Espreso. Global

US, Europe consider Russian assets to help Ukraine as funding runs out

22 December, 2023 Friday

Biden administration has stepped up efforts to confiscate about USD 300 billion in Russian central bank assets frozen in Western countries

The New York Times writes about this.

Although the United States used to strongly oppose the confiscation of the Central Bank, the White House has now begun to discuss more actively within the G7 whether it can use its existing authority to use these funds or whether it must go to Congress.

According to NYT sources, the United States is pressing the United Kingdom, France, Germany, Italy, Canada, and Japan to have a strategy for using sovereign wealth assets ready by February 24, 2024, the second anniversary of Russia's full-scale invasion of Ukraine.

It is stated that more than $300 billion of Russian assets under discussion have already been out of Moscow’s control for more than a year. After the invasion of Ukraine, the United States, along with Europe and Japan, used sanctions to freeze the assets, denying Russia access to its international reserves. However, seizing the assets would take matters a significant step further and require careful legal consideration.

President Biden has not yet signed the strategy, and many details remain the subject of heated debate. For example, where exactly the money might be directed. Ukraine’s president, Volodymyr Zelenskyy, proposed in a video address to spend funds on arms purchases.

Earlier, the Financial Times reported that the Biden administration is inclined to believe that the seizure of Russian assets is viable under international law.

“American officials have said that current funding for the Ukrainians is nearly exhausted, and they are scrambling to find ways to provide artillery rounds and air defenses for the country. With Europe’s own promise of fresh funds also stuck, a variety of new ideas are being debated about how to use the Russian assets, either dipping into them directly, using them to guarantee loans or using the interest income they earn to help Ukraine” The NYT notes.

Seizing such a large amount of money from another sovereign state has no precedent, and such an action could have unpredictable legal and economic consequences. It would almost certainly lead to legal claims and retaliatory actions by Russia.

Where Russian assets are held

It is stated that some European countries are ready to move forward with the confiscation of Russian assets. For example, German prosecutors this week seized about $790 million from a bank account in Frankfurt am Main of a Russian financial firm that was under EU sanctions.

“Very little of the Russian assets, perhaps $5 billion or so by some estimates, are in the hands of U.S. institutions. But a significant chunk of Russia’s foreign reserves are held in U.S. dollars, both in the United States and in Europe. The United States has the power to police transactions involving its currency and use its sanctions to immobilize dollar-denominated assets,” the report explained.

Most of the Russian deposits are thought to be in Europe, namely in non-Group of 7 countries like Belgium and Switzerland. Thus, the question of how to obtain access to those funds—part of which are stored in euros and other currencies—is the subject of international talks.

Where to spend the frozen Russian assets

The coalition is currently considering various options for the use of Russian assets to present a unified proposal. The first debate focused on what might be allowed under international law and each country's domestic law. Initially, it was believed that the frozen assets could be used as leverage to force Russia to start negotiations to end the war. But Russia has shown no interest in such talks, and now officials say that starting to use the funds might push Moscow to the negotiating table.

The New York Times writes that among the options that Western countries have discussed are seizing the assets directly and transferring them to Ukraine, using interest earned and other profits from the assets that are held in European financial institutions to Ukraine’s benefit or using the assets as collateral for loans to Ukraine.

“Daleep Singh, a former top Biden administration official, suggested in an interview this year that the immobilized reserves should be placed into an escrow account that Ukraine’s Ministry of Finance could have access to and be used as collateral for new bonds that Ukraine would issue. If Ukraine can successfully repay the debt — over a period of 10 to 30 years — then Russia could potentially have its frozen assets back,” the report states.

Under the so-called international law of state countermeasures, countries that hold Russian assets have the right to cancel their obligations to Russia and apply those assets to the amount that Russia owes for its violation of international law, according to proponents of seizing Russia's assets like Mr. Zelikow and former Treasury Secretary Lawrence Summers. 

Robert B. Zoellick, former president of the World Bank, convinced the finance ministers of the Group of 7 that if they act in unison, the seizure of Russian assets would not affect their currencies or the status of the dollar. 

Fears about the use of Russian assets

It is noted that one of the obstacles in the United States for seizing Russian assets has been the view within the Biden administration that being able to lawfully do so would require an act of Congress. At a news conference in Germany last year, Ms. Yellen highlighted that concern. However, Ms. Yellen has become more open to the idea of seizing Russia’s assets to aid Ukraine.

“Factions of Congress have previously tried to attach provisions to the annual defense bill to allow the Justice Department to seize Russian assets belonging to officials under sanction and funnel the proceeds from the sale of those assets to Ukraine to help pay for weapons. But the efforts have faltered amid concerns that the proposals were not thoroughly vetted,” the NYT states.

The discussion of how to give additional help to Ukraine may become moral, not legal as the country is running out of money and weapons.

Mr. Sobel believes the barbarity of Russia’s actions justified using its assets to compensate Ukraine.

“In my mind, humanity dictates that those factors outweigh the argument that seizing the assets would be unprecedented simply because Russia’s heinous and unfathomable behavior must be strongly punished,” he said.

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