Sovereign Immunity and Expropriation Government-Owned Assets
Expropriating Russian government assets to help finance Ukraine’s post-war reconstruction is an intuitively appealing proposition. Financially, it would help limit the resources Ukraine’s partners will have to provide to finance post-war reconstruction. Economically, it would help hold Russia accountable for the destruction it wrought on Ukraine. Ethically and morally, it would feel satisfying because it holds Russia accountable for the violation of international and moral norms. And strategically, it might help deter other countries from engaging in military aggression. However, expropriating the assets owned by a sovereign state is a complex issue and it is worth exploring its legal, economic and strategic implications.
The Concept of Sovereign Immunity in International Law
As it stands, international and domestic law throws up significant obstacles to the expropriation of state-owned foreign assets. Customary international law is wedded to the doctrine of sovereign immunity, which establishes that a state is immune from criminal prosecution and civil suit in another state’s domestic courts. This means that assets held by a foreign state cannot be expropriated based on decisions by domestic courts.
Some legal scholars are currently debating whether customary international law may allow a state, or more precisely the executive, to implement “confiscatory action” qua legal countermeasures in the event of a violation of international norms, while sidestepping the domestic legal process. Scholarly opinion differs; it always does. But it is generally thought that countermeasures must be revisable and temporary. As expropriation constitutes a permanent transfer of ownership, it would not seem to meet the definition of a countermeasure. Moreover, by sidestepping the legal process, executive action would deprive a foreign state of due process, which may raise additional legal-procedural issues, including the violation of the rule of law.
International law does provide for exceptions to the doctrine of sovereign immunity, including the expropriation of state assets, in the case of a violation of international law. But establishing such a violation procedurally requires a favorable vote in the United Nations Security Council (UNSC) or a ruling by the International Court of Justice (ICJ). A favorable vote in the United Nations General Assembly would merely translate into a recommendation and would constitute grounds for waiving or limiting sovereign immunity. Besides, Russia would veto any UNSCl resolution and the ICJ would need to fund Russian guilty of having committed genocide. This represents one impossible and one very high hurdle to waiving Russian sovereign immunity.
State-owned assets can also be seized in the context of a peace treaty, but this requires consent, how involuntary of the respective state. A state may agree to see its assets transferred into another state’s ownership as part of an agreement on war reparations. Russia would need to suffer a major defeat on the battlefield, before agreeing to forfeiting hundreds of billions of foreign assets. Military analysts are fairly unanimous that an outright military defeat of Russia on the battlefields of Eastern Ukraine is not in the cards. Most importantly, non-belligerents are not a party to the peace negotiations and therefore have no right to seize another state’s assets. Legally, a peace treaty, whatever its provisions, would not give the United States and its allies the right to seize Russian assets, unless Russia waives sovereign immunity. This is not likely.
Sovereign Immunity and Domestic Law
Many states have also incorporated the doctrine of sovereign immunity into domestic law, creating further procedural-legal obstacles to seizing Russian assets, at least until domestic legislation is changed. In the United States, for example, the Foreign Sovereign Immunities Act (1976) affords significant protections to states. But it also allows for some exceptions. Under the doctrine of restricted sovereign immunity, the commercial (as opposed strictly public) activities of a foreign state may be exempted from sovereign immunity. This means that state-owned commercial assets can in principle become the subject of domestic litigation and expropriation, while a presidential aircraft may not. The legal hurdles are high even when it comes to attaching commercial assets, but they are not necessarily impossible to surmount. Nevertheless, U.S. courts have consistently shielded foreign state’s holdings of foreign-exchange reserves from domestic commercial litigation, most recently in the case of creditor litigation against the government of Argentina. This would seem to put the expropriation of $200-300 billion worth of Russian central bank foreign-exchange holdings beyond the reach of commercial litigation.
Property taken in violation of international law may also be exempt from sovereign immunity. And, as suggested above, a foreign state can waive its immunity. A foreign state that has been designated as a sponsor of terrorism may not benefit from sovereign immunity, possibly making foreign-exchange holdings subject to attachment. The U.S. Terrorism Risk Insurance Act (2002) allows plaintiffs seeking to enforce terrorism-related judgments compensatory damages, including from a foreign state. But this requires the executive to designate another country as a state sponsor of terrorism. (Canada just enacted changes to allow exception to its State Immunity Act for state that support terrorism.) The U.S. government has not designated Russia a state sponsor of terrorism, sharply circumscribing this avenue towards expropriation.
State-owned assets can be seized in the event of a state engaging in armed conflict with another state. Under the U.S. International Emergency Economic Powers Act (1977), the federal government is authorized to block and immobilize foreign assets. But it can only seize them in the event the United States is engaged in armed conflict or has been attached by a country. The United States is unlikely to declare war on Russia to be able to seize Russian assets.
An important distinction needs to be drawn between the legal protections afforded to assets owned by a state and asset owned another country’s companies or individual from another country. Under international law, private foreign ownership of domestic financial and real assets does not benefit from immunity, making them subject to domestic law and hence expropriation. However, the state is obligated to compensate the owners of the expropriated assets. The World Bank’s Investor-State Dispute Settlement, for example, provides for arbitration in case of dispute and can award plaintiffs damages, even though it has no power enforce these claims. (International investment treaties weaken state sovereignty by providing for a dispute settlement mechanism that allows private foreign investors to pursue legal claims against a host state, including expropriation and discriminatory treatment.) In case of criminal activity, however, such as sanctions violation, assets owned by foreign legal or private persons can become subject to expropriation without compensation, but this can generally be challenged by expropriated partys in the domestic courts.
