Analysis:
The Unintended Consequences of Seizing Russian Assets
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Imagine you are the captain of a British Royal Navy battleship in World War I. After a fierce battle in the North Sea, you have destroyed but not sunk a German vessel. Before returning to port, you will do something that many other captains have done before you: seize the defeated enemy ship on behalf of your government. Such a step is a perfectly legal practice enshrined in the Prize Law, which dates back to the 18th century. The rule may sound obscure, but it remains in effect: In 2016, Israel invoked the Prize Law to seize the Zaytouna-Olivia, a Dutch-flagged ship that had attempted to break Israel’s maritime blockade of Gaza. The reasoning was that modern-day Israel is a successor to British Palestine, so that the British Naval Prize Act of 1864 applied. The Prize Law shows that the confiscation of enemy assets in wartime has a long tradition. Britain even gave a share of the seized ships’ value to victorious captains, a practice it only stopped in 1948.
Imagine you are the captain of a British Royal Navy battleship in World War I. After a fierce battle in the North Sea, you have destroyed but not sunk a German vessel. Before returning to port, you will do something that many other captains have done before you: seize the defeated enemy ship on behalf of your government. Such a step is a perfectly legal practice enshrined in the Prize Law, which dates back to the 18th century. The rule may sound obscure, but it remains in effect: In 2016, Israel invoked the Prize Law to seize the Zaytouna-Olivia, a Dutch-flagged ship that had attempted to break Israel’s maritime blockade of Gaza. The reasoning was that modern-day Israel is a successor to British Palestine, so that the British Naval Prize Act of 1864 applied. The Prize Law shows that the confiscation of enemy assets in wartime has a long tradition. Britain even gave a share of the seized ships’ value to victorious captains, a practice it only stopped in 1948.
Since Russia’s invasion of Ukraine, experts have been pondering whether Western governments should seize the portion of Russian central bank reserves deposited in the West. These assets, worth around $300 billion, are already frozen (or “immobilized” in legalese). The debate is about actually seizing these holdings—like those foreign ships—and transferring them to Ukraine to finance Kyiv’s war effort or reconstruction. Like many debates on Russia, the discussion is polarized, with two camps presenting seemingly irreconcilable views. On one side, those arguing in favor of seizing Russia’s state assets explain that the moral case for doing so is strong. On the other side, many legal experts have serious reservations about the legality of such a course of action. But focusing on these moral and legal arguments eclipses the broader picture: Seizing Russian central bank reserves comes with economic, financial, and geopolitical implications that need to be taken into account to reach a balanced decision on this tricky debate.
1. Definitions matter: Seizing Russia’s central bank reserves would not be a sanction. Sanctions are temporary policies that inflict economic pain in order to provoke a change in the behavior of their target. Sanctions are both sticks and carrots, and they are meant to be lifted if they are successful. In particular, sanctions on Moscow seek to degrade Russia’s ability to wage war, for example by curbing the country’s revenues from hydrocarbon exports. As such, seizing Russia’s assets does not meet the definition of a sanction. It would be a permanent, punitive step that would not affect Moscow’s budget directly. Central bank reserves serve to prop up currencies, not plug fiscal deficits.
2. Confiscating Moscow’s assets would not make a big financial difference for the Kremlin. Russia’s central bank holdings are already frozen, and there is virtually no chance that the Kremlin could regain access to them as long as the war is raging. If Russian reserves are not transferred to Ukraine during the course of the war, there is a high likelihood that these assets will be part of the reparations that Moscow will eventually have to pay as part of a peace agreement with Kyiv. This explains why some policymakers—most notably former U.S. Treasury Secretary Larry Summers and former World Trade Organization chief Robert Zoellick—argue that transferring the assets now, as a deposit against future reparations, makes sense.
3. Seizing Russia’s assets is unlikely to fuel global de-dollarization efforts. A key argument for those who oppose seizing Russia’s reserves is that such a move will accelerate attempts by emerging economies to shift away from Western currencies (a move also known as de-dollarization). This is only partly convincing: De-dollarization is a long-term, structural trend that predates sanctions on Russia. Data from both the European Central Bank and the U.S. Federal Reserve show that global de-dollarization efforts have not accelerated meaningfully since Russia’s invasion of Ukraine, both when it comes to currencies used for trade (the dollar and euro dominate) and foreign purchases of U.S. securities (they are broadly stable).
