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Two years ago, G7 countries froze hundreds of billions in frozen central bank reserves Russia held in their currencies.
It was a bold move at the time designed to paralyse Russia’s ability to wage war – and the ruble went into freefall. Now though, the Russian economy is on a war footing and this $300 billion is still sitting there – frozen and untouched.
G7 countries recently decided to leverage this money to loan Ukraine $50 billion – far less than the $300 billion principal – and declared it a win for western unity.
In reality, the West is effectively sitting on a war chest of an unfriendly adversary’s money and it can’t decide whether to take it, even though doing so is legal, economically feasible, sends a strong message to dictators like Vladimir Putin, and gets Ukraine a huge amount of money at no cost to the western taxpayer.
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G7 leaders have tied themselves in knots of financial engineering just to come up with a watered-down compromise that European leaders in particular can dress up as a “creative solution” that “mobilises” Russia’s frozen assets.
We must not fall for this line.
These “creative solutions” do everything possible to avoid touching the assets themselves. The $3 billion or so in interest generated on the assets every year is supposed to pay off the loan. In the end though, Russia wouldn’t be paying for Ukraine’s defence and reconstruction – investors would. Plus $50 billion will only last Ukraine about a year.
If the West wants to hold Russia accountable and give Ukraine the resources it needs as fast and effectively as possible – there’s only one solution – to seize all $300 billion of Russia’s frozen state assets.
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The UK, Canada, and US have all voiced support for full seizure. US Congress has gone so far as to pass the REPO Act, which empowers the President to confiscate Russian state assets denominated in US dollars and transfer them to Ukraine. Yet European G7 members – particularly France and Germany – remain dedicated to tying themselves in knots to avoid touching Russia’s assets.
Why are they doing this? In a word – fear.
Fear and Loathing in the G7
If you speak to government staffers in Berlin, the professed fear is a legal one. German officialdom is afraid to break international law – as state assets are ordinarily supposed to be immune from seizure. More than one official here has opined that seizing Russia’s assets would make us “as bad as the Russians” – as if confiscating Russia’s assets to help Ukraine is somehow equivalent to a war of aggression that has seen death, destruction, rape, and torture from Bucha to Kharkiv.
But the US REPO Act and recent Estonian legislation in the EU dispel this argument using the international doctrine of countermeasures – endorsed recently by eleven top international lawyers. Basically, states can undertake actions that would normally be illegal – like seizing Russia’s state assets – when a state has grossly violated international law, as Russia has.
So if seizing Russia’s assets is legal, might another fear be at play here?
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Yes. European Central Bank head Christine Lagarde sounded the alarm recently over whether confiscating Russia’s assets would destabilise the euro. Saudi and Chinese diplomats are rumoured to have threatened Berlin with dumping their western currency reserves if they confiscate.
But as Anna Vlasiuk, a Fellow at the Kyiv School of Economics who specialises in international sanctions points out – Russia itself already tried to do this in 2014 – and never managed to find an alternative liquid enough to replace its western currency reserves.
“Around 89% of foreign currency reserves worldwide are held in G7 currencies. The dominance the West has here is simply overwhelming,” Vlasiuk told a German parliamentary hearing in early June. “Some countries can threaten to pull out of western currencies like the euro if the G7 confiscated Russia’s reserves. But in practice this is virtually impossible economically. Furthermore, any economic effects would’ve already happened when these funds were frozen two years ago.”
Governments like France and Germany may also be nervous about the number of private French and German businesses that continue to operate in Russia. But Russia is already expropriating German businesses there – including Deutsche Bank.
Are German and French governments actually fearful they’d have to bail their companies out if Russia expropriates them? That’s something they’d have to explain to their taxpayers. They also need to explain