Home News Why Attempts to Divert Frozen Russian Assets Could Seriously Damage the West’s Credibility

Why Attempts to Divert Frozen Russian Assets Could Seriously Damage the West’s Credibility

by internationalbanker

By Nicholas Larsen, International Banker


We will also support Ukraine’s reconstruction, for which we will strive to use frozen and immobilised Russian assets in accordance with EU and international law,” read a joint statement from the members of the European Council (EUCO) published in late February to mark the one-year anniversary of the war in Ukraine. The statement thus confirmed that efforts by Western countries to use frozen public Russian assets to finance Ukraine remain undiminished. This position has not only stirred considerable debate over its questionable legality, but it has also prompted an exodus of assets from Western institutions by countries seeking to avoid being recipients of such moves in the future. In so doing, one must question the potential harm that maintaining this position will do to the reputation of the Western-led financial system.

The cost to rebuild Ukraine is upwards of $411 billion, as per recent analysis from the World Bank (WB), the European Commission (EC) and the United Nations (UN). According to Ursula von der Leyen, president of the EC, European leaders will work on a plan to allocate confiscated Russian assets toward such costs. “Russia and its oligarchs have to compensate Ukraine for the damage and cover the costs for rebuilding the country,” the EC president stated in November 2022. “And we have the means to make Russia pay. We have blocked €300 billion of the Russian Central Bank reserves, and we have frozen €19 billion of Russian oligarchs’ money.” A working group was also set up in February by the European Union (EU) to determine whether frozen Russian assets could be allocated to Ukraine’s reconstruction.

Roughly half of the total Russian central bank (Bank of Russia) assets held abroad have been seized by the EU and other Western countries, largely from the G7 (Group of Seven), since the war began in February 2022, and they now sit in Belgium’s clearinghouse, Euroclear. From a legal and political perspective, this seizure has already generated much debate among policymakers. “In principle, it is clear-cut: Russia must pay for the reconstruction of Ukraine,” Swedish Prime Minister Ulf (Hjalmar Ed) Kristersson said in February. “At the same time, this poses difficult questions. This must be done in accordance with EU and international law, and there is currently no direct model for this.”

Falling under the West’s wide-ranging sanctions package against Moscow, the appropriation of this vast sum has plenty of detractors who argue that it sets an undesirable precedent that could seriously harm the credibility of the Western financial system. That said, such actions are nothing new, with previous seizures being approved by the United Nations Security Council (UNSC) and unilaterally taken by the United States and EU member states. For example, the foreign assets of the Syrian and Iranian central banks have been frozen by the EU and the US since 2012, while Afghanistan’s central bank’s assets have been frozen by the US since 2021.

Venezuela, meanwhile, recently won a lawsuit against Portuguese bank Novo Banco to recover more than $1.5 billion of assets that had been frozen in the bank since 2019 as part of a victory for the South American nation against unilateral sanctions implemented by the US, resulting in frozen funds across international banks. But despite leading opposition parties voting to oust Juan (Gerardo) Guaidó (Márquez) as “interim president” and dissolve his parallel regime, which the West dubiously recognised as Venezuela’s legitimate government but then proceeded to use as justification for freezing roughly $2 billion of the country’s gold held at the Bank of England (BoE), Venezuela has not received its assets from the United Kingdom to this day.

With considerable experience in this freezing activity, therefore, the West was able to move quickly against Russia. But policymakers remain distinctly wary of falling foul of the law. U.S. Secretary of the Treasury Janet Yellen admitted in February that serious obstacles to confiscating major frozen Russian assets persisted. “We have, on this small scale, seized assets, but there are certainly legal challenges in doing more than that,” she explained to Reuters in February. And the German national daily newspaper, Die Welt, reported on April 13 that the EC’s lawyers had concluded that the frozen assets held in EU countries must be returned to Moscow at the end of hostilities. “There is political will, but legal barriers are high. The European Commission comes to a sobering conclusion that frozen assets cannot be touched, since once upon a time, when the war ends, they will have to be returned to Russia,” the article stated, citing an unpublished report by the EC legal team.

