The Daily Populous Wednesday January 31st, 2024 evening edition
Authored by foreignpolicy.com and submitted by foreignpolicymag

What was seen as an outlandish idea two years ago—that frozen Russian assets could be used to pay for war-torn Ukraine’s reconstruction—is edging closer to becoming reality, in what could become a landmark precedent in international law.

Financial institutions in the United States and Europe hold about $300 billion worth of Russian state assets that were frozen at the start of the war and which, if seized, could go a long way toward paying for the damage wrought by the invasion. The World Bank last year estimated the cost of that damage to be over $400 billion, and it has only grown since.

In the early days of the war, U.S. Treasury Secretary Janet Yellen dismissed the idea of seizing Russian assets as not “legally permissible.” But the notion has seen momentum recently, in part due to Russia’s continued assault on Ukraine’s civilian infrastructure and in part due to growing concerns over the near-term future of U.S. and Western aid for Kyiv.

Last week, the U.S. Senate advanced legislation that would authorize the seizure of frozen Russian state funds, following a similar measure earlier in the House of Representatives. The Biden administration has backed the bill after carefully examining the legal ramifications.

Canada already has such a law in the works. The European Union has agreed in principle to the idea of seizing at least the interest earned from frozen Russian assets for Ukraine’s reconstruction. The G-7 will further discuss using Russian money to rebuild Ukraine at a meeting next month. And a gaggle of foreign-policy luminaries made the case for such a move just last week.

“We should be prepared to do some innovative thinking about how we use these resources to help Ukraine,” British Foreign Secretary David Cameron said at the World Economic Forum in Davos, Switzerland, this month.

Such a move would be unprecedented in its scope, and it presents a complex set of legal challenges that critics fear could undermine the principle of state sovereign immunity and even erode confidence in Western financial institutions and currencies.

But the fight over the move from freeze to seize is important not just for the future of Ukraine and the calculus of Russian President Vladimir Putin today. Leading scholars of international law argue that confiscation would set a positive precedent while failing to do so would constrain future efforts. “Whichever decision is made, it will become a defining precedent whenever future aggression is confronted—and a decisive factor in the frequency with which such aggression again threatens civilization,” Harvard University’s Laurence Tribe and colleagues wrote in a seminal paper last fall.

Similar appropriations of state assets have happened before, most notably the United Nations-sanctioned U.S. seizure of billions of dollars of Iraqi funds that were earmarked for reparations for Kuwait in the wake of the 1990 invasion. The United States did something similar, on a much smaller scale, with a portion of frozen Afghan central bank funds after the Taliban took over Kabul in 2021.

But the potential seizure of hundreds of billions of dollars—roughly half the total assets of the Russian Central Bank at the outbreak of war—would be a significant change in how countries respond to aggressor states, with the ability to reshape international law with an eye to future conflicts.

“I don’t see a legal obstacle. There’s clearly a moral imperative. And any economic risk can be mitigated by countries doing this together,” said Harold Hongju Koh, a former State Department legal advisor in the Obama administration and professor at Yale Law School, who is advising Ukraine in its cases before the International Court of Justice at The Hague. “If everyone does it together, it creates a new precedent.

“Every single attack, and every bit of damage, was exacerbated by Putin’s lack of restraint, so you want to create a system where there’s a deterrent—if there’s a future dictator who understands that every such decision adds to the amount of money they’re going to have to pay back, they might decide differently.”

Russian officials are gearing up for a fight in the event the country’s assets are seized, threatening legal action in courts in Europe and the United States. Putin already signed a decree in December seizing the Russian assets of a number of European companies, including those of the Danish beer company Carlsberg and the French yogurt manufacturer Danone. Kremlin spokesperson Dmitry Peskov has warned that Moscow has a list of Western assets, reportedly nearly as large as the frozen Russian funds in the West, that could be seized in retaliation. A spokesperson for the Russian foreign ministry dismissed the potential move as “21st-century piracy” this month.

But even though momentum for asset confiscation is building, it’s not a done deal by any means. The United States holds only a small portion of the frozen Russian assets—with estimates of between $40 billion and $60 billion or so. The vast majority are held in Europe, especially in Belgium’s Euroclear financial clearing house, but the EU and most member states are lukewarm about the idea of moving to outright seizure of Russian funds, fearing retaliation by Moscow. Proponents of the asset seizure agree that the move would be much more effective if done collectively, rather than by one or two countries, both in terms of the dollar amounts involved but also in collectively defending against any potential retaliation.

Debate around the seizure of Russian sovereign assets has mirrored that of many pivotal decisions taken by Ukraine’s Western partners during the course of the war—including decisions to send tanks and offensive weapons to the Ukrainian military. In a pattern that has played out many times before, Washington and London have come around on the question before cajoling an anxious Europe to join forces.

Meanwhile, Ukraine worries about not just the cost of future reconstruction but also the continued flow of Western, especially U.S., financial and military aid due to Republican obstructionism in the U.S. Congress.