Adherents of realpolitik will wonder why customary international matters should matter and why domestic law cannot be reformed to allow the seizure of state assets. At a minimum, international and domestic law represent legal-procedural obstacles. The U.S. Congress would probably have to pass a new law, authorizing the seizure (as opposed to blocking of) Russian assets. This would violate international law, but it could certainly be done, unless the Supreme Court takes a different view. But the EU will find it difficult to agree on a common position, in part due to the legal obstacles. The European Commission appears to be keen on expropriating Russian assets, but the European Central Bank and various member states are not. The ECB is worried about the risk that weakening the rule of law will have negative real-world consequences, such as weakening the euro’s attractiveness and increasing the risk of financial instability. Some members states like Germany are concerned that if the weakening of sovereign immunity were to become a general trend, it might be exposed it to World War II related lawsuits. To the extent that these legal issues make the various relevant actors reluctant to weaken sovereign immunity to facilitate the expropriation of state assets – or provide them with arguments for refusing to do so – it will make individual, let alone concerted, multilateral action more difficult. Even if one believes that legal norms qua legal norms have no power to constrain state behavior, their existence does create procedural-institutional obstacles to expropriation.
Economic Costs and Benefits
Seizing another state’s assets also has economic-financial consequences. From the U.S. and allies’ point of view, seizing Russian state assets would help fund Ukraine’s reconstruction and limit the call on their own resources. But it might also expose the United States and its allies to financial retaliation and concomitant financial losses. Russia may decide to expropriate assets held by foreigners, imposing financial losses, particularly on private investors. And even if the U.S. government holds no assets in Russia, U.S. companies may become subject to retaliation, possibly causing a domestic political backlash. Countries with greater foreign investment in Russia will face greater financial risks. Admittedly, Russia has already imposed a partial policy of “indirect expropriation” by requiring foreign companies to pay an exit tax to finance the war efforts or lock up the proceeds for an extended period before they can be transferred. More recently, it has expropriated foreign companies outright without paying compensation.
The expropriation of state assets may diminish demand for US and European financial assets, including by third parties concerned about the potential erosion of the rule of law and sovereign immunity. In the short- to medium-term, however, the economic costs would likely be manageable, especially if the United States, the euro area, Japan, the UK, Canada, Australia act jointly. Moreover, Russia has already switched to non-allied currencies to conduct trade with other countries due to financial sanctions. For other countries, it makes sense to set up way to conduct trade in non-allied currencies, but they are unlikely to switch to Chinese yuan in a big way. The yuan’s lack of convertibility makes this impractical, to say the least. Greater international demand for yuan, even by traditional U.S. partners and allies, such as India and the Gulf states, will translate into less demand for the dollar etc. But in terms of their financial impact, the effect will be very limited.
Strategic Implications – Interdependence as Leverage
The outright or even indirect expropriation of government-owned foreign assets would have consequences at the strategic level, too. For a start, expropriating state-held assets will make the Russian government even more reluctant to reach a compromise peace. If so, it would require greater resources for Ukraine to decisively prevail on the battlefield to impose a punitive peace, including the forfeiture of foreign asset holdings. Leaving aside the question of how desirable a punitive peace might be, outright expropriation would remove the option of holding foreign assets “at risk” and of using them as a bargaining chip to Russian to sign up to a peace agreement. Admittedly, the geopolitical interests that provoked the military conflict in the first place will much more strongly influence whether or not a peace agreement is reached than a few hundred billion worth of foreign assets. But freezing rather than seizing them will make it easier to reach a peace agreement.
Even seizing private-sector assets would mean giving up, if perhaps only limited political leverage, as the prospect of regaining private assets may make private-sector interests more inclined to favor a resolution of the conflict. Expropriating private sector assets will diminish their interest in doing so. Recent U.K. court decisions reversing a government decision to lift sanctions against a prominent Russian oligarch, who happened to public opposed the Ukraine war, is an example of the reversibility of sanctions, including the freezing of assets, may help support Russian political forces and economic interests in favor of conflict resolution. Maybe. Finally, from a tactical point of view expropriating Russian assets will do little to weaken Russia’s ability to prosecute the war, relative to a scenario where the assets are merely frozen. Another consideration worth taking into account.
To Expropriate or Not to Expropriate? A Complex Political Calculus
The question of whether to expropriate Russian assets, including the question of partial expropriation, is a complex one. Seizing assets (or expropriating) assets is fundamentally different from blocking (or freezing) assets. Mindful of the legal obstacles and reputational consequences of outright expropriation, proposals have been put forward to impose a windfall tax on profits linked to Russian assets as well as schemes to invest Russian assets to generate higher yields and then channel the excess returns into Ukrainian reconstruction efforts.
This former would undoubtedly qualify as “indirect expropriation” by treating Russian holdings differently from other the holdings of other states and it would certainly violate legal principles like equality for the law. The latter would be risky, as higher risk investments might go bad, forcing governments and taxpayers to compensate the Russian government for any losses. Surely, this would prove politically unpopular. Both proposals would create reputational costs for limited financial gains and without avoiding reputational costs. It is for decision-makers to decide whether the potential political-economic costs of expropriation outweigh the potential benefits. And there is no doubt that territorial integrity is an international norm worth defending and penalizing violators for, at least in the hope of deterring future potential violators. The question is whether expropriating Russian assets is a cost-effective way of doing so, all costs and benefits considered. It is also clear that making use of $200-300 billion worth of Russian assets available to finance Ukraine’s reconstruction would be welcomed by allied countries and their taxpayers. But such a decision has also wider legal, economic and strategic implications that decision-makers are obliged to evaluate carefully before making a decision whether or not to violate sovereign immunity and expropriate Russian state assets.