Nonetheless, the West is persisting in its endeavours, with a proposal to use frozen public Russian assets to finance Ukraine slated to be published in September, an EC spokesperson told Reuters on July 20. And the UK, which has frozen roughly $23 billion in assets, introduced new legislation in June to enable sanctions on Russia to be maintained until Moscow pays compensation to Ukraine and to create other routes for frozen Russian assets to be donated for Ukrainian reconstruction.

For many other countries, however, freezing Russian assets is widely perceived as a method the US-led West employs to weaponise its primary currencies. The European Central Bank (ECB) warned in June that using interest-rate proceeds from the frozen assets could prompt other central banks to “turn their back[s]” on the euro, especially if the EU acts unilaterally without other G7 countries, according to a draft internal EU note read and reported on by the Financial Times on June 17. “The implications could be substantial: it may lead to a diversification of reserves away from euro-denominated assets, increase financing costs for European sovereigns and lead to trade diversification,” the note added. And Bank of America (BofA) analysts led by Michael Hartnett recently noted in a report that “US dollar debasement [is the] ultimate outcome as [the] dollar [is] weaponized in [a] new era of sanctions.”

Such fears are thus expediting not only the ongoing global trend of de-dollarisation but also the construction of viable alternative financial systems by China or even Russia. “But it isn’t just Beijing and Moscow,” a March 7 Al Jazeera report explained. “From India to Argentina, Brazil to South Africa and the Middle East to Southeast Asia, nations and regions have accelerated efforts in recent months towards arrangements aimed at reducing their dependence on the dollar. At the heart of these de-dollarisation initiatives is the fear in many capitals that the US could someday use the power of its currency to target them the way it has sanctioned Russia, according to political economists and sanctions experts.”

Indeed, central banks are already calling back their offshore gold assets to domestic storage facilities in increasing quantities over such fears. The “Invesco Global Sovereign Asset Management Study 2023”, published in July, captured the opinions of 142 chief investment officers, heads of asset classes and senior portfolio strategists from 85 sovereign wealth funds (SWFs) and 57 central banks collectively managing $21 trillion in assets. According to the results, a substantial percentage of central banks are concerned about the precedent set by the US freezing Russian reserves, with the majority (58 percent) agreeing that the event has made gold more attractive.

The study noted a “heightened geopolitical risk environment” in which central banks prefer to hold physical gold over gold exchange-traded funds (ETFs) or derivatives. “Gold has played a crucial role during the last couple of years. We increased the exposure 8-10 years ago and had it held in London, using it for swaps and to enhance yields, but we’ve now transferred our gold reserves back to our own country to keep it safe—its role now is to be a safe-haven asset,” the study quoted one Western central bank.

Fifty-seven percent of the central banks in the study also agreed that gold is a hedge against geopolitical turmoil. “The freezing of Russian assets by Western nations has thrust the world’s reliance on the US dollar as the dominant reserve currency into the spotlight, raising questions about its long-term viability amidst high US debt levels,” Invesco observed. But the “lack of a stable and liquid contender” keeps central banks confident in the US dollar’s position as the world’s reserve currency. “People have been looking for alternatives to the dollar and euro for a long time, and they would’ve gone to them already if there were any suitable alternatives,” an emerging-market central bank explained. “I don’t see a world in which [the] US dollar is threatened, as there is no real alternative.”

Meanwhile, Russian authorities have said the country will “do everything possible” to resist Western attempts to “plunder” its reserves. According to the Kremlin’s press secretary, Dmitry (Sergeyevich) Peskov, the West’s seizure of Russian assets amounts to “racketeering” and “violating all the foundations and rules of private property and international law”. Peskov added that the UN resolution in November declaring that Russia must make reparations to Ukraine was an attempt to use the global forum to “formalise robbery”.


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