The West wants to break into Russia’s $460b treasure chest

The European Union has taken the first step towards accessing the more than $US300 billion ($460 billion) of Russian assets that were frozen at the onset of its invasion of Ukraine.

Earlier this week the EU’s council adopted regulations that would enable the Europeans to access the earnings on those Russian assets held within the EU, or about $US218 billion of the estimated $US323 billion of the Russian government’s funds held within Europe, the US and other G7 economies.

Vladimir Putin’s Russia has reportedly already lined up foreign law firms to challenge any attempt to access the funds.Credit: AP

The major European clearing house, the Belgium-based Euroclear, holds most of the Russian funds frozen within the EU. It has said the earnings on them could amount to about €4 billion ($6.6 billion) a year.

The question of whether Ukraine’s Western allies could or should access the assets, mainly the Russian central bank’s foreign exchange reserves that the G7 froze when Russia invaded Ukraine nearly two years ago, is a contentious one.

The morality of using Russia’s own funds as reparations for the damage it has caused to Ukraine’s infrastructure through an illegal invasion – using them to help finance the estimated $US1 trillion ($1.5 trillion) or so cost of the reconstruction of Ukraine – would appear clear.

The legality of accessing those funds, however, is far more murky and uncertain and there could also be significant unintended consequences.

The US, for instance, has no legislative authority to expropriate a foreign government’s funds other than – and the seizure of Iraqi assets during the Gulf War is the precedent usually cited – if the US is engaged in a military conflict with that government.

The Biden administration, while supporting Ukraine with military and humanitarian aid, has gone to great lengths to avoid any suggestion that it is directly engaged in a military conflict with Russia.

There is a bill before US Congress that might provide the authority to seize Russia’s funds but, if acted upon, America would still probably be in breach of international laws and would compromise its status, and capabilities, as an enforcer of international laws.

International law generally prohibits expropriation of foreign private property without fair compensation and confers particular protections for foreign states and even more for the assets of central banks, regarded as cornerstones of the international financial system.

The Biden administration, while supporting Ukraine with military and humanitarian aid, has gone to great lengths to avoid any suggestion that it is directly engaged in a military conflict with Russia.Credit: AP

Freezing an asset is one thing, as the funds remain the property of the Russian government.

Seizing them would open up a can of worms and likely lead to both retaliation by Russia (which via its capital controls, holds billions of dollars of foreign company cash and assets within Russia) and legal actions in domestic and international courts that could tie up the funds and deny the EU and US access to them for decades.

Russia has already branded any attempt to use the frozen funds for Ukraine’s benefit as “outright theft” and “banditry”. It has reportedly already lined up foreign law firms to challenge any attempt to access them.

There something jarringly ironic and discordant that a country that mounted an invasion of a sovereign nation that is illegal under international laws, and which has wrought extraordinary destruction and losses and impairments of lives, could now seek to use international laws to protect its financial assets.

Targeting the earnings on the assets rather than the principal could, however, be a way to make what would otherwise be illegal under international law (and probably domestic laws).

While earnings on an asset belong to the owner of the underlying asset, the EU could impose a 100 per cent tax or levy on those earnings or create some similar mechanism, adding them to its own finances and then handing over a similar amount to Ukraine.

That would also leave the corpus of Russia’s assets intact and potentially available as a bargaining chip if ever there were serious negotiations about ending the war, which would probably have to involve Russia’s withdrawal from Ukraine’s territory to be acceptable to Ukraine and its Western allies.

If the EU and/or the US were to seize some or all of the trapped assets (and there’s another $US58 billion or so of frozen assets belonging to Russian oligarchs that might also be accessed), there have been concerns raised in Europe, particularly by Germany and France, and the US about the potential non-legal consequences.

Russia has already branded any attempt to use the frozen funds for Ukraine’s benefit as “outright theft” and “banditry”.

Ukraine has been urging the EU and US to act.Credit: Getty Images

Such action is, as indicated, unprecedented and would be an assault on a core principle of international law but it would also send a very clear signal to other governments outside the EU and US that their foreign exchange reserves might also be vulnerable.

European opponents of the proposal and, until very recently US Treasury Secretary Janet Yellen (who seems to have come on board with the Europeans this week), have cited the risks to their currencies’ status as reserve currencies and the US dollar’s dominance of global trade and finance, the potential for large-scale capital outflows and increases in borrowings costs and inflation as risks.

The Europeans are also concerned about undermining Euroclear’s role as a trusted and critical clearing house for international securities transactions.

The counterargument against those concerns is that the Russian funds were frozen, albeit not actually seized, nearly two years ago but that didn’t produce any significant shifts in capital flows or loss of trust in the European and US financial systems. There was no panicky exodus of capital.

There’s also the question of where else could foreign governments and their central banks safely hold their assets.

While China might have a long-term ambition of eroding the dollar’s dominance, would countries in the “Global South” or Middle East for instance, be comfortable shifting the bulk of their reserves from Europe, Japan and the US to China?

The reality is that the US and its currency have the deepest markets, with the EU the next major economy and financial system in line. Both have strong and transparent legal systems, which can’t be said of China.

Ukraine, desperate for more funding for its defence, of course, has been urging the EU and US to act, although they seem more interested in dedicating the funds, or leveraging them (there has been discussion of using them as security for loans to Ukraine) to help rebuild Ukraine.

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