Is seizing Russian assets for Ukraine’s reconstruction a good idea?

Two years ago, on 24 February 2022 to be exact, President Vladimir Putin sent the Russian military into Ukraine, launching a full-scale invasion. Four days later, the Group of Seven (G7) and the European Union moved to freeze Russian assets held in their respective countries. Of the $600 billion assets frozen, $300 billion were deposits held by the Russian Central Bank (RCB).

Eight months later, in October that year, Ukraine President Zelenskyy urged the US to use the RCB’s assets in reconstruction efforts. A World Bank assessment at the time showed Ukraine would need $335 billion for reconstruction.

Though initially reluctant, Washington changed its stance when it ran into difficulties with the US Congress in securing congressional funding for Ukraine.  The New York Times reported the change in US approach on 21 December 2023.

US treasury secretary Janet Yellen raised the issue at the Sao Paulo meeting of G20 finance ministers this week. On 27 February, Yellen underscored the urgency of moving forward together with the Western allies to unlock the frozen Russian sovereign assets to help Ukraine but said the US had no “preferred strategy” for how to do so.

Yellen said there is a “strong international law, economic and moral case” for deriving value from the Russian assets, and doing so would also incentivize Moscow to negotiate a just peace with Ukraine, which now faces an estimated cost of some $486 billion to rebuild and recover.

She considered it “extremely unlikely” that any G7 move on Russian assets would result in a massive shift for currencies, given the uniqueness of the situation and what she called Russia’s brazen violation of international norms.

Yellen had been working hard on this project, hoping for a G7 decision by 24 February, the second anniversary of the invasion. Her goal now is to get the job done by June.

Despite her efforts, there are compelling reasons to argue that Yellen is unlikely to succeed.

First: French finance minister Bruno Le Maire publicly expressed skepticism at the G20 meeting. He was ‘convinced’ that there was no sufficient basis in international law to proceed. Any such move, he argued, would require support not only from G7 but also from G20.

Second: The bulk of the frozen assets are held within the EU, with the US holding about $5 billion. Euroclear, a Brussels-based central securities depository, holds a significant share, with total assets of €191 billion. Euroclear chief executive Lieve Mostrey has said any move to seize or use as collateral the said assets would substantially affect “the trust in the Euroclear system, the trust in the European capital markets, the trust in euro as a currency.”

Euroclear is facing more than 50 court cases in Russia.

Third: Italy, Germany, and the European Central Bank are also opposed to the Yellen project. The Europeans believe that Washington wants to shoot off Europe’s shoulder.

There is another more modest project that the EU is working on: to use the profits made from the assets for Ukraine’s benefit. The EU Council has taken a decision and Euroclear is prepared to comply.

Apart from geopolitical complexities, various elements of domestic politics are at play here. In the US, President Joe Biden is running into serious opposition from a section of the Republicans in the Congress who are against sending more aid to Ukraine.

There is a ‘Ukraine fatigue’ in Europe, too, as Russia’s military is gaining and the morale in Ukraine is flagging.

Emmanuel Macron of France has said publicly that he won’t rule out sending NATO troops to Ukraine. However, his stand faced protests from the US, the UK, and Germany. The French foreign office had to clarify that Macron did not commit to sending combat troops.

In response, President Putin, during his annual state of the nation address, warned that the presence of NATO troops in Ukraine could trigger a nuclear response from Russia.

In conclusion, there is a certain level of naivety in Yellen’s coercive plan to persuade Putin to agreeing to a “just peace.”

What is the legal basis for the Yellen project?

Bloomberg reported that 10 experts have put out a joint statement arguing that the Yellen project is legally sound. Philip Zelikow, a former US diplomat and currently with the Hoover Institute, found a precedent in using Iraq’s funds to compensate businesses and individuals who incurred losses because of Baghdad’s invasion of Kuwait in August 1990.

The only fly in the ointment is that the decision was taken by the UN Security Council and hence valid in international law. Considering that China and the US are members of the UNSC, there is never going to be a consensus in the council on this issue. The only option the West has is to use G7.

But the big question remains: Can the G7 claim the same powers as the UN Security Council?