Is it realistic to get funds for Ukraine's reconstruction from Russia?

First of all, I am not a lawyer, and I am commenting purely from the point of view of common sense, what I have read or heard from various persons related to international law and my experience. Therefore, I apologize if there are any technical errors in legal terms or just typos.

Ukraine has several potential sources of money from Russia as a result of the war

1. Reparations.

2. Confiscation of Russian assets in favor of Ukraine and use them to finance recovery.

3. Receipt of income from temporarily frozen assets of Russia to the extent that such income either does not belong to Russia or may not theoretically belong to Russia.

4. Funding from Ukraine's allies in this war that somehow depends on Russian assets under the jurisdiction or on the territory of the allies.

Let's go through the points.

1. Reparations

Reparations, as defined by Wikipedia, are "full or partial compensation (under a peace treaty or other international instruments) by a state that has started an aggressive war for damages caused to the attacked state."

Reparations are possible only if there is either a complete defeat of one of the parties in the war (this does not necessarily mean that the Ukrainian flag flies over the Kremlin - after all, Germany was defeated in the First World War and paid reparations, but the war ended outside of Germany's territory and no foreign soldier's boot set foot on German territory on the day of the surrender), or a peace agreement between the attacking state and the aggressed state, i.e. Russia and Ukraine sign a peace treaty, part of which is a certain amount of payments from Russia to Ukraine.

"Unfortunately, it seems to me that either of the two scenarios (Russia's surrender or a peace agreement between Russia and Ukraine on humiliating terms of reparations in favor of Ukraine) is very unlikely at this point."

For Russia's surrender, the events of the end of World War I must be repeated almost exactly as they happened, that is, the monarch must abdicate, there must be a complete change of power and state system in Russia, losses on the fronts in Russia must be such that they exceed the level of tolerance of society, and society must be threatened by hunger and poverty (in this regard, I recommend re-reading or watching On the Western Front No Change on Netflix).

For a peace agreement to work, there must be concessions on both sides, meaning that both Russia and Ukraine must meet each other halfway. In a situation where at least one of the parties believes that it can succeed militarily, that party will not be motivated to make concessions, meaning that a peace agreement will be impossible. It does not matter what the objective picture is, because what is needed is not an objective defeat on the frontlines, but, for example, the belief of Russia's top leadership that they have the ability to turn the tide of the war, regardless of what the situation on the frontline actually is.

Given how inadequate Putin is, he is unlikely to realize the need to sit down at the negotiating table and make concessions to Ukraine until the second line is added to the Mausoleum.

2. Confiscation of Russia's assets in favor of Ukraine and use them to finance reconstruction

This seems to be the most desirable scenario for Ukraine, but it has several problems.

First, any confiscation would have to be based on a court or arbitration decision that has jurisdiction over the country in which the assets to be confiscated are located (or, alternatively, on a direct law, but as far as I understand, there are no such laws in the world).

Second, such litigation and arbitration processes take a very long time, are very expensive, and their outcome is not always predictable. For example, the first Yukos arbitration against Russia took nine years, from 2005 to 2014, and cost Yukos shareholders about USD 70 million in legal fees alone.

Thirdly, there are not many assets that can be confiscated, or rather, there are almost none. According to international law, assets can only be confiscated from the party that owns them and has lost in arbitration/court. In other words, only assets that belong to Russia as a sovereign state can be confiscated, and which can be found in those countries that recognize the court decision that ruled in favor of Ukraine as a plaintiff. Russia, like any other country, has several categories of assets abroad, but these are mainly assets from one of two categories:

(a) Assets that fall within the definition of sovereign protection, i.e., primarily diplomatic institutions. Each embassy or consulate is immune from attachment or confiscation of its assets.

