How to Seize Assets of War Sponsors

At least $300 billion belonging to Russia, which is waging a bloody war of aggression against Ukraine, has been frozen in the accounts of the democratic world. And the potential value of assets that could be additionally frozen reaches $1 trillion. Politicians, especially in Eastern Europe, not to mention Ukraine, want the frozen assets to be transferred to pay for the damage caused by Russia's invasion. 

In November 2022, the UN General Assembly adopted a resolution at an emergency meeting that makes Russia responsible for paying reparations to Ukraine. The document, which recognizes Russia as guilty of causing damage to Ukraine as a result of a full-scale military invasion and calls on Russia to compensate, was voted for by 94 states, 14 countries opposed and 73 abstained.

Unfortunately, this UN resolution is only advisory in nature.

At present, international law does not know a clear way in which Russian assets can be seized and transferred to support Ukraine's needs. There have been similar precedents in world history, but they require a vote in the UN Security Council, a decision of the International Court of Justice (ICJ), or a special regime of post-war settlement. Each of these options requires Russia's consent.

Is there any way to make Russia pay?

Every now and then, the headlines come with estimates of tens or hundreds of billions of dollars in frozen Russian assets in various countries. Moreover, it seems that governments around the world have even reached a consensus on how to use them in the future. The only thing is that they all suggest different methods.

The Ukrainian government is hoping for a speedy confiscation. Instead, the EU member states, which have blocked most of the Russian assets through their sanctions, have not yet decided on a clear strategy for further action and are considering various options:

holding these assets until Russia agrees to pay reparations;

use of frozen funds to generate profits that can be transferred to Ukraine;

creating special mechanisms that would allow the seizure of these assets.

Sharing the excess profits

In June, Ursula von der Leyen, President of the European Commission, announced that she would soon propose a mechanism for using Russia's frozen assets. However, the presentation of the proposal has now been postponed. The 27 EU member states are still discussing the legal assessment of the issue, calling the legal obstacles enormous.

Even a proposal that previously seemed realistic - the introduction of a tax on excess profits for private companies that hold frozen Russian assets and automatically accumulate additional income - raises reservations.

However, experts believe that the plan is legally sound.

Euroclear, a Belgium-based private financial company, holds almost 200 billion euros in accounts. These savings are profitable. In the case of Euroclear, in the first quarter of 2023 alone, it was 720 million Euros. Experts have suggested increasing taxation on these profits – at a rate close to 100% - and using these funds to help Ukraine.

However, the ECB and some finance ministers demanded that EU countries synchronize this algorithm with other G7 countries, the club of the world's richest democracies, to ensure proportional distribution and prevent "potential reputational losses of the Euro currency."

Critics of this position assure that it can't get any worse. After all, reputational damage has already been done when EU countries decided to freeze Russian assets.

Despite all the reservations, this approach has considerable political support. But this option is less acceptable to Ukraine than direct seizure of Russian assets.

Even if we assume that the profits generated from the use of EU-wide frozen assets will be several times higher than $3 billion, and given a conservative estimate of the damage caused by Russian aggression at $400-600 billion, a simple calculation shows that receiving reparations in this way could take tens or even hundreds of years.

Invest for Ukraine

Another widely discussed idea was the hypothesis that frozen assets could be invested. For example, the EU could try to oblige private entities that hold Russian funds to make high-yield investments and transfer the profits to an EU fund, which would in turn direct them to Ukraine.

However, this option also looks doubtful to critics who are trying to avoid increasing the EU's role in managing Russian assets, as well as liability and legal risks. After all, if the investment fails or causes losses, European taxpayers will have to compensate for such risks.

Looking for solutions, not reservations

According to Article 25 of the Council of Europe Convention 2005, the state shall dispose of any confiscated property under its domestic law unless the parties reach a mutual agreement. At the same time, even after reaching an agreement on the return of such funds, the requested party may retain part of the property and determine the ways in which it can be used by the other party. But EU countries are in no hurry to use this opportunity.

At the same time, Canada and the United States have developed and adopted legislation enabling the seizure of assets related to Russian aggression, and Congress has authorized the transfer of seized Russian assets to Ukraine.

Nevertheless, the successes here are modest: one year after the Canadian legislation came into force, the most significant achievement was the decision to transfer $5.4 million confiscated by the Manhattan court from Russian oligarch Konstantin Malofeev to Ukraine.

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The EU is a rules-based club, with very practical reasons for this. The immunity from direct asset recovery, in particular, protects the largest EU country, Germany, from lawsuits filed by victims of the Nazi occupation. A decade ago, the International Court of Justice ruled that Italian and Greek courts could not transfer German state assets to plaintiffs in such cases.

Taxation of private profits derived from Kremlin assets, on the other hand, looks more realistic, but seems unfairly tiny compared to the atrocities committed by Russia.

However, the most significant fact remains that blatant disregard for international law must be punished in a democratic manner. Real confiscation of assets as an instrument of just accountability must take place, if only because it can serve as a deterrent to the initiation of military aggressions in all parts of the world.

The International Coalition to Support Ukraine has repeatedly gone from complete denial to the adoption and implementation of bold and constructive actions and decisions. Hopefully, this time the leaders of the democratic world will not miss their chance to stand on the right side of history.