Freeze to Seize or to Appease? Why Russian Assets are not a Bargaining Chip

Locked away: $350 billion of Russian central bank assets are currently frozen abroad as a result of the Ukraine invasion. Image: 999xy / Adobe Stock

Despite having played out over the span of almost two years, the policy debate on transferring frozen Russian wealth to Ukraine remains riddled with implausible objections.

The turn of the year has seen the continuation of a by-now familiar debate about the fate of $350 billion in frozen Russian central bank assets, spurred in part by the uncertainty over further US aid to Ukraine. According to press reports, the US government has circulated a paper arguing that such a transfer would be lawful, and has proposed establishing several working groups to explore its modalities. In the UK, Foreign Secretary David Cameron came out with the government’s strongest-yet endorsement of the idea.

Still, a degree of caution remains. No comparable amount of foreign reserves has ever been frozen by states not at war with each other, and therefore no such large-scale, multilateral seizure has been contemplated before. This novelty of circumstance means that any decision will literally be ‘unprecedented’, whether frozen assets are transferred to Ukraine or – should the G7’s current efforts turn out to be mostly froth and bubble – given back to Russia several years down the line. The real question is what precedent the G7 in particular, and the global community writ large, should aim to set.

Desired Global Precedent

One key concern is the legality of the proposed transfer under international law. While some commentators argue that such a transfer would be unlawful, an ever-growing body of analysis suggests otherwise.

This includes multi-author papers led by Harvard Law School professor emeritus Laurence Tribe; Cambridge University’s Tom Grant; Razom Ukraine’s Yuliya Ziskina; and multiple pieces by former 9/11 Commission executive director Philip Zelikow, to name but a few experts. While this is not the place for a detailed summary of the legal issues involved, not only is there a strong case that transferring Russian assets to Ukraine would be lawful, but a coordinated G7 position would also seal the debate by forming new state practice in areas where the law remains unsettled.

If the legal path forward is clear, then the policy merits of the proposal need to be considered. This includes big-picture issues about what the international order should look like, such as whether a state perpetrating egregious breaches of international law should enjoy the protection of its property abroad in all cases; what signal a failure to seize Russian assets would send about the West’s resolve and credibility; and whether the freezing and seizure of state property in response to aggression could be institutionalised to ensure fairness and consistency in the future. This could be done by extending the mandate of the transnational REPO Task Force beyond Russia sanctions alone, similar to how the Financial Action Task Force has evolved beyond its initial focus on finance connected to drug trafficking since its founding in 1989.

The real question is what precedent the G7 in particular, and the global community writ large, should aim to set

On the other hand, concerns are often raised that seizing sovereign property would undermine the international financial system, which requires countries to have confidence in their ability to safely store foreign reserves overseas. Unfortunately, key assumptions behind this argument are rarely articulated, let alone established.

First, it is premised on the absolutist view that foreign reserves must be safe from seizure no matter what: waging a war of aggression, committing war crimes or owing hundreds of billions of dollars in reparations are simply irrelevant. This is like suggesting that real estate in London or New York would only remain valuable if the government could never, ever confiscate it, even if it derives from the proceeds of crime. This view mistakes absolute protection of property, which is unheard of in international law save for the inviolability of diplomatic premises, for the rule of law.

Second, the argument assumes that, while international finance has survived many an instance of sovereign wealth being frozen (as well as the occasional seizure), a move from freezing Russia’s property to seizing it would deal the system a death blow. The reality is that Russia’s ability to dispose of the frozen $350 billion is gone. The debate is over whether Ukraine gets the $350 billion, and it is unclear why this would precipitate any dramatic consequences that the original freezing has failed to usher in.

Finally, the argument implicitly paints non-G7 countries as a homogenous group of states all ready to stand aghast at the transfer of Russia’s frozen assets to Ukraine and de-dollarise. This overlooks the fact that some states are already fully committed to disentangling themselves from the Western financial infrastructure (most crucially, China and Russia). Many others have not chosen to follow suit despite controversy over certain Western sanctions programmes, such as the US’s long-standing sanctions against Cuba or its re-instated sanctions against Iran. Perhaps the transfer of Russian assets to Ukraine could be the straw that breaks the camel’s back, but why should that be so, and how confident can one be in making policy prescriptions on that basis?

Therefore, the argument for caution is, in reality, a shell. Its Delphic prophecy of dire consequences for international finance is not matched by any cogent explanation of its assumptions or logic.

Case-Specific Considerations

Beyond systemic considerations, there are case-specific ones. The most obvious is Ukraine’s need for funding to bolster its defensive effort, begin rebuilding its infrastructure and compensate its citizens for the damage inflicted by Russia. By most estimates, that damage – between $400 billion and $1 trillion at present – already exceeds the amount frozen in Russian state property.

The reality is that Russia’s ability to dispose of the frozen $350 billion is gone. The debate is over whether Ukraine gets the $350 billion

The major factor militating for caution is the potential for further escalation on Russia’s part, such as by seizing Western businesses’ property. This risk needs to be considered carefully. But it should be placed in its proper context: one may wonder to what extent essential foreign policy interests should cede priority to preserving inherently vulnerable assets of companies that would have priced in geopolitical risks when entering Russia to begin with, as well as having now had two years to exit their precarious positions.

The other point often raised is that frozen Russian assets are best kept frozen as a source of leverage in future negotiations. This is a superficially plausible argument that proves to be wholly untenable on closer inspection. If the purported leverage is meant to pressure Russia to cease hostilities and pay reparations to Ukraine, then the idea is inherently unworkable. The reparations Russia owes exceed the amount frozen, and since none of the frozen assets will be returned to Russia in any event, there is no incentive for the Kremlin to agree to their transfer to Ukraine in lieu of reparations.

If, on the other hand, the intention is to incentivise Russia to cease hostilities while foregoing any demands for reparations and leaving Ukraine’s and other allied countries’ taxpayers to foot the bill, then this should be articulated clearly. Many will consider the idea to be morally and politically unappealing, but this is what the ‘bargaining chip’ approach amounts to. Even then, its efficacy is in doubt since the ongoing freezing of Russian property has not led the Kremlin to abandon its military campaign.

In summary, as calls to transfer Russian assets to Ukraine intensify, it is understandable that governments are proceeding with caution. There are important and difficult issues to consider, such as how to ensure that any resulting transfer sets a desirable precedent for future responses to aggression while minimising the potential for abuse. The same attention should not be lavished on arguments that are opaque or simply implausible, such as vague invocations of damage to the international financial system or the insistence that Russia’s property be kept frozen as a ‘bargaining chip’.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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Anton Moiseienko

Associate Fellow; Lecturer in Law, Australian National University

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