I have, I admit, been struggling as to how to explain issues around the potential use of Russian sequestered central bank and oligarch funds that were held with mainly European central and other banks at the time Putin attacked Ukraine in 2022.
Discussion is being had on the use of these funds to support Ukraine. In the end, I have resorted to using ChatGPT as I have too many other issues to address today. My question to it provided this response:
The issue of sequestered Russian funds—frozen assets of the Russian central bank and oligarchs held by Western countries—has become a major geopolitical and economic debate since Russia's invasion of Ukraine in 2022. These funds, estimated at around $300 billion, are largely held in European and U.S. financial institutions. The discussion revolves around whether and how these funds should be used, with strong arguments on both sides.
Arguments for Using Sequestered Russian Funds
1. Compensating Ukraine for War Damages
•Proponents argue that Russia's aggression has caused massive destruction in Ukraine, and it should pay for rebuilding efforts.
•The World Bank estimates Ukraine's reconstruction cost at over $400 billion, far exceeding the international aid provided so far.
2. Deterrence Against Future Aggression
•Using Russia's frozen assets could serve as a precedent, warning aggressor states that financial consequences will follow violations of international law.
3. Legal and Moral Justification
•Some legal experts argue that international law allows for the confiscation of assets belonging to a state that has violated fundamental global norms (e.g., aggression against a sovereign country).
•The United Nations General Assembly has called for Russia to provide reparations.
4. Ukraine's Immediate Financial Needs
•Directing these funds to Ukraine could reduce dependency on Western taxpayers and ease the financial burden on donor countries.
•Ukraine faces ongoing military and humanitarian expenses that require significant funding.
Arguments Against Using Sequestered Russian Funds
1. Legal and Financial Precedents
•Confiscating sovereign assets could set a dangerous precedent, making countries hesitant to hold foreign reserves in Western financial systems.
•International law currently does not provide a clear legal basis for confiscating state reserves in peacetime.
2. Risk of Retaliation by Russia
•Moscow has threatened to seize Western-owned assets in Russia (such as investments by multinational corporations) in retaliation.
•This could escalate economic tensions and harm global financial stability.
3. Impact on Global Financial System
•Freezing and confiscating central bank reserves could undermine trust in the U.S. dollar and euro as reserve currencies, potentially accelerating de-dollarization.
•Countries like China, India, and Saudi Arabia might seek alternatives to Western banking systems.
4. Political and Diplomatic Challenges
•Some Western allies, including Germany and France, have expressed reservations about outright confiscation, fearing unintended consequences.
•Instead, some propose using the interest generated from frozen Russian assets rather than seizing the principal.
Compromise Solutions Being Discussed
•Using Only Interest Earnings: The EU has been exploring whether the interest on Russian frozen assets could be directed toward Ukraine without confiscating the principal amount.
•War Reparations Through Legal Channels: Some experts argue that a proper international tribunal ruling could provide legal backing for using Russian funds.
•Gradual Release Tied to Russia's Compliance: A phased approach could involve linking access to funds with Russia's post-war behavior, similar to past sanctions frameworks.
Current Status
As of early 2024, no major Western country has yet seized and redirected the principal amount of Russian frozen assets. However, discussions are ongoing, particularly in the European Union and the United States, about using the interest generated from these funds to support Ukraine.
Would you like me to track the latest developments on this issue?
In summary, the issues are:
- We could alienate Russia, and risk legal action, but that action might be won anyway.
- However, we risk alienating other states we might have difficult relationships with if we did so, and City interests think keeping their control of foreign assets more important than:
- any associated ethical issues,
- support that might be supplied to Ukraine,
- avoiding the cost of Ukrainian reconstruction that we might otherwise have to support.
- Preserving the dollar as a reserve currency trumps all (sorry).
My attitude is:
- States banking in London, Paris, Frankfurt, Brussels and New York should know the risks from doing so.
- Creating a new world financial order is essential - and preserving the power of the dollar and City of London is not core to that.
- Reinforcing anti-corruption law is key, and this is what matters here.
So, should the funds in question be made available to European states now supporting Ukraine, as well as to relieve Ukrainian debt and to fund its reconstruction? Yes, in a word. But care is required to get this right. Talks on this rate required, now.
Two final thoughts illustrate what needs to be discussed.
The first is that if this funding was available, the absurd cuts to UK overseas aid would have been even more unnecessary than they always were. There are domestic consequences of this debate.
