Faced with increasing domestic opposition to the provision of large-scale financial support to Ukraine, Washington and Brussels are exploring the seizure of Russian government owned financial assets; if the U.S. and the EU manage to overcome domestic legal constraints around the seizure of Russian assets, Russia will retaliate by seizing the assets of Western companies in Russia. In the context of increasing domestic opposition to lending financial support to Ukraine, the EU and its members have warmed to the idea of exploring the seizure of Russian government owned financial assets. Brussels and especially Washington have been more forceful in pushing the proposal, while skepticism in several EU member states remains considerable, but is softening at the margin. A decision to seize, not just freeze, Russian government owned assets, whatever its legal and political merits, would lead Moscow to retaliate by seizing the assets of Western-owned assets in Russia, not just make it difficult and unprofitable to sell these assets, forcing them to write down the value of their assets even further.
· The U.S. has until recently taken a more assertive stance than the EU and especially several EU members, like France, Germany and Italy. But in the context of the G7, the have all agreed to study the possibility and implications of seizing Russian assets.
· Western governments have frozen, but not seized, about $300 billion worth of assets owned by the Russian government. Sanctioned Russian individuals and companies have also seen their asset frozen. But Western governments have thus far refrained from confiscating Russian government owned assets.
· Moscow has introduced a variety of measures that make it very unattractive for Western companies to sell their local assets. The Russian government has also seized the assets of Danone and Carlsberg after they announced their decision to leave the Russian market.
Faced with waning domestic political support and increasing opposition from member states, the EU has warmed to a US proposal to seize the holdings of Russian government owned assets to help finance Ukraine aid or, at least, the country’s post-conflict reconstruction. While the domestic legal obstacles should not be discounted, seizing Russian government owned Western financial assets to provide support to Ukraine has gained political traction in recent months. The U.S. and the EU are more keen to seize Russian assets than individual EU members. France, German and Italy are concerned about the risk of financial instability and the possibility of Russian retaliation in the shape of Moscow confiscating Western assets in case Russian assets are seized. They are also worried about the precedent the seizure of government owned assets might set, including the weakening of protections of their own foreign-held, government-owned assets under international law. Berlin, in particular, is concerned that the expropriation of Russian government owned assets may pave the way for World War II related expropriation of German-owned assets.
· In the EU, Hungary’s opposition to a new Ukraine aid package has forced Brussels and other member countries to find ways to provide support by circumventing unanimity. Meanwhile, U.S. financial support is being held up by a divided congress and disputes over border security.
· The U.S. has been substantially more hawkish on seizing Russian held assets than the EU. Russia is estimated to hold $200 billion worth of European assets, but less than $5 billion in U.S. assets. European countries as well as the European Central Bank are concerned about the reputational damage the euro would sustain and the possible implications for financial stability.
· Under international law, government-owned foreign financial assets are largely immune from seizure. Countries, including the United States, have domestic legislation in place that largely protects foreign governments from seeing their assets seized. If the G7 reaches a compromise on some form of assets seizure, governments in many instances will need to change their domestic legislation and possibly contend with opposition from constitutional courts.
If the anti-Russian alliance decides to seize Russian-owned assets, it is highly likely that Russia will retaliate by expropriating the foreign assets of Western companies in Russia without compensation. This would lead to a further severing of economic and financial ties. More importantly, it would force financial losses on Western companies. The financial claims of Western companies are already much diminished, not least because of the various restrictions Moscow has placed on the disposal of assets by Western companies. But the loss of ownership would nevertheless force them to write down the remaining value of their assets held in Russia. The seizure and sale of assets would go some way toward the domestic financing of Russia’s war effort. Seizing Russian assets would help Western countries help support Ukraine. The Russian seizure of privately-held Western assets would help Moscow finance its war effort.
· In July 2023, Moscow established an “unfriendly countries list” requiring foreign companies selling their local assets to Russian buyers at a 50% discount and make a 10% “donation” of the total asset value. In addition, the ability to convert ruble-denominated sales proceeds into dollars and transfer them abroad was also curtailed in an attempt to alleviate undue balance-of-payments pressure.
· In November, the Russian government issued a decree that allows foreign companies that hold frozen assets in Russia to use them to buy blocked assets owned by Russian companies abroad, effectively establishing a mechanism for swapping frozen assets. This suggests that Moscow is aware of the leverage foreign-held Russian assets provide.
· On December 20, Russia passed a decree that allows the government to seize and sell off the Russian assets held by foreign energy companies deemed “unfriendly”.
· Western countries may be stepping up sanctions enforcement through the seizure of Russian assets. This month, a German prosecutor has filed a motion to seize more than $700 million worth of assets held by a Russian financial institution, the National Settlement Depository, a subsidiary of the Moscow Stock Exchange, which has been under sanctions since mid-2022, on account of sanctions violation. Even if the G7 fails to agree on seizing Russian government assets, the financial tit-for-tat is likely to intensify.