Ukraine could get Russia’s frozen assets
But such a move might violate international law
LONDON – The G7 nations are looking to use nearly $300 billion worth of Russian financial assets frozen by sanctions since 2022 to help support Ukraine, but how it will be done remains highly complex given it would set a controversial precedent.
Here are some of the ideas being looked at:
Confiscation
Washington continues to back the idea of seizing the immobilized Russian reserves in their entirety and handing them to Ukraine. Some top lawyers argue it can be done under a doctrine of international law known as “countermeasures.” The assets would then be sold or used as collateral and the proceeds handed to Ukraine, or to a dedicated reconstruction fund.
European officials raise concerns, however, that it could violate international law and open a Pandora’s box given that Russia is likely to challenge the move in the courts. Previous examples of such seizures, such as of Iraqi assets after Iraq’s 1990 invasion of Kuwait, and of German assets after World War II, happened after those wars had ended, not while they were still raging – as with Russia’s invasion of Ukraine.
Even in the United States, leading sovereign debt experts have highlighted that the International Emergency Economic Powers Act does not authorize an outright confiscation of frozen Russian property in the absence of actual armed conflict between the U.S. and Russia.
Siphon off proceeds
The lion’s share of the Russian reserves – essentially bonds and other types of securities in which the Russian central bank had invested – are held in a Brussels-based depository called Euroclear.
When those assets reach their final payout days – or “mature,” in banker speak – they get converted into cash, a transaction that is taxed at a rate of 25% in Belgium.
EU leaders have agreed in principle to ringfence the profits from the Russian assets for Ukraine, estimating it will add up to 15-20 billion euros by 2027. That includes around 3 billion euros this year which could be released to Kyiv by July, European Commission President Ursula von der Leyen has said.
Under a Commission proposal, 90% of the proceeds would go into an EU-run fund for military aid for Ukraine, with the other 10% going to support Kyiv in other ways. Some in the bloc are still wary, though, including the European Central Bank that has warned that seizing the Russian assets should only be done in tandem with other G7 powers. They want to ensure it isn’t just the euro that is affected if other countries such as China start repatriating their reserves as a precaution against them being swooped on down the line too.
Euroclear keeps a “convenience fee” from the profits officials highlight, which trims the amounts that would be available for Ukraine.
Some lawyers also point out that, legally, there is little difference between siphoning off the maturity revenues and grabbing the full $300 billion or so.
There is the risk that Russia could, through court action, try and seize Euroclear cash in securities depositories in Hong Kong, Dubai and elsewhere. The worry is that this could drain Euroclear capital and require a huge bailout.
There are plans therefore to set aside some of the siphoned-off money as a safety net.
Collateralized loan
“Collateralizing” the Russian assets for loans instead of seizing them outright is seen as one of the favored options for achieving consensus between Washington, Europe and elsewhere.
Daleep Singh, the U.S. deputy national security adviser for international economics, has talked in recent weeks about bringing forward the “present value of the future interest stream of the immobilized assets, either through a bond or a loan” to “supersize” the value of these income flows over time.
Instead of just transferring the yearly profits from the reserves, he said it was conceptually possible to transfer 10 years of profits or even 30 years’ worth.
Sources briefed on the plans say a loan is likely to be simpler than a bond while Singh has said the goal is to reach a decision on the frozen asset issue at the G7 leaders’ annual summit in Italy in June.
Reparation bonds
“Reparation bonds” have also been suggested as a way of circumventing some of the legal problems. Ukraine would sell securities that pay out if – and only if – it receives reparations from Russia for the damage done by the war.
Interest payments could also roll up and only become payable if Kyiv gets compensation.
The bondholders would not have a contractual claim on the Kremlin’s frozen reserves. But given that Russia is unlikely to pay up willingly, these assets would be the most likely source of cash to pay for damages.
Since the reserves are accruing interest, they could be used to pay both the bonds’ principal and more regular coupon payments. This would be different from confiscation, because the assets would only be transferred if a legitimate compensation mechanism first ruled that damages were due to Ukraine.
Ukraine would have a way to collect on any damages awarded up to the value of the reserves. It could therefore issue reparation bonds up to $300-350 billion. But it would only get anything like this sum if the United States, EU governments and other allies were willing to buy the securities.
Syndicated loan
The bond idea has been fleshed out further by Lee Buchheit, a veteran legal expert in sovereign debt, and Singh, who returned to the White House earlier this year.
Their view is that Ukraine could pledge its claim for reparations against Russia to a syndicate of its allies in return for a loan. If Moscow refused to pay the damages, the allies could then use Russia’s frozen assets to pay off the loan. The justification for doing this is the widely recognized legal principle that, if a creditor controls a debtor’s assets, it can set off those assets against an unpaid debt.