Second, money is not the answer in itself. This money avoids the need for central bank money creation, but spending it without consideration of the inflation consequences makes no sense. In that case, suppressing excess consumption may still be required. There is no way around the likely need for significant increases in the taxation of those with wealth if the aftermath of the war in Ukraine is not to be profoundly disruptive. In that case, this money is not an answer to anything in itself. Money never is.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
I think your last paragraph is most important – connecting sequestration of Russian assets to our ability to support Ukraine is wrong. Decide what is required and then do it; don’t delay while we haggle about money.
Having said that, this is a complicated issue and not a new one; eg. at the start of my career (1980s) we had the sequestration of Libyan assets to deal with.
Lots of mutterings about precedents set etc. but the only test is “does it make a just, sustainable peace more or less likely?” – and on that, I just don’t know.
“are largely held in European and U.S. financial institutions” Nope, estimates are Euro200bn – Europe holds almost all, USM about $5bn.
In this case Europe “holds all the cards” & can act without Mangos say so.
Overall I agree 100% with the points you make. Although I did smile at this:
“However, we risk alienating other states we might have difficult relationships with”……which other part-European country do we have a “difficult realtionship with” & which is in a hot war with its neighbour?.
I was trying diplomacy
Maybe it’s not my thing
I am not absolutely certain of this… but my best guess is:
Russian reserves are about USD500bn equivalent.
Some will be gold – not sure where that is held… probably in Russia.
Some will be held in Chinese currency and securities – so held in China.
Some will be held in USD of which a very good portion will be held in US Treasuries and Russia (like all countries) will have a custody account at the Fed.
Some of their USD will be invested in USD denominated “offshore” dollar bonds and these will be held in Euroclear (Belgium)
Some will be held in EUR denominated government bonds of Germany, France etc. these will be held either at the relevant Central bank or Euroclear.
The USD 200bn is the chunk held in Europe… but this is a minority of total Russian FX reserves.
An obvious issue is that its the ability to deposit funds safely abroad that makes being a leader of a Corrupt state or one of his or her supporters actions worthwhile.
If you knew that were you the Arch Panjandrum of Ruritania and your fortune could only be held in Ruritanian Banks & Assets you might be more circumspect or even decide not to stage the coup that put you in power in the first place
I appreciate it may lie on the extreme end of the distribution (of options discussed) however the paragraph that starts “Creating a new world financial order is essential” resonates with me. What I don’t want is a new world order defined by a deranged US president. The fundamental weakness of the current and possibly future US defined system is reliance on central banks. Maybe just get on with transition to a distributed crypto based financial environment?
– and preserving the power of the dollar and City of London is not core to that.
Thanks
12 out of 10 Richard.
We’ve learnt nothing from 1919, where the issue then was too focused on money (reparations).
All the British Government focus – on both the Ukraine problem and the economy (which are closely linked) is perversely wrong.
I have watched a week of debate on the future of Europe, as if Germany didn’t exist; because they are wrestling with forming a new Government. There is no solution without Germany at the centre. Look at the geography. It doesn’t work. Europe taking centre stage in its own defence means that eighty years of Germany being excused from its geopolitical responsibilities (for understandable historical reasons that we can no longer continue in the world in which we now live).
The absurdity of Britain fiddling with shuffling around spending constraints to pay for the piffling uplift in defence spending of 0.2% (that makes no serious difference to the problem we face); all to protect ridiculous and absurd fiscal rules – is far beyond idiotic. I suggest Britain faces the real problems candidly. Why am I saying this?
Because this is what the Germans are now saying; the penny now seems finally to have dropped there – but not here (Britain is still utterly lost in fantasies and illusions). This is from Reuters:
“‘Germany’s likely next chancellor, Merz, has seized the moment after the return of Donald Trump to the White House put the transatlantic alliance in turmoil and underlined the urgency for Europe to strengthen its own defences. …. ….. …
Economists and investors have urged Germany to reform its constitutionally enshrined state borrowing limits known as the ‘debt brake’ in order to free up investment and support an economy that has contracted for the past two years.
The reform would mark a rollback of borrowing rules imposed after the 2008 global financial crisis that many have since criticised as outdated and putting Germany into a fiscal straitjacket.
“In view of the threats to our freedom and peace on our continent, whatever it takes must now also apply to our defence,” said Merz, leader of the CDU/CSU conservatives.
“We are counting on the United States of America to continue to stand by our mutual alliance obligations in the future. But we also know that the resources for our national and alliance defence must now be significantly expanded.”