(b) Assets that fall under the definition of partial sovereign protection, i.e. assets that are generally protected by sovereign protection, but there are conditions (and there are very, very few) when such assets can be confiscated. First of all, these are assets of central banks, because these institutions hold a lot of assets in other countries for purely technical reasons. That is, the Central Bank of Russia (CBR) cannot hold, for example, rupees in Russia itself, because the rupee has no legal right to circulate outside India, and it keeps the rupees it owns in a correspondent account with the Central Bank of India or some commercial bank there. But even for those currencies that have the right to circulate outside the issuing country (primarily the dollar), central banks keep them outside their countries, because one of the functions of central banks is to ensure international settlements and it is more efficient to do so by clearing them in the issuing country or in some international financial center (for example, in London). At the same time, this money is protected by the same limited sovereign privilege, i.e. it cannot be confiscated, even by a court or arbitration decision of the relevant jurisdiction. This, as far as I understand it, stems from the same international agreements of the early and mid-twentieth century that concerned the harmonization of relations between states, including the diplomatic service. That is why the EU or the US can freeze the CBR's assets, which they have done, but they cannot confiscate them.

There are only two cases in history that can be used to some extent in this context, both of which were in the United States. One is the case of Venezuela's foreign exchange reserves, which were in the United States, and which were first frozen, and then the United States transferred them to another party for use. The problem is that this case is not applicable to us because the United States transferred these assets to Juan Guaido and his government, which the United States considered the legitimate government of Venezuela, unlike Maduro's government. That is, if Russia had its own Sviatlana Tsikhanouskaya, whom the United States would recognize as the legitimately elected head of state, then she could be given the right to dispose of these assets.

The second is the story of Afghanistan's USD 7 billion in foreign exchange assets, which were frozen in the United States after the fall of President Ashraf Ghani and the Taliban's rise to power two years ago. This case is already much more relevant to our case, because the fate of these reserves was as follows: half of them were supposed to be used by the Biden administration to pay off the judgments that were handed down in the lawsuits of the families affected by 9/11 (although I don't really understand, to be honest, under what legal sauce Afghanistan as a sovereign country was found guilty in this case, because these funds belonged to the sovereign state of Afghanistan, which did not attack the United States in 2001, and so now the fate of this money is unknown, because the last thing I read was an explanation by a judge in New York, who has jurisdiction over the address where the relevant Federal Reserve unit is located, in which he writes in great detail about his doubts about the applicability of US law to the payment of this money to the victims of the World Trade Center attack), and half was sent to a special fund for Afghanistan reconstruction, which has an account with the Bank for International Settlements in Basel, The fund is managed by a board consisting of two former senior officials of the Afghan central bank, the US ambassador to Switzerland and a representative of the Swiss government) and whose task is to use this money for the actual reconstruction of Afghanistan, i.e. this money will return to the country in one way or another.

In any case, this case seems to me to be relevant to our situation, because the victims of the September 11, 2001 attack successfully obtained recognition of their claims by the relevant courts and have a non-zero chance of receiving money from the country where Osama bin Laden was at that time, as the leader of the entire operation to hijack the planes and send them to the World Trade Center.

The problem of confiscation of these funds is very accurately illustrated by the fate of arbitral awards and court decisions in the Yukos vs. Russia cases. The Yukos shareholders have recovered more than USD 50 billion (plus interest, which is accumulating every day, so I think it is now much more than USD 60 billion) from Russia in many jurisdictions, but have not yet been able to recover any of Russia's assets, because everything that remains within the countries that recognize the judgment of the Hague Court is protected by sovereign privilege. And they were unable to impose a penalty not because they didn't try (the number of top-notch economic detectives working for Yukos shareholders is off the charts), but because there are simply no such assets left available.

By the way, a lyrical digression. The Yukos shareholders in the case of confiscation of Russia's money are likely to become very serious competitors of Ukraine, because they already have everything - all their court decisions are fully enforced, their claims have already been registered in all relevant instances in the EU, the US and other countries, and I have a suspicion (I don't know this, but it would be logical to assume this) that as soon as an asset is recognized as belonging to Russia and can be confiscated, their claim will be the first to be made.  

