Russia’s attempt to seize Ukraine by force is a crime of aggression, but response in the West so far has been “prudent”. Western nations have refrained from taking too active a part in defending Ukraine from Russia, preferring to act as if this is just a local affair between Russia and Ukraine, while sending a lot of arms and munitions to Ukraine—in the hopes of persuading Russia to give up.
There solid reasons for caution, because a runaway war could create a truly worldwide war like we saw twice in the twentieth century. Given so many countries bristling with nuclear weapons, that’s very risky.
But at the same time, wars are inherently risky, and not finishing one when you can is a huge risk of its own. That war could spiral out of control at any point.
I only have one opinion out of about 8 billion, but my opinion is that the West needs to be more aggressive to stop this war. That’s why I posted AUMF for Ukraine, where I argued it is time for Democrats in Congress to begin work on a bill that would authorize the use of military force in Ukraine.
Obviously, I am not suggesting we send in the Marines anytime soon. But I think we need to prepare the country for active U.S. involvement, because I don’t see the requisite action needed to stop the war.
And if Russia were to topple the government in Kyiv, we would be in a tough position where NATO could actually come apart. Or, if Donald Trump were to win the presidency, he could give away Ukraine to Putin, essentially undoing the progress the U.S. and NATO have made since President Reagan and successive Presidents “persuaded” the Soviet Union to tear down its wall with he West, pitching trillions of dollars of U.S. military spending into the garbage dump.
So, I want the Russian Republicans in Congress to face up to the consequences of their actions.
At the same time, there are billions of dollars of Russian assets frozen in the West that could go to Ukraine. After February 2022, the West froze around $300 billion in Russian assets. What is stopping these assets going to Ukraine to buy the war materiel they need to kick the Russians out?
These funds are controlled by financial institutions and behind them governments in the EU and U.S. that could make this happen. But these institutions and governments are prudent. And there’s good reason they should be cautious about just turning over this money to Ukraine.
One reason they are cautious is because most money has value on the basis of trust. Think about the dollar bill in your pocket. (I know, you are post-cash, but pretend.) Why does it have value?
It has value because it is backed by law. In fact, if you read the fine print, your paper currency says (actually in all caps):
THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE
In other words, you have to accept U.S. currency in payment for whatever you buy. It’s the law.
You are generally willing to accept cash as cash because you trust the U.S. government. You trust that the government will make good on this claim. Within the jurisdiction of the United States.
But what if you’re China? In that case, you use U.S. currency because you know that it has value. You know that if you deposit funds in a U.S. bank, that bank will make good on your deposits.
What if you invaded Taiwan?
Well, in that case, IMHO, your assets in U.S. banks should vanish. But what about assets in British banks? What about deposits in Switzerland? If banks there hold on to Russian deposits, then China can be more confident their enemies will not just seize them if they invade Taiwan.
The way they should seize them.
So, if the international banking system just scoops up Russia’s frozen assets and hands them over to Ukraine, other countries might worry. This is one of the reasons financial institutions and the governments behind them have frozen these assets but they haven’t handed them over to Ukraine.
However, after two years of war, leaders in the West are considering how this could change. According to Reuters, EU leaders are considering four major proposals how these funds could be repurposed for Ukraine. Here is my summary based on their article:
- About $230 billion is held in the EU, mainly in Euroclear (a Brussels-based central securities depository). As those assets mature, they can be converted to cash. It appears taking the profits could be legally defensible. The seized profits could be around $3 billion a year. This would be taken as a tax by Belgium. However, Euroclear has about 33 billion euros on deposit in Moscow. Moscow might try to seize Euroclear cash in Hong Kong, Dubai, and elsewhere.
- The entire reserves could be seized under international law under the doctrine of “countermeasures”. The proceeds could go to Ukraine or to a dedicated reconstruction fund. However, China and other countries might then worry about the safety of their assets. U.S. law does not appear to sanction this kind of seizure unless there is armed conflict between the U.S. and Russia.
- Ukraine could, on its own it appears, sell bonds that would pay out if it receives war reparations after the war terminates. Russian assets now being frozen are the most likely way that money would be paid to Ukraine after the war. In effect, Russia’s frozen assets would act as security for the bonds. Probably these securities would only be purchased by the U.S. and EU governments.
- Lee Buchheit, a legal expert in sovereign debt, and Daleep Singh, a deputy national security adviser for international economics for the White House, suggest Ukraine could pledge reparations to a syndicate of allies. This is based on the principle that a creditor can pay off unpaid debt.
