Take from Russia and give to Ukraine. Can the West confiscate frozen Russian billions?

The situation is unprecedented. Never before has an attempt been made to take so much money from a nuclear power and one of the permanent members of the UN Security Council. Iraq was forced to pay reparations to Kuwait and other countries affected by the first war.

Argentina paid for the Falklands. But the world has not attempted confiscation on such a large scale since the Treaty of Versailles, which taxed Germany after the First World War.

Supporters of confiscation are getting louder. The scenarios of asset confiscation, the lion's share of which the Kremlin moved from the USA to Europe before the war in the hope that the EU will not cut ties with Russia - its main trading partner and main supplier of energy - because of Ukraine, are numerous.

Critics of confiscation in the West fear that such a move would undermine financial stability and the role of the dollar and euro as major reserve currencies. The Kremlin, for its part, promises to respond by withdrawing Western assets blocked in Russia.

The US, Europe and allies wanted to agree on the confiscation before the February meeting of the "Big Seven", but it did not work out. The next deadline is the summit of leaders of developed democratic countries in Italy in mid-June.

The situation is getting more complicated every day. We tried to answer the main questions - how much money is frozen, can it be taken from Russia and given to Ukraine, how exactly, what will be the consequences when everything happens?

This is what is known today.

 

Why do they want to take it away?

 

The first argument is that Russian aggression has caused enormous damage to Ukraine. The World Bank has already estimated the cost of the country's recovery and reconstruction at $411 billion, which exceeds the amount of frozen Russian funds.

 

Back in December 2023, the leaders of the "big seven" countries promised that there would be no unfreezing of assets, until the Kremlin compensates Ukraine's losses.

 

"The logic is simple. Russian property will not be returned to Russia in the near future. And Ukraine, according to international law, should receive compensation from Russia," Philip Zelikov from Stanford University argued for confiscation.

He is a veteran of the US State Department and one of the first to publicly raise the issue of Russian assets after the invasion of Ukraine.

"Russia made a colossal mistake of historical proportions. There was no precedent in history for an aggressor country to keep huge sums of money in accounts in countries that suffered its aggression. I immediately thought that it was logical that those countries would want to take advantage of the situation and use frozen Russian money to help Ukraine. But it took them almost two years," said Zelikov.

 

Another argument is to show Vladimir Putin the unity and determination of the West in conditions where this is increasingly questionable due to the refusal of the US Congress to grant aid to Ukraine and disputes within the EU over the extent of sanctions and military aid.

"Putin only understands the language of force. And that force needs to be demonstrated in order to force him to peace. Because today Putin is laughing in our faces," said President of the European Union Budget Committee and former Belgian Finance Minister Johan van Overtveldt.

He proposed his scheme - not to confiscate 190 billion euros of Russian assets frozen in Europe, but to use them as collateral for a loan. Give money to Ukraine and make Russia pay back the loan after the war is over.

"We must act more courageously. Yes, the confiscation of almost 200 billion euros will have legal, monetary and geopolitical risks. But now it is much more dangerous to sit idly by," Van Overtveldt said.

The third argument - Ukraine needs money now, and the West allocates less and less.

Supporting Ukraine costs tens of billions a year. But if Europe managed to overcome political differences within the EU and approve the aid budget, then the other key sponsor of the Ukrainian resistance - the US - suspended the allocations at the end of 2023.

US presidential candidate Donald Trump threatens not to allocate a penny to Ukraine if he wins the elections in November.

Due to the lack of military aid, the Ukrainian military is handing over positions to Russia, and without financial support, the budget may not have enough money to maintain the country, pay pensions, pay salaries and rebuild critical infrastructure that is bombed by Russia on a daily basis.

 

This year, Kyiv needs about 40 billion in aid, of which the EU and the IMF have so far promised only half.

The confiscation of Russian assets would help the West to resolve the financial issue of supporting Ukraine several years in advance.

