Options for Thawing frozen Russian Assets

The cost to rebuild Ukraine is estimated to be somewhere between 483€ billion and 927€ billion. Meanwhile, Russian financial assets frozen abroad amount to around 300€ billion. While not nearly enough, these assets constitute a potential source of aid to Ukraine that would not have to come out of the state budgets of Ukraine’s allies. Economic sanctions have thus far failed to force Russia to cease its aggression towards Ukraine and it is unlikely to pay reparations under any probable scenario. The frozen assets could play a role in addressing both these problems. On the second anniversary of the full-scale invasion, I want to break down the discussion on the strategic benefit of those assets and explain a new proposal to invest them into catastrophe bonds, which has been put forward this month by Maximilian Hess and Yakov Feygin. 

First, what are the funds? 

Russia keeps a significant portion of its foreign reserves abroad. Most of these reserves are owned by the Russian Central Bank. After the 2022 invasion, Russian assets kept by Western financial institutions have been frozen; this does not constitute a change in ownership. However, since the Western institutions holding Russian assets are not allowed to do business with Russian financial institutions anymore, the Russian Central Bank has no access to the profits and cannot buy, sell, or manage the assets.   

The discussion on frozen assets has been centred around Euroclear, a financial intermediary located in Belgium. Currently, it manages 180€ billion worth of frozen assets belonging to Russia’s central bank. The measures which will eventually be applied to the Russian assets held by Euroclear will likely set a precedent for how other entities deal with frozen Russian assets. 

How could they help Ukraine? 

After 2014 (and in the early stages of the full-scale invasion) much media attention has been given to freezing and the subsequent seizure of the assets and luxury possessions of Russian oligarchs in the West. While it has been fairly rare, there have been instances of Western governments seizing property. This essentially means the ownership has changed, expropriating the oligarch in question, and transferring the asset to the state, which then has full discretion to use or sell the seized asset. 

The reason that this is such a rare occurrence is the high legal threshold. While the conditions and laws on seizing foreign property differ from country to country it is generally necessary to prove that the asset in question (or its owner) is directly connected to a crime as defined by law. Following this procedure, assets have been seized after their owner was found to be in violation of the western sanctions against Russia or involved in money laundering.  

“As a matter of practice, neither international nor domestic criminal law assigns criminal responsibility to states as such, but rather to those who act on a state’s behalf.”1 

While rare in the case of individuals, assets owned by the Russian state in the form of central bank assets cannot be seized that way. Regardless, it would be near impossible to establish a direct connection between the country’s foreign reserves and concrete criminal activity. 

Short of seizing the assets, the G7 and the EU agree that Euroclear’s windfall profits from the Russian assets should be used to support Ukraine. The most popular proposal is as follows: The financial instruments held by Euroclear should continue to generate revenue, which is then kept by Euroclear, since it is not allowed to interact with the Russian asset owners; this revenue is reinvested which in turn delivers profits; profits made by Euroclear (around 3€ billion for the first three quarters of 2023) will be taxed extraordinarily, and the levies will be collected from Euroclear and transferred to aid Ukraine.  

Why have the assets not been seized? 

Aside from the previously mentioned legal hurdles, the main reason these assets have not been seized is the fear of potential consequences. It could cause a loss of trust in the currencies and the financial markets of the G7 countries leading to an outflow of investments, a further weaponization of financial institutions and retaliatory measures against western businesses. 

Without giving any judgement as to the plausibility of those fears, it suffices to say they appear threatening enough for political decision-makers to leave the assets untouched for now. It should be noted that, even if there is political will, it will take considerable time to develop a legal mechanism in different countries to actually seize and transfer the money, all the while treading barely explored territory in international law. 

What are alternative ways to use them for Ukraine’s benefit? 

Earlier this month, the Belgian government suggested a plan that would involve using seized Russian assets as collateral for debt that Western allies could use to provide immediate financial aid to Ukraine. I want to shed the spotlight on another solution that stops short of outright confiscation: using the assets to buy Ukrainian catastrophe bonds.  

Here is how this would work: As usual, the bonds would pay interest on the initial amount invested and the investment would be returned when the lifetime of the bond expires. In addition, a trigger is defined. The example in the proposal is a certain amount of damage to Ukrainian infrastructure. Should this condition defined as a trigger be fulfilled in the future, the buyer loses its initial investment and the party issuing the bond, in this case the Ukrainian government, can use it to finance the reconstruction of the country. Since the bond and possible interest would still be owned by Russia, it is suggested to pay the interest not in cash, but in further bonds.   

Using this scheme, two scenarios are possible: either the trigger occurs, or it does not. If it does, Ukraine has the initial investment at its disposal to rebuild the country without its European allies having to seize the assets. If it does not, the negative events defined as a trigger do not occur and Russia would not have increased its wealth as the interest is not paid in cash. 

This would incentivize Russia to curtail its aggression and ensure that it contributes to the reconstruction of Ukraine. Regardless of whether this approach would deliver results, it is important to keep working on a plan to use the frozen Russian assets as leverage to repair the damage already done by the war and minimize future suffering. 

Estimated Reconstruction Cost: https://www.worldbank.org/en/news/press-release/2023/03/23/updated-ukraine-recovery-and-reconstruction-needs-assessment 

https://www.weforum.org/agenda/2024/02/even-as-the-war-persists-ukraine-is-rebuilding-heres-how/ 

New Proposal: https://www.ft.com/content/26f7d8e3-1e2a-49ae-9e02-38200cf513f6? 

Russian Central Bank Assets Abroad: https://www.reuters.com/world/europe/what-where-are-russias-300-billion-reserves-frozen-west-2023-12-28/  

Euroclear: https://www.ft.com/content/68af1b50-2088-4128-a2fd-f35cde914eaf  

and its profits: https://www.ft.com/content/88ff88c4-6efe-40b7-b635-80eb6bd73c2c  

Seizing Oligarch Assets: https://www.forbes.com/sites/giacomotognini/2023/04/14/inside-the-150-frozen-homes-yachts-and-jets-of-sanctioned-russian-oligarchs/  

Legal Hurdles: https://foreignpolicy.com/2023/01/13/putin-sanctions-oligarchs-freeze-seize-assets/  

Paul B Stephan, Seizing Russian assets, Capital Markets Law Journal, Volume 17, Issue 3, July 2022, Pages 276–287, https://doi.org/10.1093/cmlj/kmac014 

G7 Backing: https://www.ft.com/content/78692f48-bca5-49fb-bca0-fa103e5df58a  

ECB Concerns: https://www.ft.com/content/4e6499e0-33db-423a-a74b-528118792d22  

Fears of Retaliation: https://foreignpolicy.com/2023/01/13/putin-sanctions-oligarchs-freeze-seize-assets/  

Increasing Weaponisations of Financial Institutions:  

Lucia Quaglia & Amy Verdun (2023) Weaponisation of finance: the role of European central banks and financial sanctions against Russia, West European Politics, 46:5, 872-895,  

DOI: 10.1080/01402382.2022.2155906 

Belgian Proposal: https://www.ft.com/content/d4477c47-b338-492f-b5a8-6bfb51c09c80  

Paul B Stephan, Seizing Russian assets, Capital Markets Law Journal, 17 (3), July 2022, p. 284 https://doi.org/10.1093/cmlj/kmac014