The Case for Confiscating the Central Bank of Russia’s $350B+ Foreign Reserves
MT799 Authenticated | Independent Contributors Column
Dear BWR Subscribers,
Welcome to the first publication of “MT799 Authenticated”, Barbershop Whispers….Russia (BWR) independent contributors column. MT799 Authenticated will be published twice a month during 2024. The independent contributors are seasoned experts in subjects ranging from Russian geopolitics to culture and language.
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About Jamison Firestone, Esq.:
Jamison is the co-founder of FD Advisory, a London (UK) based legal firm that services global multinationals on issues ranging from anti-corruption to cross-border acquisitions and sanctions.
Jamison lived and worked in Russia for 18 years, providing legal and tax services to Russian and international businesses with his law partner, Sergei Magnitsky, the namesake of the global Magnistky Act. Sergei exposed the largest known tax fraud committed against the Russian government by Russian government officials. He was arrested by the very government officials whom he accused of the fraud and died in a Russian prison without ever having stood trial. Putin later exonerated all the Russian government officials and accused Magnitsky of the fraud crime.
For further reading about Jamison and Sergei Magnitsky, see the book Red Notice by Bill Browder.
Jamison received his JD from Tulane University, is a member of the New York Bar, and is fluent in Russian. Jamison served on the American-Russian Chamber of Commerce for nearly a decade and resides in London with his family.
The Case for Confiscating the Central Bank of Russia’s $350B in Foreign Reserves
On February 28th, 2022, four days after Putin’s tanks rolled into Ukraine, the G7 countries did something truly surprising. Instead of just throwing Russia out of the SWIFT payment system, they also froze the Central Bank of Russia’s (CBR) foreign deposit reserves by making it illegal for anyone in the G7 countries to do anything further with them. According to the CBR’s 2021 annual report, there was $351B in cash and bonds in G7 countries at the end of the year. No one outside of Russia is sure of the exact amount the G7 froze nine weeks after that snapshot.
To locate and value the frozen reserves, countries must require anyone holding CBR reserves to report them to their respective governments, and only a handful of countries have enacted such a requirement. To date, approximately $280B has been located, of which $210B is deposited at Euroclear, the Belgian financial custodian.[1]
All this money is the property of the Russian government. The money is unrelated to Russian oligarchs or any other sanctioned persons. The CBR foreign reserves dwarf the total of the frozen assets of sanctioned persons. No costly lawsuits need to be brought to prove ownership or how the money was acquired. It is undisputedly the property of the Russian Federation, a country that has violated two resolutions of the UN General Assembly and an order of the International Court of Justice (ICJ) calling for it to withdraw from Ukraine.
The big question of the day is, what should be done with the money? The answer is to transfer ownership of the money to Ukraine as a payment on behalf of Russia for reparations owed to Ukraine.
There is no question that reparations are owed. It resulted from the unprovoked and illegal war of aggression Russia has waged against Ukraine, a war whose goal is, among other things, the acquisition of another state’s territory by force. The need to pay reparations is confirmed by two resolutions of the UN General Assembly and an ICJ order, all of which Russia has ignored by failing to cease its war and withdraw from Ukrainian territory.[2]
The next question is, now that we know Russia will not comply with international law, when do we transfer the ownership of money?
This a crucial question. Russia continues to bomb civilians, homes, hospitals, power stations, and other critical infrastructure. These structures must continuously be rebuilt. Otherwise, civilian deaths will continue to mount and may exceed the number of military casualties at the 1,500KM front.
While it’s true the final amount due from Russia is yet unknown, it is safe to say that it is larger than the sum total of frozen CBR foreign reserves held by the G7 countries, increasing daily.[3] As a result, the G7 countries initially announced that the CBR foreign reserves would be held until Russia paid full reparations or agreed to allow the G7 to use the frozen reserves as payment towards Russia’s reparations.[4] Unfortunately, this means the reserves would be held until the fall of Putin’s regime and any like-minded successor regimes.
Allowing the Russian government to block the transfer of the reserves to Ukraine does not make sense and would be immoral. If criminals had to agree to serve their sentences, there would be no need to have courts, as no sentences would ever be enforced. Furthermore, withholding the reserves until at least the end of the war and until Putin agrees to pay reparations needlessly and cruelly compounds the suffering and death in Ukraine. This money is already owed to Ukraine. It is immoral to hold it until after the war and until Russia gives its blessing. It’s akin to withholding medical treatment from the wounded to see who survives the war and then asking the attacker if you can now treat the survivors.
Last year, legal experts worldwide researched sovereign immunity issues and the legal basis for transferring the reserves to Ukraine. Sovereign immunity only applies to seizures by national courts; it does not govern seizures by the executive branches of governments or seizures ordered by international courts. However, if a government takes the money of another sovereign, it breaches international law and must return the money... HOWEVER…
A powerful argument has been developed that the Doctrine of Countermeasures allows governments to seize the assets of an aggressor to honour its obligations of reparations (which is a debt) under international law. This argument has been made in multi-author papers by some of the world’s leading legal experts.[5]
To be clear, this would not be taking money from Russia as a penalty or a sanction. It’s restoring the norm by forcing Russia to honour its obligation to pay reparations. If a bank takes money from one’s account and transfers it to the treasury to pay your tax debt, it has not confiscated/stolen any money from you. The money was used to settle one’s debt, which is reduced by the amount paid. It's that simple.
While many voices still oppose confiscating the CBR reserves, they have not been able to mount an effective legal defense to the Countermeasures Argument. Instead, they have fallen back on non-legal economic and political arguments to oppose the action.
