It struck a lot of us as passing strange that in the aftermath of Russia’s second attack on Ukraine (the first in 2014), the response of many Western powers was to freeze Russia’s foreign exchange assets outside the country — that’s about $300 billion, throw in some sanctions, and pursue what appeared to be a strategy to repo a bunch of oligarchs’ yachts. To be fair, that’s a bit of an oversimplification, but the whole “let’s get the oligarchs — that’ll show Putin” strategy was a little weird. If anything, it made the oligarchs need Putin more. There were two things that would have hit Putin hard: not just freezing, but seizing Russia’s state assets outside Russia, and sanctioning Russian oil exports. More on that latter idea later.
Marc and I, all in on the need to defeat Putin before he starts adventuring beyond Ukraine, wanted to understand why no one has taken Russia’s money and given it to Ukraine. After all, the war’s costs for Ukraine are substantially more than $300 billion at this point. So, like our friends in Hollywood, we turned to the nepo-network, and brought in my husband, Stephen Rademaker to tell us how to grab the cash. (He’s a lawyer, represents Ukrainian interests, worked in the White House, State Department, House, Senate etc… But, full disclosure and all that.)
Turns out, seizing sovereign assets is not the done thing, and the United States doesn’t actually have the legal means to do it. Enter the REPO Act, now pending in both the House and Senate, supported by the White House, which would enable the President to do just that. Historically, there are reasons why countries shy away from snatching other states’ assets… What if they do the same to us? Is it legal under international law? (Depends.) On the other hand, there’s a simple way to think about this: Once the war between Ukraine and Russia is settled, are the United States and our friends in Canada, Europe, and Asia going to unfreeze that cash and hand it back to Putin? “Don’t worry Vlad, our taxpayers will foot the bill for rebuilding Ukraine. Enjoy your money.” Not a chance. So this seizure makes sense. And legally, let’s face the reality that Russia is the aggressor here. Aggressor states lose their sovereign immunity when they decide to, you know, invade other countries.
Now back to the question of why we’re letting Russia earn billions by exporting oil. This is a complex issue for — you guessed it — political reasons. Russia is a major oil producer, and oil exports are its main source of foreign exchange. In turn, that foreign exchange is what’s keeping Putin’s war machine going, letting him buy all those nice weapons and ammo from Iran and North Korea etc. The simplest thing should have been to slap sanctions on all of the buyers of Putin’s oil and be done with it. Donald Trump proved it can be done when he, through primary and secondary sanctions, reduced the flow of Iranian oil to a dribble during his term.
But… less oil and gas on the international market means higher prices. Americans don’t like paying high prices at the pump. And when they’re mad about that, they take it out on the incumbent. Hence, team Biden and our Euro allies had the brilliant idea of imposing a price cap on Russian oil. “Sure, Vlad, you can sell your oil, but at a substantial discount and that’ll mean less money for you.” Needless to say, all of Russia’s energy customers were delighted. Cheaper oil? Awesome. A win-win for both Putin and his customers (ahem, China, India et al).
After Navalny’s murder, some believed Biden would finally slap sanctions on Russia’s energy customers and actually begin to choke the Russian economy. (He didn’t.) Now let’s see once REPO is passed whether Biden actually seizes the $5 billion in sovereign Russian assets in the United States. What’s your bet?
HIGHLIGHTS
Did Putin see this coming?
SR: I don't think Vladimir Putin saw this coming. I mean, he thought he was sitting on about $600 billion that he could draw on to conduct the war. After day one, he lost $300 billion of it because it was about $300 billion that were in these foreign accounts that were frozen. The question ever since has been is the plan just to return this money to Russia after the war, or will we use this money to provide compensation to the victims of Russian aggression? That debate is continuing.
I do think under international law there is no question that first, Russia has committed aggression and that's a violation of the most fundamental principle of international law. Second, anyone who commits aggression in violation of international law is liable to the victims of their aggression for the damages they've inflicted. The most recent reliable estimate of the damages inflicted by Russia on Ukraine, it was issued by the World Bank about a year ago, February of last year, and the total at that point was $411 billion that Russia owed to Ukraine. Obviously, a lot more damage has been inflicted over the past year, so that number would be much larger today.
What are the risks of seizing Russian assets?
SR: There have been two principle objections that have been offered to confiscating the Russian assets and providing them to the victims of Russia's aggression in Ukraine. The first is an objection under international law that the Russian assets are the sovereign property of the Russian Federation. There's a widely respected principle called sovereign immunity. Those assets are supposed to be immune from being attached in a court proceeding in the United States or something like that.
