When Russia invaded Ukraine, the United States (US) and its allies responded financially. They froze billions of dollars belonging to the Russian government and wealthy Russian elites. All that money, held in foreign banks beyond Russia’s authority, is now beyond limits to Moscow. It’s a significant economic hit since Russia can’t use that cash to fuel the military effort. By securing that pot of riches, the United States and its allies are pinching Russia’s economy and undermining its ability to continue fighting in Ukraine. Denying them that cash supply threatens Russia’s ability to continue its war efforts. This asset freeze is a potent weapon that shuts down a critical resource stream that keeps Russia’s military machine going.
At present, the European Union (EU) and the US are implementing different strategies regarding the $300 billion worth of frozen Russian assets.
EU’s strategy focuses on using the earnings generated by frozen funds rather than the principal amount itself. The EU has established legislation that allows them to capture these investment gains, which are projected to be worth more than €4 billion per year. The funds raised through this means might then be channelled to Ukraine’s rehabilitation via the EU budget. This strategy is viewed as slower but maybe more legally sound.
On the other hand, the US is mulling a more extreme approach, directly taking a portion of Russia’s frozen assets. This strategy is seen as a faster option to help Ukraine, but it risks legal difficulties and concerns about jeopardising the dollar’s reserve position. The US authorities have yet to make a definitive judgement regarding confiscation.
There are several reasons why seizing frozen Russian cash is a complicated matter.
First and foremost, legal challenges are important. Seizing assets raises concerns about due process, as property rights are protected by law, and owners need an opportunity to fight their assets’ seizure. A seizure could be challenged and reversed in court without adequate legal proceedings. This might be a propaganda triumph for Russia, undermining the entire legal foundation for the sanctions imposed.
Second, confiscation, particularly without clear standards, establishes a hazardous precedent threatening the rule of law. It might damage trust in the international financial system, which traditionally values private property. If governments take assets in times of crisis, it may discourage future foreign investment.
Finally, the impact on the dollar’s role as the world’s principal reserve currency is a major worry. If the US begins liberally confiscating assets, it may alarm other countries that keep their reserves in dollars. These countries may seek other currencies viewed as safer, potentially undermining the dollar’s worldwide supremacy.
The EU confronts substantial challenges in confiscating the profits from the reinvestment of frozen Russian sovereign assets for 2022-2023, totalling €5.2 billion, in the foreseeable future. According to a European official involved in developing a process for expropriating Russian money, the EU will have challenges in retrospectively seizing revenue earned before February 12, 2023, when the EU decides on the status of income from frozen assets. The Belgian depository Euroclear has already declared this €5.2 billion as operating profit, which the Belgian government will tax. While the EU hopes to receive €15 to €20 billion from Russian assets between 2024 and 2027, there is still disagreement within the European Commission about how to use these potential funds, with some favouring support for Ukraine’s budget and others advocating for investment in the EU’s defence industry to produce weapons for Kyiv.
The Russian money that is the subject of American interest is the $50 to $60 billion currently held in US banks and financial institutions. The REPO Act, an acronym for Rebuilding Economic Prosperity and Opportunity for Ukrainians, is currently under consideration by lawmakers. It would grant the US government the authority to confiscate the frozen Russian funds if approved.
However, there are still many unknowns about actually seizing that money. Nobody knows for sure how much they will take. The final figure will be determined by what precise guidelines are incorporated into policies and laws and whether any legal challenges arise to prevent certain aspects of it from being implemented.
Furthermore, there has been talk of doing the entire asset seizure procedure as a collaborative effort with other countries rather than the US acting alone. So, international cooperation may impact the amount of Russian funds they obtain.
While the goal is to raise $50-60 billion, converting those frozen assets into cash for Ukraine is proving to be a difficult process with numerous obstacles. The devil will be in the details of policymaking and bargaining with partners to determine who gets what share of Russia’s pie.
While the idea of seizing Russian assets to punish Moscow’s aggression sounds appealing, the REPO Act faces significant opposition. Critics raise concerns about the legality of confiscating private property, arguing that it violates international laws and property rights and could spur lengthy court battles. There are also fears it sets a dangerous precedent that other nations could exploit by seizing foreign assets, injecting uncertainty and instability into global finance. Some worry that such a provocative move could dangerously escalate tensions with Russia, potentially leading to unpredictable and severe consequences. Doubts also linger about the effectiveness of asset seizures, as Russia may find alternative funding sources while the legal process drags. As an alternative, opponents suggest focusing efforts on stricter multilateral sanctions or establishing a mechanism to return seized funds to Russia after the war’s end, contingent on certain conditions being met. The challenging debates around the REPO Act highlight the complexity of wielding economic warfare.
As the REPO Act moves through Congress, reactions have been divided along partisan lines, reflecting the larger debate surrounding the plan. Democratic senators overwhelmingly favour the idea, seeing it as a way to condemn Russia’s aggressiveness while immediately delivering aid to Ukraine. Republican opposition, on the other hand, has rallied around fears about legal challenges, setting an unfavourable precedent for asset seizures and perhaps escalating tensions with Moscow.
At this early stage, determining a precise vote count on March 13, 2024, is uncertain. The REPO Act is still being debated and revised in congressional committees, and there has been no formal floor vote yet. Furthermore, senators’ positions may shift as the debate continues. However, some evidence points to a level of existing support: the House already supported a non-binding resolution supporting the President to pursue Russian asset seizures in May 2022. Public opinion polls also reveal general support for using confiscated Russian funds to assist Ukraine, which may convince some indecisive senators. The breakdown of votes for and against the contentious REPO Act may become clearer as the parliamentary process progresses.