and kleptocratic regime, the Putin regime, were allowed in? Where was the KYC when Russian oligarch money flooded into Western jurisdictions but from a country where the absence of the rule of law was clear from as far back as 2007/08, if not earlier. Accepting funds from jurisdictions where there is no rule of law, where oligarchs have no criminal convictions because they can buy off judges, is not much better than money laundering in my view. And where was the rule of law when a bevvy of German politicians, think tanks, and big corporations took Putin’s thirty pieces of silver to lobby for Russian interests for the decades leading up to the invasion. Come on. Seriously. Get off your high horses - no one believes this drivel.

Laws are made by politicians, and in this case laws need to be made or changed to make this happen. It is not a legal issue, it is a political issue - it requires political will, and honesty that tax Western payers won’t pay.

Third, the sovereign immunity argument. Here I would refer to the work done by Zelikow, Zyskind et al around countermeasures which in essence argues that a state only has the right to sovereign immunity if it is itself operating according to international law. They argue, compellingly, that in the case of Russia, it is clearly not acting according to International law, as reflected in its actions by invading Ukraine, hence a time out can be called to sovereign immunity to seize assets. 

Fourth, the precedent, set for example for Russia to seize Western assets in its jurisdiction or indeed against Western states for unlawful actions in other conflicts. 

Well on the issue of the confiscation of Western assets in Russia - it is already happening. The Russian state is forcing fire sales by Western investors in Russia in relatiation for Western sanctions. So we would only be retaliating against Russian actions - a deterrent? 

Meanwhile, many of these same Western investors with assets in Russia are lobbying their own governments to help secure their assets by not going after assets immobilised in Western jurisdictions. I simply ask why these same investors who made bad investment calls by investing and remaining in Russia against the best advice of their own governments should in effect now be bailed out by their own governments? They should not and Western security interests should not be sacrificed for the benefits of a few investors who should have known better. 

The issue of precedent is an interesting one and seems to be shaping opinion in Germany. The fear seems to be that if the G7 agree to seize Russian assets in this case as prior reparations for Russia’s invasion of Ukraine then Germany might be subject to similar claims for WW2. I would argue that if this is the case, legislation can be writtten to spell out that this reparations case only relates to Ukraine, and should not set a wider precdent - as was I think with the two prior precedents of Iraq and Afghanistan. But it is an interesting one that Germany is in effect forcing other G7 taxpayers to cover financing costs of Ukraine because Germany itself does not want to shoulder its own historical burdens. Former Allies are kind of bailing out Germany again, after doing so once already with the Marshall Plan. If Germany then is so worried about the precedent why does it then not shoulder the full financial cost of Ukraine fighting the war and then winning the peace? Why should British or US taxpayers pay up for Ukraine now so as to safeguard German taxpayers from paying up for their historical debts?

The issue of who should pay is an interesting one, indeed. Our governments, or at least the governments of some G7 states, think it is fine for their own tax payers to pay the huge burden of defending Ukraine against Russia, the aggressor. They prefer to tap their own taxpayers rather than confiscating the huge pot of Russian assets now stuck in Western jurisdictions. The property rights argument is often used against seizing Russian assets - that these assets are lawfully Russian, and we have no legal authority or right to take away Russian property rights, even though Russia has so clearly trampled over the property rights of Ukraine. But these same politicians seem to be happy to take away the property rights of Western tax payers, taking their assets away from them (by taxing them), to defend Russian property rights, to make Russia, the aggressor whole. How is that right or indeed politically defensible. Some Western politicians are happy to tax their own populations to pay for the war in Ukraine rather than doing what is right and making the aggressor, Russia, pay. Indeed, it is remarkable that they even imagine a scenario where they take money from their own taxpayers to make sure Russia gets paid back in full. That is insane and should be political suicide. The rights of Western tax payers is being made subordinate to the rights of Russia. 

In conclusion, while I understand the concerns, and our first choice might not be to go after immobilised Russian assets, we are not operating in an ideal world. We are operating in an environment where a brutal facist regime, has invaded an innocent country, is on a land grab, is pursuing war crimes and genocide against that country. Sure we can wait for all the legal niceties to be signed off, but by that time Ukraine might already of lost, and the so called Western rule of law which we all value might have also been trampled over by Russian tanks. This is a Western national security crisis and imperative, and as noted above, needs must. It is an existential threat to Western Liberal Market Democracy. We simply cannot afford to lose this battle, or afford Ukraine to lose, Give me an alternative which would assure Ukraine’s financing to ensure its victory, without going after Russian assets. If not, your arguments are academic - worse, a danger to Western national security.

I think this happens as we simply have no choice - needs must.