Putin is winning economic war against the West

Attempts to sequestrate Russian assets frozen under the sanctions regime risk backfiring

There are few monikers more irritating than that of the Global South – the fashionable term for countries making up the developing and low-income world. Nations of such disparate and often conflicting geopolitical and economic interest cannot be so easily pigeon-holed.

Yet there is one thing many members do tend to have in common, which is a generally anti-western mindset. This assumes particular meaning when it comes to Russian sanctions.

That these have self-evidently failed is largely because major parts of the Global South have refused to be bound by them, thereby providing ample export markets for Russian oil – which after being refined is frequently re-exported to Western markets – and abundant alternatives to the West in meeting Russian demand for manufactured goods. Russia grew more strongly last year than any G7 advanced economy, including the US, and according to International Monetary Fund forecasts, is expected to do so again this year. Sanctions have at best only slightly weakened its war machine.

To understand the roots of anti-western feeling you have to go way back to colonial times, and the resentments that this now long gone world incubated. But it has also grown worse in recent decades, starting with disastrous Western interventions in both Afghanistan and Iraq, and continuing with the global financial crisis, which undermined trust in Western financial markets.

Unlike China, which has showered the Global South with development money, the West has taken few steps to effectively court these economies. It then further added to the sense of grievance by initially refusing to share vaccine innovations during the pandemic with low-income countries.

Up goes the cry: “Why should we assist in a “white-on-white” conflict on Europe’s fringes when you do nothing to restrain the Israelis in Gaza or the civil war in Sudan?”

Lack of attention to the Global South has come back to haunt now that Western interests are threatened by an axis of Russian, Chinese and Iranian authoritarianism. The developing world believes it owes us nothing.

Attempts to sequestrate at least some part of the £220bn of Russian assets which are frozen under the sanctions regime, and apply it to the Ukrainian war effort, have further stoked suspicions. We live in an era of global money which is supposed to be governed by law of contract, yet the West casually disregards its own rules when it suits while still lecturing others on abiding by them. If the West can do this to Russia, moreover, it can do it to anyone. If you are going to claim the moral high ground, it’s important to be consistent. Yet it seems that one illegal act – Russia’s invasion of Ukraine – is to be countered by another in the seizure of Russian assets.

The Global Times, a Chinese state-controlled news outlet, had this to say about the matter: “To seize and transfer frozen Russian assets... will set a disastrous precedent against the existing international financial order.”

Nor is it an issue only of concern to Russia, its Chinese allies, and the Global South. “Moving from freezing assets to confiscating and disposing of them is something that needs to be carefully considered”, Christine Lagarde, president of the European Central Bank, said last week, which is understated central bank speak for “This is beyond the pale”. Central banks are often accused of being essentially supranational organisations with scant regard for the nations to which they belong. Sometimes it’s true. During both the First and Second World Wars, they set out to operate in international money markets as if not a shot had been fired, with regular contact maintained and gold reserves scrupulously curated on behalf of hostile powers.

Yet they were absolutely right to do so, for theirs is the long view that one day the war will be over and order will be restored. Western financial mores must prevail throughout, untouched by human conflict. That’s why Western powers are tying themselves up in knots trying to figure out a “legal” way in which they can grab the Russian money. It’s complex, and not wholly convincing.

Simply to help yourself to the assets would plainly be an act of unmitigated theft, and though possibly justifiable on moral grounds, would undermine wider faith in global money. The great bulk of the Russian assets are held through a hitherto largely unheard of institution called Euroclear, a Belgium-based financial services company that specialises in settling securities transactions, and the safekeeping of these securities.

Unfortunately for Russia, some part of its foreign currency reserves are held in Euroclear, much of it originally in government bonds. Many of these have now matured, and thereby been turned into cash. Euroclear is not obliged to pay interest on cash, but is now earning quite large amounts of it on the frozen assets. Questions therefore arise over who the interest belongs to. It is this money that G7 powers seek to mobilise for Ukraine’s benefit, either by seizing it directly, which is the favoured US approach, or securitising it for immediate use as a downpayment on any reparations that might eventually be extracted from Russia.

Western policymakers seem to be coalescing around this latter approach as potentially the “most legal” way of getting their hands on the money.

In the end, however, it amounts to little more than a fig leaf. Call a spade a spade; whichever way you cut it, this is Russian money. It sets a particularly unfortunate precedent to confiscate it, however compelling the case for making Putin pay for the damage he’s caused. Beijing will be only too happy to use it as a way of further alienating the Global South from their one-time Western masters. What really sticks in the craw about all this is that when we look around the world today, and see the enormous progress that has been made in lifting billions out of poverty, and the astonishing leap forward in wealth and prosperity that has been achieved, it is above all the Western designed, rules-based order on trade and finance that has enabled it.

China would not be where it is today without the access to Western markets that this system of governance has granted. That the Global North did not attempt to impose secondary sanctions on countries that continue to do business with Russia is testament not just to the need to keep global trade functioning in some shape or form.

Nor is it about the evident hypocrisy in the sanctions regime; when it comes to the stuff the US no longer makes – fertilisers and nuclear fuel rods in particular – there is no such ban on Russian exports. But most importantly, it’s about not punishing innocent bystanders in Putin’s war. To sink back into the economic fragmentation that characterised the interwar years would be a deeply regressive step. Warts and all, our system works, and if that means perversely keeping Russia’s money safe for more peaceful times, so be it.

‘Anti-western feeling has grown worse with the disastrous interventions in Afghanistan and Iraq’