Ukraine has no court decisions in its favor yet, and I don't know when they will be (or if they will be), and no one knows (see above, the first Yukos v. Russia trial lasted nine years and cost USD 70 million in legal fees alone).

"In addition to the Yukos shareholders, there are also several lawsuits against Russia that have been almost or completely pursued by (drum roll, everyone, here comes a surprise) a certain gentleman named Igor Kolomoisky."

Immediately after the annexation of Crimea in 2014, his companies and he personally as their shareholder filed a number of lawsuits against the Russian Federation to compensate for the property lost as a result of the annexation of Crimea. That is, if we assume, for example, that tomorrow a court in the United States decides that the money of the Central Bank of Afghanistan can be used to pay compensation to victims of 9/11, and this will set a precedent that will be used to recognize the possibility of using the Central Bank's money frozen in the United States to cover losses, then there will be another line: Yukos, Kolomoisky and his company, Oschadbank of Ukraine (thanks to the initiative of Andriy Pyshnyi, who went to court over the assets lost in Crimea) as all those who already have advanced claims. And somewhere far behind will be Ukraine's claim, which will most likely still be pending in the courts, and it is not known how much money the CBR will have left to satisfy it by the time all the trials are over and Yukos, Sberbank and Igor Valerievich have long since had money in their accounts.

In fact, this is why I believe that direct confiscation of assets for Ukraine's recovery is also unlikely in the short term.

3. Generating income from temporarily frozen assets of Russia to the extent that such income either doesn't belong to Russia or may not theoretically belong to Russia

This is the most logical and most accessible source of financing for recovery, but its size may be small relative to Ukraine's needs. What I mean is that the same assets of the Central Bank consisted of money (which is now frozen) and investments in various securities. For example, I read somewhere that part of the Euros from the CBR's assets were invested in German Eurobonds. Now these Eurobonds are frozen on the accounts of one of the two depositories in Europe (most likely Euroclear, because it reported a much larger amount of assets related to Russia on its accounts).

If I remember correctly, Euroclear is responsible to its clients for the safety of their funds, but has no obligation to pay them the interest they may receive for placing this money.

The logic is simple: Euroclear is not a bank, people come to it with money only to buy securities, or it receives money from the sale/redemption of securities, so usually the money is kept there overnight or for a couple of days, and therefore you won't make/lose much on it. In the case of the CBR's money, it will be there for a very long time, meaning that Euroclear can receive, against the backdrop of current relatively high rates, significant payments that can be provided (at the request of Euroclear and the Belgian government, which have already been announced) to Ukraine, and this money will not belong to Russia.

Unfortunately, we are still talking about tens, at most hundreds of millions a year, but these funds are definitely not problematic in terms of obtaining them. There are several such gaps that can be used until a global solution to the problem of payments for the restoration of Ukraine is found, and I have cited only one of them above that I have heard about. Unfortunately, all of them would still yield hundreds of millions when billions are needed.

4. Funding from Ukraine's allies in this war that somehow depends on Russian assets under the jurisdiction or on the territory of the allies

This is the most likely scenario for gaining access to big money, which will be de facto Russia's money, but will not be de jure. This is something that the best legal minds in the EU and the US are currently working on, but they have not yet found a legally sound solution.  

Tim Ashe, the most famous stock analyst specializing in Ukraine and Eastern Europe, for example, is promoting the idea of creating an investment fund that will include all of Russia's frozen assets, which will be used as collateral for Eurobonds (debt securities - ed.), the proceeds of which will be used to rebuild Ukraine.

"That is, this money will be lent to Ukraine at relatively low rates (because there are pledged assets of the highest investment category), but this proposal has many obvious drawbacks."

