The US and Europe want to transfer $300 billion of Russian assets to Ukraine

U.S. President Joe Biden's administration is signaling support for seizing more than $300 billion in Russian central bank assets stashed in Western countries and has begun urgent discussions with allies about using those funds to help Ukraine at a time of financial crisis, according to senior U.S. and European officials. weakens. Writes about this The New York Times.

Photo: IStock

Until recently, Treasury Secretary Janet Yellen argued that without Congressional action, seizing these funds "is not something that is legally permissible in the United States." Some senior U.S. officials feared that countries around the world would be hesitant to keep their funds in the New York Federal Reserve or in dollars if the United States set a precedent for seizing the money.

However, the administration, in coordination with the G7, has begun to reexamine whether it can use its existing authorities or whether it should ask Congress for authorization to use those funds. Support for such legislation is growing in Congress, giving the Biden administration optimism that it can gain the necessary powers.

Talks between finance ministers, central bankers, diplomats and lawyers have intensified in recent weeks, officials said, with the Biden administration pushing for Britain, France, Germany, Italy, Canada and Japan to come up with a strategy by Feb. 24, the second anniversary of the full-scale Russia's invasion of Ukraine.

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More than $300 billion of Russian assets in question have been outside Moscow's control for more than a year. After the invasion of Ukraine, the United States, as well as Europe and Japan, used sanctions to freeze these assets, denying Russia access to international reserves.

But the transfer of assets will take a significant step forward and will require careful legal consideration.

President Biden has not yet signed the strategy, and many details remain hotly debated. Policymakers must determine whether the money will go directly to Ukraine or be used to benefit it in other ways.

They also discuss what restrictions might be placed on these funds, such as whether the money can only be used for reconstruction and budgetary purposes to support Ukraine's economy, or whether it can be spent directly on the war effort.

The discussions took on even greater urgency after Congress failed to reach an agreement on military aid by the end of the year. Lawmakers abandoned the latest effort on Dec. 18 amid a stalemate over Republican demands that any aid be tied to curbing migration across the U.S. border with Mexico.

Alternative source of financing

Earlier, the Financial Times reported that the Biden administration has come to the conclusion that the seizure of Russian assets is possible from the point of view of international law.

A senior administration official said this week that even if Congress ultimately reaches an agreement to fund arms supplies to Ukraine and aid to its government, waning Republican support for the war effort and Ukraine's increasingly precarious military position make it clear that an alternative source of funding is desperately needed. .

U.S. officials said the Ukrainians' current funding has nearly dried up and they are trying to find ways to supply the country with artillery shells and air defense capabilities. Since Europe has also not promised fresh funds, many new ideas are being discussed about how to use Russian assets: directly, to guarantee loans, or using the interest they generate to help Ukraine.

“The amount of money we're talking about just changes things,” said Philip Zelikow, a State Department official during both Bush administrations and a senior fellow at Stanford University's Hoover Institution. “The fight for this money that is happening now is, in a sense, the most important campaign of the war.”

The seizure of such a large sum of money from another sovereign state is unprecedented, and such an action could have unpredictable legal and economic consequences. This will almost certainly lead to lawsuits and retaliatory measures from Russia.

Ukrainian President Volodymyr Zelensky mentioned those discussions in a video address to his country last week, saying that "the issue of frozen assets was one of the very important decisions considered" during his recent talks in Washington. He seemed to suggest that these funds should be used to purchase weapons: "The assets of the terrorist state and its affiliates should be used to support Ukraine, to protect lives and people from Russian terror."

In a sign that some European countries are ready to begin confiscating Russian assets, German prosecutors this week seized about $790 million from the Frankfurt bank account of a Russian financial firm sanctioned by the European Union.

The Biden administration has said virtually nothing publicly about the negotiations. State Department spokesman Matthew Miller said: “This is something we have considered. Both operational and legal issues remain." He said he did not have further details.

Access to assets

American institutions hold a very small portion of Russian assets—about $5 billion, by some estimates. But a significant portion of Russia's foreign reserves are held in U.S. dollars, both in the United States and in Europe. The United States has the ability to control transactions in its currency and use its sanctions to immobilize dollar-denominated assets.

