Ukraine - educating the FT

It is frustrating as someone who has been following/pushing the immobilised CBR asset issue since the start of the full scale invasion to see such poor coverage in the Western media - so many so easily falling for the Kremlin narrative.

I attach here the latest FT piece.

https://www.ft.com/content/616d7c24-fbb6-4830-aa6c-77d362b5fddb

The main line is about all the poor Western companies with assets now stranded in Russia, and which could be subject to confiscation by Russia, due to the move to use immobilised CBR assets for Ukraine. What it does not say is that these companies basically made bad investment calls. They stayed in Russia too long - they could have long exited when it became clear what the type of regime Putin’s Russia was. Therein there are lots of points of information - 2008 invasion of Georgia, Putin’s suppression of the opposition in 2011, killing of Nemtsov, Navalny, Politkovskaya, WMD used twice on NATO soil (Litvinenko and Salsbery), annexation of Crimea in 2014 and Russia’s first invasion of Donbas in the same year, then in the lead up to the full scale invasion where in 2021 the US and U.K. spelled out the invasion was going to happen But these companies ignored those warnings and stayed invested. They stayed invested as they were making huge profits in Russia. So this is a moral hazard play in my mind. Western companies either had no moral compass or thought that they knew better than their own governments; likely both. And now many of these same companies are lobbying their own governments begging for a tax payer bailout again - as this is what it would amount to. If immobilised CBR assets are not used - because of the lobbying of these companies - then the Western taxpayer would have to pay, and that’s a bail out in my mind. That is again totally unfair - but creates yet another moral hazard play. It’s actually a moral moral hazard play if you get the drift. It rewards bad behaviour, and it rewards immoral investment choices.

And as the FT piece notes, Russia is already acting to seize, not just immobilise Western assets in Russia, so actually it’s now only fair for the West to take similar action. Actually it is not similar, as the EU is talking about moving to use sovereign immobilised assets to support Ukraine, while Russia is moving against private sector Western assets in Russia.

The FT highlights the paucity of Russia’s legal case but again to restate:

First, the RL concept does not envisage seizing CBR assets - it should in my view - and it stops short of that. The underlying assets remain in ownership of the CBR. There is little difference between the RL and the Extraordinary Revenue Arrangement (ERA) used to provide Ukraine with $50 billion in financing since 2023 from the interest on immobilised CBR assets. So Russia could not launch a legal case in the West around seizure, it did not on the ERA, and will not on the RL.

Second, even if it was seizure, and Russia tried to use the sovereign immunity defence, well to launch any such action in Western courts it would first have to lift its own sovereign immunity. That would leave Russia liable to counter claim for upwards of $1 trillion in damages to Ukraine. There is a reason that over 3.5 years since the CBR assets were first immobilised that Russia has not launched legal action in Western jurisdictions and this is one of them. The others are that no specific action has been taken against the CBR assets - they have just been immobilised, and Western entities told not to allow the CBR to shift them. There is also the countermeasures arguement which would make seizure legal. Essentially this argues that a country only benefits from sovereign immunity when it is abiding by international law. When it s not, it’s sovereign immunity lapses and actions can be taken then to sanction those assets - their seizure would be one such action. Clearly Russia is in violatation of international law - see various UN votes - so can have its sovereign immunity lifted and have its assets seized.

The other legal route suggested is through EU courts on the basis of bilateral investment treaties. But even herein, Russia has limited options as these relate to the private sector, not sovereign assets. Any Western court would lack jurisdiction.

So one concludes that a) Russia has a very weak/non existent legal case; b) Would struggle to find a Western court which would agree jurisdiction, which is exactly why Russia has not launched any legal action for 3.5 years and is now only launching legal action in Moscow, which has zero jurisdiction over where the assets are currently immobilised.

What I see here though is a huge PR campaign against immobilisation by Russia, its friends and agents in the West, and the big business that made bad investment calls in Russia, have assets stranded and now wants a Western tax payer bailout. That’s the real rub. And where are these business interests strongest - Belgium, Austria, and Italy.