“We need to get to the moment where we can reconstruct the country, and unless we have the money to defend ourselves, we might not get to the point where we can reconstruct ourselves,” said Illia Chernohorenko, a former official at the Ukrainian Justice Ministry and former advisor to Ukrainian President Volodymyr Zelensky. His parents were bombed out of their apartment during the first month of the war and have been refugees ever since. Chernohorenko is now getting another doctorate in international law at the University of Oxford, researching issues such as moving from asset freeze to asset seizure.

But before Ukraine can get its hands on that money needed for rebuilding, questions remain about the legality of such a seizure. The United States already has the authority, under the International Emergency Economic Powers Act, to confiscate state funds; the new legislation currently before Congress is just meant to clarify that authority and specifically earmark its use for Ukraine’s reconstruction. Other countries, such as the United Kingdom, would need to pass new legislation to be able to move from freezing assets to seizing them.

One of the main objections to the plan, from both Moscow and some Western legal experts, is that such asset confiscation could violate Russia’s sovereign immunity. Seizing assets of individuals and private companies, such as those on designated sanctions lists, presents few legal issues. But seizing funds belonging to a sovereign state’s central bank could, critics say, run afoul of the idea that states are essentially immune from legal remedies and would itself be a violation of international law.

Proponents dismiss those concerns. For starters, they say, sovereign immunity only applies to states facing judicial action by other nations, not executive or legislative remedies. More to the point, they say, Russia, by its illegal invasion of Ukraine and widespread and well-documented commission of war crimes, has essentially forfeited its right to be treated as a sovereign, the same way sovereign immunity is waived when state corporations engage in business fraud.

“You can’t act like a private murderer and say, ‘I should be defended like a sovereign actor,’” Koh said.

Others have argued that the line, such as it was, was crossed when the funds were frozen at the outset of the war. That’s one reason why many are sanguine about concerns of capital flight away from the Western financial system.

“What are you talking about, ‘the sanctity of sovereign funds’? We’ve crossed that line, let’s not kid ourselves,” said Daniel Fried, a former U.S. ambassador to Poland. “The Chinese saw what we did, the Saudis saw what we did, and they didn’t pull their money out of our banks.”

Another big issue is the so-called doctrine of countermeasures. In theory, a state that suffers a violation of international law—such as an illegal invasion—has the right to redress that wrong, even if that means temporarily violating international law itself. What’s more, if the aggressor state has violated universal norms, such as the U.N. Charter, all states have the right to resort to countermeasures. That’s the basic rationale that proponents point to for the move from collective asset freezes to outright seizures.

The tricky part is that countermeasures are meant to be reversible. If Western countries do move to seize Russian funds and distribute them to Ukraine, the measure would clearly not be reversible. Critics say that’s one reason the move could be counterproductive: With the funds disposed of, Russia would have little incentive to end its war in Ukraine.

But proponents of confiscation dismiss that concern as well, principally by arguing that any such distribution of funds to Ukraine can be seen essentially as a down payment by Russia on the war reparations that it would be legally obliged to pay in any event but likely never will voluntarily. Since the war damage already far exceeds the $300 billion or so in Western hands, giving the money to Ukraine is for all intents and purposes reversible because Russia would have been on the hook for that and more at some time in the future anyway.

There are also practical considerations. The Russian funds are held in many different countries, in many different forms—securities, government bonds, and so on. That could complicate efforts to turn Russia’s frozen riches into usable funds for Ukraine. And unlike in 1991, when the United Nations organized a compensation fund for Kuwait, the Russian veto in the U.N. Security Council means there’s no chance of a similar entity being created this time around.

That means the United States, if it goes ahead, and any other countries that join would have to establish some sort of ad hoc fund to administer monies for Ukraine; for the disbursement of $3.5 billion of Afghan reserves, the United States created a commission in Switzerland. Current legislation under consideration on Capitol Hill—the REPO Act—would, if passed, create a Ukraine Support Fund for reconstruction and humanitarian assistance.

The lingering legal questions, fears over Russian retaliation, and concerns that asset seizure could undermine global confidence in widely used currencies such as the U.S. dollar, British pound, or the euro are just some reasons that Europe is moving more cautiously on this issue. The latest proposal, which could be finalized next month, involves taking only the proceeds of frozen Russian assets—interest accrues to about $3 billion a year—and using that for Ukraine. Proponents of outright confiscation say the EU compromise measure is too small to make a dent in Ukraine’s huge reconstruction bill and also faces the same potential legal challenges as more vigorous actions.

As Russia’s war on Ukraine, the biggest challenge to the international order since World War II, staggers into its third year, it’s becoming clear that Moscow’s actions are reshaping more than frontiers and front lines: They are potentially laying the groundwork for a seismic change in international law. Sovereign impunity, after this, might be a thing of the past.

“They started a war, and they’re going to hide behind law? No, thank you,” Fried said.