The euro rallied to a three-month high on the news, German government bond futures fell sharply, while stock futures rose. European defence company shares have soared in recent days as momentum to ramp up spending across the region gathers pace.
‘Pending more clarity on this issue, and being mindful of some execution risk, we believe this is one of the most historic paradigm shifts in German postwar history,’ said Robin Winkler, chief economist at Deutsche Bank Research.
‘It is clear at the time of writing that there is now meaningful upside risk to our 1.0% growth forecast for 2026.’
Merz said the CDU/CSU and SPD parliamentary group would submit a motion to the Bundestag lower house of parliament next week to amend the constitution so defence expenditure above 1% of economic output is exempt from the debt brake.
A commission of experts will separately develop a proposal for modernizing the debt brake to boost investments on a permanent basis.
Changing the so-called debt brake and creating a special fund require a two-thirds majority.
The outcome of the exploratory talks on the special infrastructure fund and the reform of the debt brake is a real game-changer,’ said Sebastian Dullien of the IMK institute.
‘If this succeeds, then the stagnation of the German economy is likely to be overcome quickly. Not only because urgently needed investments will now be made, but also because the overall mood is likely to shift significantly. Germany is once again economically and militarily capable of taking action.”
Frankfurt-listed shares in German defence firms Rheinmetall , Hensoldt and Renk all rose on the news in late trading, gaining between 1.5% and 5.2% at 1909 GMT.
Merz said he would meet outgoing SPD Chancellor Olaf Scholz on Wednesday to discuss additional aid for Ukraine, with more than 3 billion euros on the table.
‘Our country is running on wear and tear, and that is why it was important for us to invest, to invest massively, so that our country functions better again. A future government must stop the deterioration of our country,’ SPD leader Lars Klingbeil said.
The United States has repeatedly pressured Germany to increase its defence spending to overhaul a military that has felt neglected since the end of the Cold War and diverted weapons to support Ukraine in the war against Russia.
‘All in all, Europe is in the midst of historical changes,’ said Carsten Brzeski, global head of macro at ING.
‘The developments of the last few days have pushed the likely next German government to make a historical move by announcing a fiscal package that could finally mark the start of better years for the economy.'”.
The two-thirds majority is the problem for Germany. We do not have that problem. The fiscal rules are unsustainable. They are killing us. We MUST think the same way as Germany. MUST. It isn’t an option. There is no option. We have made it more difficult, but that is our own fault. Every other solution is a recipe for utter failure. If we don’t recognise this, and that there is no future for Europe without Germany fully returned to a major international political role, nothing effective will be achieved in Europe.
Thanks John, and much to agree with.
While I note the universal willingness of many countries to hold Rusia to account for the destruction they have caused in Ukraine, why are there no demands for Israel to pay for the reconstruction of Gaza? If the Arab States and other countries fund reconstruction this will invite future rounds of lethal destruction by Israel.
However, I also wonder if it’s possible for the countries that built major infrastructure in Gaza, including hospitals, to bring a raft of legal suits for damages against the Israeli State. This should be a viable option in cases where the Israelis deliberately targeted the buildings and facilities they funded that should have been protected under international law. If the Gaza genocide has zero cost or ramifications for Israel there will be a lot more destruction worldwide. This is especially true now that the Israelis have set an alarming new precedent for attacking critical infrastructure that will be emulated in many future conflicts.
This ruling is advisory but will go to the General Assembly. In theory sanctions could be enacted against Israel if it does not comply -which they will not. And Trump will back them.
We, and the rest of Europe, will have to decide whether we back international law or not.
https://www.ohchr.org/en/press-releases/2024/07/experts-hail-icj-declaration-illegality-israels-presence-occupied
Thinking a bit more
Looking at MMT, any Russian assets in the form of Government Stock or Bank Deposits could simply be ‘recreated’ if they were seized and the Russians then decided that they were going to play nicely at some stage in the future, so that doesnt create any real issues.
The position with shares and ‘real’ property is a bit more complex as you cant simply – say give an Oligarch his London Penthouse Flat or shares back in the same way but I am sure some sort of solution could be found.
I suggest in any event we dont want this sort of money in Europe/the UK anyway so handing over the cash at some stage in the future revalued to take account of what the property could be worth at some date in the future neatly solves another issue
The funds being talked about are central bank assets: currency, gold, bonds. There are unlikely to be properties or corporate bonds pr shares in here, although there may be for oligarchs funds. There money laundering has to be investigated.