Some of those arguments and some of the answers to them are:
If the G7 confiscates the CBR reserves, the action will discourage other countries from holding foreign reserves in G7 jurisdictions and USD, CAD, GBP, EUR, and JPY denominations.
The CBR reserves have already been frozen, and there has not been any significant exodus of reserves from the G7. The G7 has already demonstrated that the Western-led global economy is not a haven for the reserves of aggressor countries, nor should it be; that would be tantamount to enabling aggression.
Furthermore, what is the alternative reserve currency if the G7 seizes the reserves in concert? RMB, INR, AED, or BTC? These are not appealing alternatives for obvious reasons, e.g., market liquidity, market depth, rule of law issues, home country capital restrictions, etc. If gross violations of international law put a country’s reserves at risk, it might be more prudent not to steal your neighbour’s sovereign territory.
The West could use the reserves as a bargaining chip.
Putin has written off the reserves. Returning $350B of Russia’s money will not persuade Putin to withdraw from Ukraine. In any case, the money is already owed to Ukraine and is necessary to repair the damage Russia has done.
What if Russia retaliates by seizing G7 sovereign and private assets in Russia?
Putin began seizing Western private assets from “unfriendly countries” (countries that sanction Russia) shortly after the invasion, and Putin will continue to take Western assets and give them to his supporters.
Most Western investments in Russia have already been written off and are insignificant compared to the CBR foreign reserves the G7 has frozen. Are we to deprive Ukraine of 300B+ it is owed and desperately needs in an attempt to protect a few remaining foreign investors who didn’t leave Russia after its latest invasion?
“Who says Russia will even owe reparations?” (There are Putinites outside of Russia who ask this with loud indignation)
Suppose Russia manages to wipe Ukraine from the map or bully it into unconditional surrender and waiving its right to reparations. In that case, one can try to make that argument, but the G7 is in a position to prevent that injustice, and using Russia’s money to help prevent that would be poetic justice.
There is a growing consensus within the G7 that there is a solid legal basis for reparations; taking action is now only a question of political will.
The US and Canada have existing domestic laws that allow the transfer of CBR reserves to Ukraine, the Emergency Economic Powers Act (IEEPA) and the Special Economic Measures Act (SEMA), and Congress, with the support of the White House, is developing a new bill, the REPO Act which specifically enumerates the President’s right to transfer the frozen CBR foreign reserves in the current situation as well as how they would be used.
Time is of the essence. The G7 provides Ukraine about $100B annually in financial and military support. In 2023, financial aid pledged by the EU exceeded that pledged by the US, and most of its financial assistance went to Ukraine, whereas 90% of US military aid to Ukraine stayed in the US.
The Kremlin launched an unprovoked war for territorial expansion against a sovereign country, pays no heed to the UN or the ICJ, and is legally responsible for reparations to Ukraine. The G7 countries must move quickly and create a mechanism to seize and transfer the reserves to Ukraine. Failure to impose significant costs for violating a cornerstone of the post-World War II international legal order would undermine that order and set a precedent for future rogue actions by Russia or other authoritarian regimes.
To progress with the seizure, the US, with the support of Canada, the UK, and Japan, has proposed that working groups from the G7 explore ways to transfer the frozen CBR, with G7 supervision of its use, and agree to a roadmap by 24 February, the second anniversary of Moscow’s full-scale invasion of Ukraine.[6]
Unsurprisingly, the most vigorous opposition to confiscating CBR reserves comes from the European Central Bank (ECB). Most of the reserves are held in the EU, and the ECB fears the EUR will bear the brunt of any blowback. In the past, the EU discussed keeping the reserves frozen but taxing the interest at 100% and transferring that money to Ukraine. That would result in €2B to €4B a year, a sum wholly inadequate for Ukraine’s needs, and would leave the principal locked until Russia agrees to pay it to Ukraine. There are also proposals for borrowing against the reserves. In any case, much work will be done between now and February 24th.
Meanwhile, Russia has announced that it intends to sue and use the legal system to prevent or delay the transfer for decades. However, it isn’t clear that any international court would have jurisdiction, and it doesn’t look like Russia has a particularly strong case.[7] It’s doubtful that Russia could significantly delay the transfer should the political decision be taken.
Returning to the political decision, this is a pivotal moment in history. A decision to do nothing does not preserve the status quo but rather enables the erosion of international law and security that we all depend on. It would also be a great moral failing. This isn’t our money. Who would we be if we were to delay or deny Ukraine what it is owed during its time of greatest need?
[1] https://www.ft.com/content/9529da2e-963e-4b46-956f-3d78548fa3be
[2] https://www.justsecurity.org/wp-content/uploads/2022/11/N2267912.pdf
[3]Patricia Cohen, The World Bank estimated the cost of rebuilding Ukraine at $411 billion. Support is growing to use Russian funds for it., N.Y. TIMES (Mar. 27, 2023), The $411 billion figure does not include the costs of rebuilding the Russian-occupied territories that Ukraine hopes to recover.
[4] https://www.reuters.com/world/europe/britain-plans-maintain-russian-sanctions-until-ukraine-is-compensated-2023-06-19/ and https://www.politico.eu/article/brussels-to-go-after-russian-frozen-foreign-reserves/
[5] https://rusi.org/explore-our-research/publications/commentary/freeze-seize-or-appease-why-russian-assets-are-not-bargaining-chip
[6] https://www.ft.com/content/d206baa8-3ec9-42f0-b103-2c098d0486d9
[7]https://united4ukraine.network/wp-content/uploads/2023/12/legal-memo-on-countermeasures.pdf , page 26 footnote 56.
Vol 2, No 3 - BWR MT799 17.01.2024
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