Maybe Meloni could explain to her electorate that they are going to have to pay a much higher taxes to support Ukraine, of defend against inevitable future Russian attacks on Europe, because Meloni is bailing out greedy Italian business interests.

You could ask well these assets are now a negotiating chip in the Trump driven peace efforts. No. First, Putin long considered these assets long gone. They have only been brought back into play by the Trump administration. And actually the better negotiating position would be to give these assets to Ukraine to send Putin a strong message of Western determination to do whatever it takes to support Ukraine, and to ensure Ukraine is properly funded and then armed to fend off Russia. The Trump plan, incredibly plans to give some of the assets back to Russia - rewarding the aggressor. It also assumes that the EU stumps up another $100 billion for funding investment deals around the peace agreement. The clear message there is Russia pays nothing for its aggression, actually is rewarded for its aggression. And actually Europe pays for Putin’s aggrsssion by covering the rebuild costs in Ukraine, That’s a terrible message to be sent to future aggressors. And not giving these assets to Ukraine undermines its defence and undermines its negotiating position. But perhaps this is what some of these lobbyists actually want.

In recent days I have not heard much around the reserve currency defence - maybe because we already won that argument. But the argument goes that a move to use the immobilised CBR assets to fund Ukraine would send a terrible message to other large owners of FX reserves in Western jurisdictions - China, Gulf states, India et al, that their assets are not sage in Western jurisdictions. The threat is that they would pull these assets as they would not assume them to be secure anymore. Lots of counter arguments herein:

First, well their assets are safe if they don’t invade other countries, break international, law, commit war crimes and genocide, as Russia has done. Maybe it would send a strong message to the world that such actions have consequences and hence it would deter such things. This would be a positive.

Second, thus far there is little evidence of a shift in FX reserves out of Western reserve currencies on the move to immobilise. Herein I would say that immobilisation is as good as seizure as the message from the West has been Russia is not getting these assets back unless it pays reparations. The message is that Russia has already lost these assets. So if you are China, India, Gulf states you would have already got the message and reduced reserve currency exposure, but they have not.

Third, the reason they have not is that there are no liquid alternative markets for the upwards of $10 trillion in such reserve currency assets. And none of these states really trust each other to deposit their FX reserves with each other.

Fourth, let’s just think of the market implications of this. Let’s say Saudi Arabia decides to pull its assets from France, or Belgium or Germany in response. Such action would be construed as a globally systemic event. It would crash Bund or Oat or Gilt prices initially, yields would rise and with it borrowing costs, fears over global growth would increase, and commodity prices, including oil prices would fall. This would cripple KSA at a time when MBS wants to spend trillions on his Vision 2030. Actually fears over global systemic risk would see a return to safe haven trades, so buying USTs, Bunds, Gilts, et al and seeing their prices rallying back. It’s just not logical. China, Gulf states, India etc have not moved their assets yet for a reason, there are no alternatives.

And as I have long argued, the biggest risks to the Euro, as a reserve currency, is not taking action to use immobilised assets to fund Ukraine. If these assets are not used, Ukraine risks being underfunded, and losing the war. The consequences of that would be simply catastrophic for Europe - tens of millions of Ukrainians moving West, straining European political, social and economic cohesions. And then the need for defence spending in Europe to rise massively, from 2% of GDP to 5%. That means larger budget deficits, higher borrowing, more debt, higher interests rates and less money for other spending including social spending. It would mean lower European growth, a weaker Europe and euro as a result.

Spelling this out, if Russian CBR assets are not used to support Ukraine, European taxpayers will have to pay. That means that Russian taxpayer money is being seen as a higher claim than our own taxpayer money, despite Russia being the aggressor. It also means that the Western taxpayer will be bailing out greedy Western business which made bad investment calls by staying in Russia too long.

But the pro Russian lobby still seems to be acting in pushing the alternative agenda.

For a fools guide to all this, see below: