• Stefano Merlo

Russia’s frozen assets: what becomes of them now?


Drafting a list of Russian oligarchs’ property was one of the first moves of any western government after the invasion of Ukraine. Politicians lined up on news channels emphasising how tough they had been towards Putin’s regime and how many Russian assets are now in the hands of authorities. Nearly three months after the conflict began their initial strategic role - namely to convince Putin’s circle that their wealth would be at stake if they didn’t stop the Kremlin’s invasion - has lost its significance. As Ukraine enters the fourth month of war the handling of these frozen assets raises different normative issues. First, one can ask how these funds should be used. Second, and relatedly, who should benefit from them? Depending on how one answers to these questions, two follow-up issues arise concerning the practice of allowing governments to move from freezing to seizing sovereign assets. This short piece sets out some of the considerations that must be accounted for in answering these interrelated questions, including the state of the conflict and Russia’s financial position.


What should be done with foreign Russian assets and who should have a claim against them?


Since the start of the Ukranian invasion roughly 300 billion of Russia’s foreign assets, more or less the size of Finland’s GDP, have been frozen by western governments. While this clearly didn’t stop Vladimir Putin’s plan, it surely made it particularly hard for Russia to use the dollars accumulated abroad to finance its economic policies. The simple fact that these assets are recorded on the balance sheets of institutions that lie beyond Russia’s jurisdiction makes them perfect ‘hostages’ in the financial war that wages parallel to one on the ground.


The first normative issue has to do with the role these assets should play in the conflict. One could argue that if anything can get Russia to the negotiating table, then that is going to be the Russian fortunes that have accumulated beyond its borders. At the same time, using these assets as a bargaining chip jeopardises any prospect of compensating the victims of this conflict: the thousands families of soldiers and civilians that died during the occupation, the nearly 5 million refugees who had to flee their homes in the middle of the night and those who won’t have a home to return to when they eventually come back. Simply put, if these assets are used in international diplomacy there will be hardly any prospect of Ukrainians using them to rebuild their country.


Moreover, one can question whether all frozen assets should be used in the same way. While the properties of Russian oligarchs can arguably be seen as being illegitimately obtained and used to sustain Putin’s regime, the frozen assets of the Russian Central bank are publicly owned and ultimately belong to Russian citizens who may not have much agency over Putin’s war. It is true that, in principle, both kinds of assets have been used in support of an odious war, yet we might want to show that the reasons for seizing them are different. One might even argue that only the property of Russian millionaires in London should be seized, while publicly owned assets should only remain frozen.


Should governments be able to seize, not just freeze, foreign assets?


For some legal scholars weighing the cost and benefits of using these assets for reconstruction or diplomacy only means pushing a more fundamental problem aside. A frozen asset cannot be used, sold or transferred by its owner, but that doesn’t imply that the government can freely choose what to do with it. As a matter of fact, most constitutions entrench the principle that the state cannot take away private property and put it to public use without some form of compensation or a fair trial. The discussion among legal scholars on whether foreign assets are granted the same rights as domestic ones has been raging for months now and I gladly avoid the task of summarising it. Suffice to say that, allowing governments to seize the assets of a foreign country, with whom there are no official hostilities, could leave too much room for discretion. Will future governments use these powers appropriately? What if the next sitting government decides to seize the assets of a foreign country in the context of a trade war? The risk here is that increasing the ability of executives to interfere with other countries will disincentive them to use normal diplomacy.


Moreover, using frozen assets - most of which are owned by the Russian state and its administrations - might be against international law and the principle of sovereign immunity that states grant to each other’s property. We may want to take this money from the foreign exchange reserve of the Russian Central Bank and give it directly to Ukrainians in need. This would be in breach of international law, but perhaps compelling, nonetheless. Why though, might states be reluctant to break international law in favour of compensating victims? One answer is because the international order relies on compliance with norms. If the US or UK (for instance) set a precedent of being able to take money legitimately owned by another country and redistribute it according to their version of justice, imagine the risks not only as a result of the principle, but for international cooperation in general.


Incompatible Strategies


Adding Russia’s potential default to the picture makes formulating an answer to these questions even more complicated. On May 25th the US administration decided to make it impossible for Russia’s money to reach its foreign creditors, so that the country would technically be in a situation of default. When bondholders don’t get paid because a country doesn’t have any funds left, other financial institutions can also refuse future lending so that, in practice, the country cannot rely on foreign cash to fund all its programs. From the US perspective this follows a simple tactic: if the money that Russia borrowed from banks and investors abroad in the previous years cannot be paid back, then this will deter any other American lender from funding Putin’s regime.


However, from the point of view of helping Ukrainians, the American strategy of making Russia default might be counterproductive. Technically, a sovereign bond is nothing more than a financial contract between a creditor and debtor. If the latter cannot fulfil the terms that have been signed, the former can try to get its money back through legal means. In this case, international banks could ask an American court to be compensated as a result of Russia breaching the terms of the bond contract. If the court finds that Russia should pay its creditors, then the first pot of money that can be readily seized and used for compensation will be those frozen Russian assets that are already on American soil. In short, if Russia defaulting for the first time since the Bolshevik revolution in 1917 is a real possibility, then the class of claimants of these frozen assets becomes even longer.


This would clearly be the worst possible scenario. Those that financed Putin’s cruel war by lending their money to the Russian state and, indirectly, bet on its success, should be the ones bearing the risk of a default. Instead, the existence of these frozen assets and the possibility that courts could use them in case of a lawsuit by bondholders against Russia, allows international banks to reduce their risk. Of course, this comes at the expense of the Ukrainian population.


As is often the case in international relations, the only certainty is that everything can change very quickly, so giving an answer to these questions is particularly complicated. For instance, the success of the Ukrainian army at reclaiming their territory would make the option of using the frozen assets as a compensation for the victims of the conflict more attractive. Similarly, the success of the legal claim of Russian bondholders should not be taken for granted, as it depends first and foremost on Russia’s capacity to compensate them despite the financial hurdles set up by the US. A 26 June deadline for Russia to pay its creditors looms. Some kind of answer to the questions set out here will have to be found.











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