The bulk of Russian holdings are believed to be in Europe, including Switzerland and Belgium, which are not members of the G7. As a result, diplomatic negotiations are underway on how to access these funds, some of which are held in euros and other currencies.

American officials were surprised that Russian President Vladimir Putin did not repatriate these funds before the invasion of Ukraine. But in interviews over the past year, they suggested that Putin did not believe the funds would be confiscated because they had remained untouched since his invasion and annexation of Crimea in 2014. And bringing the funds home to Russia would be another signal that an invasion is imminent, at a time when Putin has vigorously denied American and British accusations that he is preparing for military action.

One G7 official said the coalition was considering various options for using Russian assets with the aim of putting forward a unified proposal by the second anniversary of the war, when many senior officials will gather in Germany for the Munich security conference. The first debate focused on what would be permissible under international law and each country's domestic legislation, as well as consideration of Russia's likely legal responses and countermeasures.

How can you use money

Earlier this year, US officials said they believed the frozen assets could be used as leverage to force Russia to the table for a ceasefire; it is assumed that in exchange for this Moscow will gain access to some of its assets. But Russia has shown no interest in such talks, and officials now say the start of using the funds could push Moscow to come to the negotiating table.

Options that Western countries have discussed include directly seizing assets and transferring them to Ukraine, using interest and other profits from assets held in European financial institutions to benefit Ukraine, or using those assets as collateral for loans to Ukraine.

Daylip Singh, a former senior Biden administration official, in an interview this year proposed placing the immobilized reserves in an escrow account that Ukraine's Treasury could access and using them as collateral for new bonds Ukraine would issue.

If Ukraine can successfully repay its debt (within 10-30 years), then Russia could potentially get its frozen assets back.

“If they can't repay the debt, then I think Russia will have something to do with it,” said Singh, now chief global economist at PGIM Fixed Income. “Thus, Russia will be interested in the establishment of Ukraine as a sovereign independent economy and country.”

Legal basis

Developing a strong legal case has become one of the most difficult challenges for policymakers deciding how to proceed.

Proponents of seizing Russian assets, such as Zelikow and former U.S. Treasury Secretary Lawrence Summers, argue that countries that own Russian assets have the right to cancel their obligations to Russia and use those assets to pay off debts owed to Russia for violating international law under the law. called the international law of state countermeasures. They note that after Iraq's 1990 invasion of Kuwait, $50 billion of Iraqi funds were confiscated and funneled through the United Nations to pay compensation to victims in Iraq and other countries.

Robert Zoellick, the former president of the World Bank, argued to GXNUMX finance ministers that as long as they acted together, the seizure of Russian assets would not affect their currencies or the status of the dollar. He suggested that other countries were unlikely to rush to convert their money into another currency, such as the Chinese yuan.

“With reserve currencies, there's always the question of what alternatives you have,” noted Zoellick, who was a Treasury and State Department official.

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One of the obstacles to seizing Russian assets in the United States has been the Biden administration's belief that doing so legally would require an act of Congress.

“While we are beginning to look into this issue, it is not legal right now in the United States for the government to seize this money,” Yellen said. “This is not something that is legally permissible in the United States.”

However, Yellen has since become more open to the idea of ​​seizing Russian assets to help Ukraine.

Congressional factions have previously tried to include provisions in the annual defense bill that would allow the Justice Department to seize Russian assets belonging to sanctioned officials and send the proceeds from the sale of those assets to Ukraine to pay for weapons. But those efforts failed amid concerns that the proposals had not been thoroughly vetted.

With Ukraine short on funds and ammunition, the debate over how to provide additional aid could shift from a legal issue to a moral one.

“You can understand the precedent view of those who don't think assets should be seized,” said Mark Sobel, a longtime Treasury Department official. “Given the skirmishes and wars in many countries, one can easily argue that such a precedent could get out of control.”

However, Sobel argues that the barbarity of Russia's actions justifies the use of its assets to pay compensation to Ukraine.

“In my view, humanity dictates that these factors outweigh the argument that asset seizure would be unprecedented simply because Russia's abhorrent and incomprehensible behavior must be vigorously punished,” he concluded.

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