First of all, this is loan money. That is, Ukraine has to pay it back, even with interest (and this is no longer a time of low interest, so it will be tangible amounts). I'm not sure that there will be much support in society for the idea of borrowing money from Russia and then paying it back with interest.

Secondly, it will mean the alienation of Russian assets that are currently protected by sovereign privilege or partial sovereign privilege, and I don't really understand how this solves the problem of international law and the protection of such assets, because if these assets are pledged, then in case of Ukraine's default on its obligations, i.e. when the society decides not to pay back the money, which is 100% fair from the point of view of Ukraine, then in the event of Ukraine's default on its obligations (i.e., when society decides not to pay interest and not to return this money, which is 100% fair from Ukraine's point of view), these assets should become the property of those who gave money as collateral for such assets. 

I really hope that some solution will be found, because there is a reason why everyone is racking their brains over this, but unfortunately, it is neither obvious nor easy. This will definitely be a precedent-setting decision, so unfortunately, Western countries will be very careful about what it will be and how it can be implemented without risking long-term consequences for their sovereign assets in other countries.

I have written to this point, and it is time for some constructive and optimistic thoughts, because otherwise it looks like everything is bad. 

What should be done, in my opinion?

1. Sue the sh*t out of them! It is said that this is Donald Trump's usual reaction to any lawsuits against him

The state needs to file lawsuits in all possible courts that may even theoretically have jurisdiction to compensate for damages.

I hope that this is happening now, although as of today, I have not found any claims filed by Ukraine against Russia dated after February 24, 2022 on the website www.jusmundi.com. This site collects all published international lawsuits, international arbitration materials, etc., and I recommend that those interested in international litigation and arbitration proceedings look there - there are a lot of very interesting things there and it is constantly updated.

"Even if the prospect of recovering something from Russia is very small, it still exists (for example, as part of some global settlement) and it would be very wrong if Yukos and Kolomoisky received compensation because they already have court decisions, and Ukraine does not."

Secondly, even if there is no realistic possibility of obtaining full compensation, the existence of claims recognized by international courts is a very effective tool to make the life of the aggressor country much more difficult than it is now.

There is a very illustrative example of how in the early 90s the Swiss company Noga pursued Russia throughout Europe and the world. Noga supplied food to Russia in the early nineties and was not paid for several tens of millions of dollars. The company filed for arbitration against Russia in Stockholm, won the arbitration, and began to pursue Russia wherever it could. Noga filed for the seizure of any Russian property that theoretically did not fall under sovereign privilege. They arrested the sailing ship Sedov with cadets, which went to a training camp and entered a port in Europe (because they thought it was owned by the ministry), arrested CBR funds on commercial bank accounts (they tried to prove that these funds did not belong to the CBR, but to the Russian government and could be confiscated), filed for foreclosure on the bank accounts of Russian trade missions abroad (unlike embassies and consulates, free-standing trade missions do not have diplomatic protection).

There were two of Noga's most striking stories. The first one was about Pavel Borodin, Yeltsin's chief of staff (analogous to the current presidential chief of staff), who was imprisoned in Brooklyn. He was on his way to George W. Bush's inauguration and was arrested in the Mabetex criminal case (if anyone is interested, Google it, there's a whole other story) at New York airport. Borodin had forgotten his diplomatic passport at home, and he couldn't be late for the inauguration, so he flew as a private citizen, i.e. without diplomatic immunity. He was arrested in New York, deported to Switzerland two months later, where the case was being prosecuted, and the judge allowed Borodin to be released from prison on bail of 5 million Swiss francs. The bail was posted by the Russian government, and Noga seized it as state funds. The whole situation was eventually resolved through diplomatic channels, and even the bail was returned to Russia, but the head of the Russian presidential administration spent four months in prison.

The second story is about the arrest of two Russian MiG fighters that were supposed to participate in the Le Bourget air show in Paris. Noga obtained a Swiss court order to arrest the planes, and bailiffs arrived in Le Bourget but were unable to arrest the planes because they were moved to a closed part of the airfield and immediately flew back to Russia.  

