A radical turn in Ukraine war strategy

THE US proposal to seize US$280 billion in Russian assets, frozen in international financial institutions since the start of the Ukraine war, marks a radical turn in Washington’s strategy towards the conflict.

Late last month, the US legislature gave President Joe Biden the power to confiscate Moscow’s funds under the Rebuilding Economic Prosperity and Opportunity (Repo) for Ukrainians Act.

On paper, it means that Washington could use Russia’s own money to wage war against them. The conventional wisdom in Washington is that the Repo Act provides a legal basis for the transfer of Russian state assets in the US to Kyiv, to compensate for the damage Moscow has inflicted on Ukraine. For instance, ex-world Bank president Robert Zoellick is quoted as saying that the Repo Act achieves “elegant justice by using Russia’s own money to help Ukraine resist (Vladimir) Putin’s brutal aggression”. The Act, he said, “represents a rare combination: sound policy, good politics and ethical values”. And he is just one of many effusive US voices on this issue.

But then there is only about US$6 billion in Russian assets sitting in the ledgers of US banks. Most of the rest are in Germany, France and Belgium. The Europeans have expressed grave reservations about the scheme. European Central Bank president Christine Legarde has warned that such a move would start “breaking the international legal order that you want to protect, that you would want Russia and all countries around the world to respect”.

Indeed, as it has been noted elsewhere, even during the first and second world wars, central banks behaved as if not a shot had been fired; gold reserves of hostile powers were not appropriated. The EU has its own, somewhat less ambitious, plan: to pass the interest generated on Russian assets held by Belgium-based clearing house Euroclear to Ukraine. Last year, Euroclear generated 3.25 billion euros of after-tax profits on the Russian funds.

All this back-and-forth is the result of Western frustration that the war is not going their way. All those early predictions that the Russian economy would collapse within weeks of the onset of war and subsequent sanctions have been proven wrong. The ruble is clearly not rubble.

In January, the International Monetary Fund estimated that the Russian economy expanded at 3 per cent in 2023. The World Bank projects Russia’s growth at 1.3 per cent in 2024 and 0.9 per cent in 2025 – which is better than the outlook for the EU’S major economies.

If the World Bank’s projection turns out to be correct, it is clear that the Russian economy is not about to implode. More importantly, Moscow will have the industrial capacity to wage a long war of attrition against Ukraine.

The G7 grouping will make the final decision. If, despite the reservations of the Europeans, the G7 is persuaded to grab Russian cash, the international financial system could be in for some very turbulent times. The current global payments order, based on the US dollar and, to a lesser extent, the euro, is held together by trust and predictability. Once these twin tenets are vitiated, it would no longer be an “order” as we know it. It will be anyone’s guess how many nations will remain unruffled about having their assets in any Western financial institution.

We will find out how things will turn out on Jun 13, at the end of the G7 meeting.