The freezing of those assets, which occurred on day one after the conflict, has been generally accepted as consistent with international law. But taking the additional step of actually confiscating them, changing the ownership, or divesting Russia of ownership of those assets and giving them to someone else, that has been very controversial among international lawyers. Articles have been written by some international lawyers claiming that that would violate the principle of sovereign immunity and it can't be done. We've looked at this very carefully, and as have other scholars, and conducted analysis and come to a conclusion that there are principles under international law to permit the confiscation of these assets.
The second issue has been more of a practical consideration about how will other governments react if the Russian assets in the United States and Europe are confiscated. More specifically, only a country like China, which has not just billions, but perhaps over a trillion dollars in the United States, and probably a huge amount in Europe as well, won't they react to this by pulling their money out? What would the impact of that be on our economy and the continued use of the US dollar as the world's reserve currency? The Europeans have very similar concerns about what would the impact be on the Euro if they were to confiscate the assets.
Those are the two practical considerations. I could put it in perspective. The first one about international law is I would call it mainly a State Department concern. They're the guardians of international law. The questions about the impact on financial markets and the US dollar, that's more of a Treasury Department concern.
What about the risk of countries fleeing from the dollar because of the risk of confiscation — what’s called de-dollarization?
SR: We've got some experts out there who are bona fide experts and have studied this and will strongly assert that this could be done safely for the US dollar. I'm including here Larry Summers, who was Secretary of the Treasury under President Obama, Bob Zoellick, who was World Bank President under President Bush. They've been very active in advocating this idea.
Didn’t Russia surrender its sovereign immunity when it invaded a sovereign state?
SR: Well, those who say that there's no basis under international law for confiscating these assets would basically reject the argument you just made. The supporters of confiscating the assets rely on exactly that argument. There is a concept under international law called countermeasures, and the idea of countermeasures is that when a country has violated its international legal obligations, other countries who are harmed by that action are entitled to do things that would otherwise be illegal under international law in order to persuade the government that's violating its international obligations to come back into compliance with those obligations. So when I talked earlier about a theory that's been developed to justify taking this action, the theory is called countermeasures.
Would seizing assets create reciprocity risk?
SR: That concern has been wrapped up in the larger argument about aren't you going to harm the status of the US dollar as the world's reserve currency? And it is not an insubstantial concern, but I think we can all agree that the United States does not commit naked aggression, American allies do not commit naked aggression. The ICJ, the International Court of Justice, ruled that, in March of 2022, that there was no justification under the Genocide Convention for Russia to have invaded Ukraine, and it ordered Russia to suspend military operations. Russia has been in defiance of a world court ruling ever since March of 2022. There's a very clear case here of Russia acting in complete violation of the basic principles of international law.
Yes, it is foreseeable that the United States and its allies may conduct operations at some point in the future that others object to, that some will claim are aggression, but I think the United States government's satisfied that that's never the case. When we conduct operations, we do it in a lawful manner. And so, I think we'd be on solid legal ground, and Americans should be confident that we would be on solid legal ground. And then, there's the practical consideration of, okay, so I don't know how much money the Federal Reserve has on deposit in Moscow or in Tehran, I think it's probably zero in Tehran, and close to zero in Moscow, and not very much in Beijing. So there is the practical consideration that the US dollar and the Euro are the principal currencies in use around the world, and the threat that some other country's going to freeze the accounts of the US government, or maybe confiscate them, is one that is not a very substantial threat to us.
Could this model be used in case of a contingency in Taiwan?
SR: I do think China's a much more complicated case than Russia, because the US has much more economic exposure in China than it's ever had in Russia. But first of all, Vladimir Putin has threatened that if we confiscate the Russian assets that he will retaliate by confiscating Western investment in Russia. You're right that many US companies have announced their exit from Russia, but many of them are still trying to sell their assets in Russia, they're finding there are very few buyers, so that's why they're still... Maybe they've suspended operations, but their assets are still there and they're still trying to figure out how to offload them. So there is something left for Putin to confiscate if he wants to do that. That's a small version of what we would see in the case of a China scenario.
There is a bill before Congress called the REPO Act. Explain what it is all about, and why Biden now supports it?
SR: The legislation's necessary because today, the president has the authority to confiscate foreign assets if the United States is at war, so if Congress had declared war, or we were conducting military operations against a foreign government, the president would have existing statutory authority to confiscate the assets of that hostile government. That same authority doesn't exist if we're not at war. And so, the REPO Act, which you mentioned, would expand the president's authority to apply in a case like the one we faced with Russia and Ukraine.