(How will the West use Russia's frozen assets? by Marc Jones and Jan Strupczewski, 21 March 2024)
Of these, only suggestion 2 is really radical. There are legal and financial risks for it. As noted, other countries might decide to pull funds from central depositories in the West, which could significantly weaken the USD, pound sterling, and euro. Russia would probably sue, and there could be significant costs defending this action. And, of course, the 33 billion euros on deposit in Moscow would disappear, which is a good tenth of the estimated value of frozen assets.
There are, however, precedents for seizing these funds. German assets were seized after World War II. Presidents Ronald Reagan and George H.W. Bush took similar measures against Iranian government assets in 1981 and Iraqi funds in 1992, where assets were seized after the invasion of Kuwait. Also, the UN “has established that Russia has a duty to compensate the states injured by its aggression”. (See How Frozen Russian Assets Could Pay for Rebuilding in Ukraine by Jonathan Masters, 24 July 2023, Council on Foreign Relations.)
Probably the most popular options are the most tepid ones. For example, there is the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act, which would use assets confiscated from the Russian Central Bank and other sovereign assets for Ukraine. This is legislation from Sen. Jim Risch (R-ID) and Sen. Sheldon Whitehouse (D-RI), as of last June, that would help rebuild Ukraine after the war. But nothing to win the war. (Even so, we should back this bill, because at least it’s something.)
How much money are we really talking about?
Based on figures from Reuters and other sources, I estimate that after the February 2022 full invasion of Ukraine by Russia, when the U.S. and its allies blocked transfers of funds to Russia’s central bank and finance ministry, this trapped more than $300 billion in the West. This appears to include about $224 billion in euro-denominated assets, $73 billion in assets denominated in U.S. dollars, and $47 billion in assets tied to the British pound. (This actually totals around $344 billion, but that’s at current exchange rates and there are obviously rounding errors.) There is likely another roughly $64 billion in other countries (including Japan, Canada, and other countries friendly to Ukraine).
If Ukraine had this money to fund the war, it could purchase or build most of the weapons and ammunition it needs.
There’s an additional downside to this, however. If we provide Ukraine access to these funds, it kind of lets governments off the hook for providing military aid. This money should be considered in addition to aid provided by the U.S. and other Ukrainian allies, not a substitute. But politics what it is, that may not be possible.
The one way this would exert political pressure, however, is that it would make it clear that even withholding U.S. military assistance would not allow Russia to simply take over Ukraine. Right now there is a perverse incentive for Republicans to withhold aid because Ukraine might collapse and Donald Trump might win, and they’d be off the hook. But if there’s plenty of money for Ukraine to win, regardless of how much Republicans help out Vladimir Putin, then they will have backed the loser(s).
So, perhaps freeing up at least some of these funds for Ukraine could be a victory, even if it lets governments somewhat off the hook.
My suggestion (you knew I have one) is to allow Ukraine to go to court and claim damages from Russia. They could then ask for what is essentially asset forfeiture. A number of Russian oligarchs have already had their money turned over to Ukraine under asset forfeiture laws.
To get this kind of judgment, I think we need a court with sufficient jurisdiction. The UN could potentially designate or impanel such a court. As noted above, the UN has already established that Russia has a duty to compensate the states injured by its aggression. I suggest that Ukraine qualifies.
With a judgment in hand, Ukraine could go to Euroclear, for example, and demand forfeiture of funds in the amount of the judgment. As the AP reports:
Last May, the Justice Department announced that it had transferred $5.4 million seized from Russian tycoon Konstantin Malofeyev to a State Department fund for rebuilding Ukraine.
And in December, Germany’s federal prosecutor filed a motion for asset forfeiture concerning more than 720 million euros ($789 million) deposited by a Russian financial institution in a Frankfurt bank account because of a suspected attempt to violate embargo regulations.
(Nearly two years after invasion, West still seeking a way to steer frozen Russian assets to Ukraine by Fatima Hussein, 17 January 2024)
There’s definitely risk here. But the big risk is that really bad people will take the lesson that they can get away with really bad things and their money will be safe. The message to depositors should be, “We protect the money of upstanding citizens, not criminals.”
The West needs to find a way to allow Ukraine to use Russian money already frozen in West to fight the Russians in Ukraine.
After all, Russia didn’t have to start this war.