Following the sanctions imposed on Russia for its military intervention in Ukraine, the Group of Seven (G7) and the European Union announced in February 2022 the freezing of an average of 300 billion euros (USD 325 billion) of the Russian Central Bank's reserves. These frozen assets, representing nearly half of Russia's total foreign reserves, are predominantly held in G20 countries.
The situation further escalated in June 2024, when the G7 and the European Union agreed to utilize the interest accrued from these frozen assets to fund a USD 50 billion loan aimed at supporting Kyiv in its defense against Moscow. President of the European Commission Ursula von der Leyen announced on July 26 that the European Union would transfer 1.5 billion euros (USD 1.63 billion) from the proceeds of these frozen Russian assets to Ukraine, despite repeated warnings from Moscow of potential retaliatory actions.
Freezing Russian Assets
Western countries, particularly the G7 members and the European Union, took significant action by freezing assets owned by the Russian Central Bank, primarily in the form of cash and securities. The largest portion of these assets, amounting to approximately 191 billion euros (USD 208 billion), was blocked or frozen on the Euroclear platform in Belgium - a financial services company specializing in securities settlement and custody. France froze about 19 billion euros (USD 21 billion), and Germany about 210 million euros. Additionally, Switzerland and the United Kingdom, both outside the European Union, collectively froze Russian assets valued at about USD 30.2 billion.
In addition to the frozen assets of the Russian Central Bank, Western countries have also targeted the funds of individuals subject to sanctions. In Germany, the combined value of frozen assets, including those of sanctioned individuals, is estimated at around 4.1 billion euros (USD 4.5 billion). In Switzerland, this figure reaches 17.6 billion Swiss francs (approximately USD 20 billion), while in the United Kingdom, the frozen assets amount to 22.7 billion pounds sterling (USD 29 billion), with some estimates, according to The Guardian, reaching as high as 25 billion pounds sterling (USD 32 billion). In the United States, the estimated value of seized Russian assets is around USD 5 billion, and in Canada, it stands at approximately USD 328 million. These asset freezes have been carried out under the domestic legislation of the countries that imposed the sanctions.
In recent developments, as part of the G7 and the EU's continued support for Ukraine, there has been growing advocacy for using frozen Russian assets to finance the Ukrainian defense effort. Proposals have emerged to either confiscate these assets directly to fund Kyiv or maintain their frozen status while using the interest generated from them. The G7 and the EU have already taken steps through the latter approach, announcing plans to use the returns from these frozen assets to support Ukraine's war efforts. The assets remain in the central banks of the respective countries, with G7 nations extending loans to Kyiv, to be repaid using the annual returns from the frozen Russian assets, estimated at between 3 and 5 billion euros. Notably, the majority of these assets are held in European banks, following President Vladimir Putin's decision in 2018 to withdraw a significant portion of Russian reserves from US banks in response to earlier economic sanctions imposed on Moscow.
Dangerous Consequences
There are significant ramifications to confiscating frozen Russian assets or using the interest generated from these assets to fund Ukraine, including the following:
1. Undermining the global financial system:
Confiscating or freezing Russian assets and using them, or their returns, sets a dangerous precedent that undermines the global financial system's reliability. Regardless of intentions like military support for Ukraine or post-war reconstruction, these actions carry significant economic and political consequences, potentially eroding the system's legitimacy, particularly in relation to private property rights. As most countries hold foreign exchange reserves in the United States and European Union, subjecting these reserves to political disputes or using them as tools of economic sanctions—beyond freezing to outright confiscation—could destabilize the global financial order, especially if the Russian case sets a legal precedent.
A precedent occurred in 2003 when the United States seized Iraq's reserves for post-war reconstruction, though on a much smaller scale than the current volume of frozen Russian assets. Christine Lagarde, President of the European Central Bank, warned in April that confiscating Russian assets for Kyiv could threaten the international financial system and raise legal and ethical questions. She noted that using these assets to fund military aid to Ukraine might violate international law, potentially leading to the fragmentation of the global financial system amid growing concerns about its political exploitation.
2. Violating the rules of international law:
International law is intended to protect states and officials from having laws enforced on their property without consent, raising critical questions about the legality of confiscating Russian assets or benefiting from their returns. It questions the alignment of such actions with international law principles. While the West may argue that these measures could deter Russian military operations or justify them under Russia's moral responsibility to finance Ukraine's reconstruction, these arguments fall short of providing a solid legal basis and could be viewed as a deliberate violation of international law.
Although international law may permit the temporary freezing of Russian assets as part of sanctions, confiscation or use of returns from these assets is a different matter for which no robust legal justification has been found. This legal ambiguity could erode trust in the international system and the perceived fairness of its laws.
3. Impact on the Euro and Dollar as reserve currencies:
The G7's inclination to confiscate Russian assets has sparked significant opposition, particularly in Europe, due to concerns about the impact on the euro and dollar as global reserve currencies. In June 2023, the European Central Bank warned that using proceeds from frozen Russian assets could prompt countries to diversify their reserves away from euros and US dollars. This shift could undermine the dominance of these currencies in the global financial system, as nations may seek to reduce their exposure to geopolitical risks associated with holding reserves in these currencies.
Limitations of Effectiveness
The feasibility of confiscating Russian assets or using their returns to curb Russia's war efforts in Ukraine is viewed with skepticism by many experts. The primary economic harm to Russia was inflicted through the initial freezing of these assets, and the effectiveness of confiscation as a tool of economic pressure is likely to diminish over time. The Russian economy has already shown resilience in the face of successive sanctions, suggesting that further escalations may have limited impact.
In response to the threat of asset confiscation, Moscow has hinted at retaliatory measures, including freezing foreign investors' funds in Russia, estimated to exceed USD 500 billion. Experts warn that such a response could have severe repercussions, particularly for the European financial system. For example, Moscow's retaliation could potentially lead to the bankruptcy of Euroclear, the main European depository institution, as the Central Bank of the Russian Federation could seize 33 billion euros of Euroclear's assets within Russia and pursue legal actions to confiscate its assets in other jurisdictions.
In a further escalation, President Vladimir Putin issued a decree in April 2023 allowing temporary control of foreign companies' assets in Russia, directly responding to the freezing of Russian assets abroad. Additionally, on May 23, 2024, Putin signed a decree authorizing the confiscation of US assets in retaliation for the US House of Representatives' vote in April to seize frozen Russian assets.
Conclusion
As the war in Ukraine drags on and the costs of supporting Kyiv continue to rise, Western countries have explored alternative strategies to sustain their military assistance without further financial burden. One such approach is the exploitation of frozen Russian assets. However, this strategy is fraught with significant risks. It threatens the stability of the international financial system at a time of global economic uncertainty, potentially triggering changes that could ultimately disadvantage the West.
Moreover, the short-term effectiveness of asset confiscation remains doubtful. Despite over two years of Western sanctions, the Russian economy has shown considerable resilience, finding new markets and forging stronger ties with alternative trading partners. This resilience indicates that confiscating assets or their returns may not apply the expected pressure on Russia's economy. Additionally, Western countries face the complex challenge of crafting a legal framework that allows for such confiscation without violating international law or undermining the credibility of the global legal system. These challenges underscore the need for careful consideration of the long-term implications of any such actions.