It's rare for an administration to object to Congress trying to give the president more legal authority to do something, because even if the administration thinks we'll never use this authority, that's not a reason not to have the authority, they figure they can trust themselves not to abuse the authority. So I was always a little mystified that the Biden administration initially was resistant to the idea. I don't think they ever publicly declared their opposition, but the signals that they were sending were unfavorable. That has changed in the last four or five months, and I think press stories on this have suggested that the trouble they're having in persuading Congress to approve continued US military assistance to Ukraine is part of the rationale why the Biden administration feels they need to be doing more to signal their support for Ukraine.
A lot of Russian money is held in banks outside of the US. Even if we did seize the assets here at home, would it just be a drop in the bucket?
I don't think there's ever been a proper accounting of how much Russian money there is that's been immobilized around the world. The number that gets thrown around most commonly is about $300 billion worldwide. The one solid number is that there's about $200 billion in Belgium, which sounds a little strange, but there's a single bank there called Euroclear that is involved in processing payments. And for some reason, $200 billion of the $300 billion is in that single bank in Belgium. How much is in the United States? You see varying numbers. I think if you ask the Biden administration, they'd say it's about 5 billion that's actually in the United States.
What is the status of the REPO Act on Capitol Hill?
SR: I do think the fate of the REPO Act is somewhat mixed up with the question of what's going to happen to the Ukraine funding. But there are freestanding bills that were introduced in the House and the Senate. The bill was introduced in the House by Mike McCaul, who's the Republican chairman of the House Foreign Affairs Committee. He has Democratic co-sponsors. So his bill is bipartisan. Likewise in the Senate, the ranking Republican on the Senate Foreign Relations Committee, Jim Risch is the lead sponsor of the REPO Act. He has Democratic co-sponsors, Sheldon Whitehouse, who's a member of the committee and others. Both bills have been marked up in committee. In the Foreign Relations Committee there was one no vote, Senator Rand Paul of Kentucky, which probably doesn't surprise you to hear that. There were two no votes at the House Committee markup.
Those two no votes were cast by Democrats on the House Foreign Affairs Committee. But in both cases, overwhelming support in both committees. And as I indicated, the signals the Biden administration is sending are that they favor enactment of this legislation as well. So I don't think at this point the ultimate outcome is in doubt.
Could this money be used for Ukrainian military assistance instead of reconstruction?
SR: I suppose the practical answer to your question is, well, yes. I mean the money could be made available to Ukraine for as military assistance rather than for purposes of reconstruction. And of course there are some in the United States, including those who oppose providing further US military assistance who, "Well, we shouldn't ask the taxpayer to pay for this. Let's just use Russia's money instead." It sounds like a glib answer until you recall that there's only $5 billion in Russian money in the United States. So that 5 billion of Russian money that could be repurposed for military assistance is a drop in the bucket compared to the overall Ukraine account or appropriation that's been requested, which is $50 or $60 billion.
So I mean, it's hardly a substitute for the assistance that's needed. But secondly, I don't want to go into the international law weeds with you, but the justification under international law for confiscating these assets is very strong if they're being confiscated to satisfy a debt that Russia has to Ukraine, it's much weaker and frankly much harder to justify.
The aim of seizing assets is distinct from pure economic sanctions, right?
SR: The right way to think of this, this is providing compensation to the victims of Russian aggression. This is not about punishing Russia, the confiscation of the assets the immobilization of the assets was a sanction, and that was to deny Russia resources that it would otherwise be able to use to conduct the war. And I think you'd have to agree that if Russia had an extra $300 billion and change they would probably be spending it in ways right now that would support their war effort and be detrimental to Ukraine. So it is a good thing that they don't have access to that $300 billion.
Full transcript here.
SHOWNOTES
Rebuilding Economic Prosperity and Opportunity (REPO) for Ukrainians Act
Some Tips for Congress on How to Seize Russian Assets (Lawfare, January 24 2024)
US Senate panel backs 'big hammer' plan to seize Russian assets to help Ukraine (Reuters, January 24 2024)
Should we seize Russian funds to pay for the war in Ukraine? Commentators weigh in (Washington Post, 16 November 2023)
The U.S. is Considering Giving Russia’s Frozen Assets to Ukraine (Foreign Policy, 30 January 2024)
New U.S. Sanctions Targeting Russia (Covington, 2 January 2024)
On the Second Anniversary of Russia’s Further Invasion of Ukraine and Following the Death of Aleksey Navalny, Treasury Sanctions Hundreds of Targets in Russia and Globally (U.S. Department of the Treasury, 23 February 2024)
How Russia Dodged Sanctions in Seven Charts (Wall Street Journal, 24 February 2024)
This makes a lot of sense. Russia should be punished for violating the sovereignty of another country, and the best way to do that is to use its international assets to assist the country that was invaded. We should also consider similar actions against North Korea (not that they have a lot of assets) and Iran for providing the weapons that Russia is using.