All of this may not have made Noga a lot of money, but all of these actions put anyone in Russia in a situation where any trip to Europe by a Russian official was analyzed for the risk of "getting it on with Noga," and Russia was being attacked in the press even though Noga's reputation was controversial, to put it mildly.

The end of Noga's story is not exactly known - officially, the company lost the appeal and never filed any more lawsuits, but I heard from several high-ranking Russian officials at the time that they had pissed off Russia so much that they were paid in full.  

This story has a simple moral: even if the prospect of getting money is not very high, there is a lot of international inconvenience that can be caused by a successful lawsuit against a state. That is why, in my opinion, Ukraine should sue Russia wherever possible, because you never know (a) where the court will rule in your favor and (b) how circumstances may change.

Thirdly, it is important to file lawsuits in all possible courts in order to simply consolidate the status quo regarding Russia's seized assets. The fact is that now all of them have been seized, in most cases, by decisions of the executive authorities in the respective countries. That is, President Biden's administration decides to seize Russia's assets. And if, God forbid, Trump or someone similar to him becomes the next president, this arrest can be lifted by the same decision as it was implemented. However, if there is a parallel court decision of some jurisdiction confirming the legitimacy of the seizure of Russia's assets, it will be much more difficult, if not impossible, to unblock them.

Fourth, we never know what the future holds. In 2003, Muammar Gaddafi decided to pay USD 2.7 billion to the families of the victims of the Pan Am flight bombing as part of his reconciliation with the West, fifteen years after the terrorist attack took place. In 1988, the possibility of getting anything out of Libya was not only illusory, but simply unscientific fiction.

Fifthly, he took a legal action - the International Tribunal in The Hague issued an arrest warrant for Mr. Huilo, and he is sitting in Russia, not flying anywhere, not even to friendly South Africa.

2. Abramovich is our everything

In addition, all Russian oligarchs should be sued, both on behalf of the state and on behalf of the victims (both individuals and businesses), and the state, in my opinion, should create a regime of maximum encouragement for those who want and have a reason to sue both Russia and individual Russian oligarchs or businesses.

Naftogaz won against Gazprom, and Gazprom paid it. In contrast to the difficulties with confiscation or foreclosure on the assets of the Russian state, the assets of Abramovich, Deripaska, Usmanov, and Malofeev do not have diplomatic protection. Did Gazprom sponsor the Potik PMC? Let him be responsible for what that PMC did in Ukraine. Did Deripaska sponsor the Ruslan PMC, which recruits mercenaries for the war in Ukraine and is fighting in Bakhmut? Let the companies from Bakhmut that suffered destruction, with the support of the state, sue for damages in Australia, where RUSAL has a subsidiary, and sell RUSAL's assets in Australia to compensate for the damage.

This is not easy (because, for example, in this case, it would be necessary to prove that the Australian court has jurisdiction over this dispute, but for this, for example, one could find some Ukrainian Australians whose parents lived in Bakhmut and whose house was destroyed by the Russians), but it is possible, especially given the very positive attitude towards Ukraine and its situation in the world.

"I am surprised that there is still no initiative by lawyers to file lawsuits against Russian companies in those jurisdictions where their assets have been seized on behalf of Ukrainian entrepreneurs and the population affected by the war."

It seems to me that we are not doing enough on the legal front and that there is a lot that can be done. Because now is the time when the mood in all our allied countries is in our favor, but it is not clear how long it will last.  

There will be elections in Poland, Britain, and the United States, and there will definitely be early elections in some other allied country, and it is far from certain that all of these elections will be in favor of candidates who support Ukraine. And court decisions live forever, even if governments and presidents change.

Source

About the author: Serhiy Budkin, founder of FinPoint, investment banker.

The editors don't always share the opinions expressed by the authors of the blogs.