4. Transferring Russia’s reserves would require cooperation from Euroclear. Russia’s immobilized reserves are mostly made up of European government bonds held in electronic form. Three-quarters of these assets are held by Euroclear, a Belgian company that acts as a trusted depository for global securities. Euroclear and three other Western firms—Clearstream in Luxembourg, DTCC in the United States, and Jasdec in Japan—dominate the global market for such services, which are at the core of global financial market infrastructure. In practice, transferring Russia’s reserves to Ukraine would require collaboration from Euroclear.
5. Weaponizing Western financial channels like Euroclear fuels financial fragmentation. In 2012, the United States and European Union cut Iran off from Swift, the Belgium-based cooperative connecting banks across the world. This was a turning point for many rogue states, which started to design alternative financial mechanisms that would be sanctions-proof. If Euroclear were to facilitate the seizure of Russian reserves, emerging economies could take note that, like Swift, Western securities depositories have become untrustworthy. Non-Western alternatives to Euroclear, such as China’s Securities Depository and Clearing, could become more appealing for non-G7 economies, fueling financial fragmentation.
6. Financial fragmentation undermines the long-term effectiveness of sanctions. The risk of further eroding trust in Western financial channels explains why the United States does not want to act alone when it comes to seizing Russia’s reserves: Washington would very much prefer to spread the potential blowback that such a step would entail across like-minded allies. The bigger picture is that financial fragmentation comes with massive consequences. Over time, the rise in alternative financial mechanisms risks making Western sanctions ineffective. It would also make it harder for Western security services to track the financial transactions of groups involved in, say, terrorism or nuclear proliferation.
7. Getting Russia’s reserves could be a double-edged sword for Kyiv. Receiving $300 billion—an amount roughly twice Ukraine’s current GDP—would obviously help Kyiv to finance its war effort. However, there are two other, longer-term factors to consider. First, those American politicians who advocate ending financial support to Ukraine would probably find it easier to advance their views if they can explain that Kyiv has just received a massive pot of money. Second, receiving and possibly spending the reserves now would deprive Kyiv from the option of using these assets as a bargaining chip in peace negotiations.
8. Seizing Russia’s reserves risks fueling resentment against Western states. Outside Western countries, the dominant view is that the war in Ukraine should stop as soon as possible, even if it means that Kyiv cedes part of its territory, a view that partly stems from Russia’s successful disinformation efforts in non-Western states, notably in Africa. Yet this view also reflects rising resentment against Western countries. The debate on Russia’s reserves is closely followed around the world and could fuel this trend, with policymakers in many emerging economies voicing serious reservations about seizing these assets.
9. Seizing Russia’s assets could fuel the perception of double standards. The intense controversies that have emerged around the legality of seizing Russia’s reserves show that such a move is far from straightforward under international law. Whatever their outcomes, these fights fuel the growing perception that Western states are happy to tweak the rules-based order if it suits their priorities, for instance by creating new legislation that is tailor-made to seize Russia’s reserves, as Canada has already done. To these critics, this reinforces the sentiment that the West is applying a double standard in Ukraine, reacting far more strongly to war on its doorstep than to wars elsewhere.
10. Confiscating Moscow’s reserves could set a precedent that Beijing or others could use. Western countries are on the right side of the moral argument to support Kyiv, not to mention that a Russian victory would be a catastrophe for those who support Western liberal values. However, there is no reason to believe that in the future, China, India or other emerging economies will not assume that they are also on the right side of whatever conflict that could arise between them and Western states (for instance, around Taiwan). If Western democracies have previously set a precedent by seizing Russia’s assets, how will these states manage to convince anyone that China or India have no right to confiscate Western holdings if they so wish?
Would the debate around Russia’s reserves be as intense if the amount at stake were smaller? It is probably the massive number that makes a seizure so tempting. However, confiscating the Russian central bank’s foreign-exchange reserves would come with huge economic, financial, and geopolitical unintended consequences. Perhaps the moral arguments in favor of seizing these assets outweigh the consequences. Acknowledging these impacts, however, is the first step towards reaching a balanced conclusion in this thorny debate.
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Agathe Demarais is a columnist at Foreign Policy, a senior policy fellow on geoeconomics at the European Council on Foreign Relations, and the author of Backfire: How Sanctions Reshape the World Against U.S. Interests. Twitter: @AgatheDemarais
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