Using Russia’s money to pay for Western weapons deliveries to Ukraine seems like a clever idea. Or maybe it’s too clever by half?
The Group of Seven (G7) industrial countries are planning to raid Russia’s foreign currency reserves of around $280bn. Of those, $210bn are held at Euroclear, a financial depository based in Belgium.
After Russia invaded Ukraine, the immediate response by the West was to freeze the money to deprive Russia of the financial means to fund the war. Now the Western allies want to go a step further and seize the assets themselves.
There are many ways to do this. What the US is proposing is a hideously complex financial construction based on the idea of using the Russian assets as collateral for a bond. When I first read about it, I was reminded of the subprime bonds in America that caused the 2008 global financial crisis.
Two G7 countries are resisting the American proposals: Germany and Japan. What these two have in common is that they both face war-reparation claims themselves. In 2022 the previous Polish government made a claim of €1.3trn against Germany because, unlike Russia, Poland never received compensation for war crimes it suffered during the Second World War. In January of this year, Radosław Sikorski, the current Polish foreign minister, reiterated those claims as compensation for the deaths of more than five million Polish citizens. Japan is facing similar compensation claims from South Korea.
There are subtle legal linkages between these claims and those against Russia. If the West argues that Russia owes money to Ukraine for the war crimes it committed, it can surely be argued that Germany owes money to Poland or that Japan owes money to South Korea.
Russia has several avenues to defend itself against a money heist on its reserve assets. It could sue. Some of the money is not held in Europe, but in places like Hong Kong. If Russia took legal action there and won, it could create a hole in the balance sheet of Euroclear, which would then need to be recapitalised by the EU. Russia may also succeed in European courts. There are a lot of legal opinions out there, but we would be in uncharted legal territory. Never before has anybody tried to extract war-crimes reparation payments while the war was still raging.
Another plausible Russian response is retaliation. The West, too, has assets in Russia. The number of Western companies in Russia is hard to ascertain. The Kyiv School of Economics Institute estimated last year that 1,400 Western companies were still conducting business in Russia – and that only 300 had left the country.
I have seen reports that, after an initial wave of departures in 2022, only a few German companies have exited Russia since. The turnover in Russia for German firms alone is reported to be €21.3bn. On 26 April, Vladimir Putin moved to sequester the Russian subsidiaries of two European household goods companies: Ariston of Italy and Germany’s BSH Hausgeräte. We are not the only ones with the power here.
For me, the biggest reason to be cautious is the eurozone’s precarious position in the wake of the debt crisis. China, Saudi Arabia and Indonesia have leaned on the EU not to tamper with Russian assets on the grounds that it would create a precedent. These countries, too, have large holdings in the EU. They will surely be asking themselves: could it happen to us? Why take the risk?
There is much complacency in the implied responses to these questions. I am hearing arguments like: where else can they go? Or: they have nothing to fear unless they want to invade their neighbours. If we set a precedent by taking Russian assets, would we not simply do the same to China over Taiwan? It is also not true that they have nowhere to go. Money is more mobile than factories.
Despite my scepticism about the merits of an asset seizure, I believe it will happen. The reason is that this is the only way through which the West can fund its support for Ukraine without having to raise taxes or incur more debt. After the pandemic and the initial economic shock of Russia’s invasion, Western countries supported their economies through large deficits. Now, everybody is consolidating their public finances. I always suspected Europeans would tire of funding Ukraine’s defence against Russia if they had to pay for it with their own money. Russia’s untapped reserve assets are simply too tempting.
But an asset raid would come at a price. One of the most formidable advantages the West has is the trust that markets and investors have in our currencies and our financial systems. When we use the financial sector to force our political will on others through sanctions, we encourage them to create their own financial infrastructure. This is easier today than it used to be. The blockchain technology that underlies cryptocurrencies makes such restructuring at least feasible.
But this takes us beyond the time horizons of G7 leaders. They are focused on the next move, not the grand strategy. This is why I believe they will probably find a way to approve an asset raid at their summit in Italy in June – or at least initiate proceedings. They have no other plan.
One of the lessons of the financial crisis is that complex financial instruments always conceal risk. That is why they are opaque. Back then, the risk was a mass default by US homebuyers. What we are now trying to conceal is our inability to pay for the support we have pledged to Ukraine.
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This article appears in the 01 May 2024 issue of the New Statesman, Labour’s Forward March