Not the Money Ukraine Needs: the West Doesn’t Dare to Transfer Frozen Russian Assets

In connection with the parliamentary elections in the EU and the upcoming presidential elections in the United States, Ukraine’s partners continue to actively discuss the transfer of frozen Russian assets to Ukraine. They even find common political solutions. But, despite all these visible shifts, one should not rejoice in such news, and here’s why.

On May 27, 2024, at a summit in Italy, G7 representatives made a statement about the potential use of USD 285 billion of frozen Russian currency reserves. The partners never made the final decision but made “progress” in the discussion. However, this could not be called progress yet.

What did they agree on?

The G7 leaders promise to approve a specific mechanism this week, but it is already clear from the statement that not all Russian assets would be confiscated, but only interest rates on them. Moreover, these funds will go not to Ukraine but to its creditor.

The plan looks as follows: it is not the USD 285 billion currently frozen by Ukraine’s allies that will be seized, but the interest rate received as an unpredictable profit from investing these funds. When we talk about investing, we mean in particular securities owned by Russia, which still generate income through deposit rates in the market. The amount of such unpredictable income is estimated at several billion dollars a year, but it is proposed to charge not all the income, but only the interest rates on it.

This covers primarily assets placed in EU depositories, in particular Euroclear in Belgium. Earlier, the EU Council approved the decision to transfer to Ukraine part of the interest accrued on the sovereign assets of Russia, frozen in the European Union, but it has not yet been detailed and implemented. (version updated after publication).

Due to the fact that the interest on the investment of frozen Russian assets obviously will not cover the losses that Russia caused to Ukraine for more than 2 years of full-scale invasion and will neither cover the existing military needs of the state, the United States proposed another way: to provide Ukraine with a loan of USD 50 billion.

So that Ukraine does not have to repay this loan, it is proposed to be provided as a pledge of the above-mentioned interest on Russian assets. Another important point is that, most likely, we are talking only about the interest that will be received after the decision on confiscation is made. That is, the accumulated income for 2 years of the full-scale invasion is not to be collected, referring to the prohibition of the retroactive effect of the law in time.

From all that has been described, it seems that the proposed mechanism is a kind of balance of political interests of Ukraine’s partners, which, if not minimizes, at least delays the legal, economic, and political risks for an indefinite period. The direct recovery of Russian assets will take place only when the loan matures.

But for Ukraine, such a decision is more of a humiliating compromise than an effective effort against the aggressor. In addition, practical issues regarding the implementation of the developed mechanism have only increased.

What is the problem with such “confiscation”? 

First of all, the question remains about who exactly, in what way, and for how long will pay Ukraine the mentioned USD 50 billion.

From the experience of making such unpopular decisions, it seems that this should be a shared responsibility because, during the full-scale invasion, no country has yet confiscated frozen Russian sovereign assets. The United States seems to be the closest to such a prospect, as last month Congress passed the REPO Act, which empowers the president.

However, according to various estimates, less than a third of all frozen Russian assets are stored in the United States. Most of them are concentrated in the EU, which is most cautious about the issue of confiscation and relies on legal and economic risks. Despite this, at this stage, it is clear that the issue of confiscation is primarily political, and the full-scale aggression of Russia has shown that the economic European Union lacks political unity.

International and national lawyers long ago answered the question about the legal possibility of confiscating sovereign assets and overcoming their immunity. The international doctrine of “countermeasures” allows confiscation of state assets if such a state has violated its security obligations. Moreover, according to this principle, freezing assets is also a countermeasure, so the states in which the assets of the central bank of Russia are stored have already violated immunity when they froze these assets.

It is also important that under the proposed scheme, the main frozen USD 285 billion of Russian assets will remain unconfiscated. According to recent political statements, Western partners want to withhold this amount in case of Russia’s lawsuits. On this issue, international lawyers also spoke out critically, noting that no international court would consider such a lawsuit because Russia did not recognize its jurisdiction.

Russia began to appropriate private assets of Western enterprises a long time ago, and in response to the risk of confiscation of its sovereign assets in the United States, Putin quickly adopted a decree on the so-called “confiscation for confiscation.” The only difference between what is feared in Europe and what Russia is already doing is that when resolving the issue of confiscation, Putin does not worry about violated international legal guarantees, “dangerous” economic precedents, and political support.

Thus, we expect a detailed plan from the G7 leaders on the use of Russian assets. But for now, the process looks like a bureaucratic postponement of the painful issue of confiscation and the transfer of such necessary funds of the aggressor to Ukraine.

Instead of being able to fight at the expense of Russia, we will again receive money for military and post-war needs from the pockets of taxpayers of partner countries—Americans and Europeans. Such a decision definitely cannot be called a victory, either in the financial sense or in any other sense.

We believe that all frozen sovereign assets of Russia, as well as any income from them, should be directly transferred to Ukraine in the near future within the framework of the international doctrine of “countermeasures” as a response to the unprecedented aggression of Russia and its numerous violations of international law. Further delay in adopting this purely political decision demoralizes and humiliates Ukrainians, who confront the aggressor every day.

*While drafting this text for publication, the G7 countries stated that they would create a fund to support Ukraine, using the proceeds from frozen Russian assets. The United States, the United Kingdom, Japan, and other countries will make contributions in the form of loans, and the return on investment of frozen assets will be used to repay these loans. Effectively, assistance to Ukraine will be provided in the form of donations, so we will not need to repay this money. 

This explains the mechanism to some extent, but the main problem with the unwillingness of partners to confiscate Russian assets, unfortunately, is not be solved. And these funds will not be used to Ukraine’s advantage yet.

This publication was prepared by Transparency International Ukraine with the financial support of Sweden.