 

Who is for, who is against

 

Americans - for. Even Treasury Secretary Janet Yellen supports confiscation. Back in December, she was worried about the fate of the dollar, but at the end of February, at a meeting of G20 ministers and bankers, she changed her tone.

"Our coalition, which represents more than half of the world's economy, has pledged not to unfreeze $285 billion worth of Russian assets until Russia compensates for the massive losses it has caused. I believe we urgently need to find a way to use Russian assets to help fund Ukraine defense and reconstruction. There are strong arguments for that - legal, economic and moral. But we must act together and in a balanced way," Yellen said.

Yellen stopped worrying about the dollar and the euro. The world still holds almost 60 percent of savings in dollars, about 20 percent in euros and only about three percent in Chinese yuan.

Actually, there are no alternatives to the dollar, euro and yen, so I'm not too worried about it. A risk to financial stability will only arise in the event of a mass transfer. But I think that is extremely unlikely, especially given the unique situation in which Russia is brazenly violating international norms.

But the opinion of the Americans is secondary. Europeans are leading the charge. Of the 285 billion in Russian reserves, only about five billion are frozen in the US. The rest is on European accounts.

European politicians spoke cautiously at first, but with June EU elections approaching and against the backdrop of problems with approving US aid to Ukraine, they began talking about confiscations.

"The time has come to start a conversation about using the profits from frozen Russian assets for the joint purchase of military equipment for Ukraine," European Commission head Ursula von der Leyen said at the end of February.

The European Commission – actually, the EU government – is preparing a plan to partially use Russian money or profits from its investments, but that plan has not yet been presented. He may appear before the EU summit on March 21 and 22.

But any plan may encounter resistance from one of the 27 EU countries. Hungary has traditionally blocked sanctions against Russia and has even spoken out against asset confiscation.

Pro-Russian politicians in the camp of skeptics are supported by technocrats from countries that opposed Russian aggression.

"Every step in the direction of (confiscation), especially central bank assets, must be carefully weighed from the point of view of legality and consequences. Our goal is to support Ukraine and weaken Putin, not to weaken the West and undermine world order and financial stability," he said. German Finance Minister Christian Lindner.

And last week, French President Emmanuel Macron allowed the expropriation of interest from frozen assets, but said the assets themselves could not be touched.

"We are not in favor of doing things that are prohibited by international law and starting a discussion that, in my opinion, will weaken Europe," Macron said.

 

What are the withdrawal options?

 

The frozen funds are foreign currency reserves of the Central Bank of Russia, which before the war it deposited in foreign accounts in dollars, euros, pounds, yen and francs. The largest part - almost 200 billion euros - is kept in the form of securities in the Belgian depository Euroclear.

Bonds generate income, part of which is redeemed and converted into cash. Under Belgian law, such income can be taxed, even if it is 100 percent.

Since it is only about one state and tax, and not about confiscation, it is exactly this money that has been talked about so far.

But in this way, the EU will receive only a few billion euros per year for Ukraine, because it is only interest, and not the main amount of Russia's frozen reserves.

Moreover, it will not be possible to withdraw the already accumulated interest of almost four billion euros, because even if the European law is adopted, it does not have retroactive effect. In addition, this money has already been set aside for court disputes with Russia.

"The interest rate is a drop in the ocean, taking into account the needs of Ukraine," the head of the budget committee of the European Parliament, Johan van Overtveldt, rejects this option. "But there is also a middle ground between doing nothing and taking only interest".

He offered to use the frozen 200 billion as collateral. In that case, the EU could take a loan to help Ukraine, and make repayment of the loan a condition of peace negotiations with the Kremlin after the end of the war.

The decision on what to do with the bulk of Russian money seized in the West is still far from final. For now, the only thing that is clear is that even if the 27 EU countries suddenly agree among themselves very quickly, they will not take any unilateral action without the full and unconditional support of their allies - the US, Great Britain, Canada, Australia and Japan.

And they will have to wait at least until the June summit of the "Big Seven" in Italy.