Russia Must Pay

Indeed, the paramount task seems to be ensuring that Russia pays for all the damage it has caused in Ukraine. It's not just about the horrifically long toll of Ukrainian lives lost. The environmental damage is colossal, with five million hectares of agricultural land contaminated with military debris and unexploded ordnance, not to mention forests and other lands. Cities, power stations, dams, and bridges have been destroyed. Therefore, the amount Russia must pay already far exceeds the three hundred-plus billion dollars in frozen Russian state assets abroad. This is a massive challenge, especially since the G7 countries have yet to establish legally sound mechanisms for seizing Russian funds for Ukraine's benefit. However, progress is finally being made.

The process of seizing Russian funds to compensate for Ukraine's losses from the Russian invasion is finally moving forward. This week, US Treasury Secretary Janet Yellen, along with other G7 finance ministers, will meet in Italy to take concrete action. The Ukrainian finance minister will also be present at the meeting. Some might say this is only a small step, but it actually sets a precedent. For the first time in history, a mechanism for financially punishing a nuclear-armed country that violates international agreements and commits horrific unprovoked aggression against another state is being created.

"Russia must pay" should become a guiding principle, not only to provide Ukraine with the funds for reconstruction and loss compensation but also to serve as a lesson for autocracies tempted to destabilise global order. This is crucial, as Russia achieving its desired outcomes could signal to other autocracies that they can take up arms or blackmail the world with them. So far, there has only been one similar precedent in history – the use of Iraqi assets to compensate for the losses suffered by Gulf countries following Baghdad's invasion of Kuwait in the early 1990s.

The world has been too slow in moving from recognising that Russia must pay to creating a mechanism to seize money from the Russian autocracy. To be fair, the first crucial step was taken in spring 2022, immediately after the invasion. Russian state foreign assets were frozen, but only those accessible in G7 countries and some other democratic nations.

However, many assets of numerous Russian state and private corporations involved in supporting and financing military aggression have not been significantly blocked. In an authoritarian state like Russia, even private corporations and banks are integral parts of the military machine used by the regime to invade neighbouring countries. Moreover, a mechanism for seizing funds and directing them for compensation was not promptly established and is only now beginning to take shape.

This delay in targeting Russian assets and deploying a mechanism to seize them for Ukraine and other affected countries is primarily due to the lack of precedent. A global superpower, which Russia undeniably is, has violated international law norms that have maintained world peace for over 75 years. We are now witnessing perhaps the last chance to steer the world away from the brink of a third world war. The question is stark: either Russia pays for everything, setting a lesson for violators of international law, or the gateway to the horrors of World War III opens.

Photo: US Treasury Secretary Janet Yellen, along with other G7 finance ministers, will meet in Italy to take concrete action Source: Twitter/ Janet Yellen

Dynamics of Utter Evil

The situation already appears horrifyingly cynical. On the one hand, the losses Ukraine has suffered from Russia's aggressive invasion have been calculated. As of May 2024, these losses are estimated to be at least $500 billion. A World Bank report from 15 February 2024 states that the total cost of reconstruction and recovery in Ukraine following Russia's full-scale invasion is estimated to be $486 billion over the next decade. This figure is based on calculations by experts from the World Bank, the European Commission, the United Nations, and the Ukrainian government, as cited in the World Bank report. These calculations cover the period from the beginning of the invasion to 31 December 2023.

In the past 12 months, this figure has risen from $411 billion, an increase of $75 billion. However, these numbers are neither complete nor final. Firstly, Russian forces continue to destroy various facilities in Ukraine daily, adding new material losses every day. Secondly, not all material damages have been accounted for in the overall total. Thirdly, and most importantly, there has been colossal damage to Ukraine's human capital. Millions of children have suffered psychological trauma, thousands have died, and tens of thousands have sustained various injuries and illnesses related to the war. Human losses, even among the civilian population, have not been fully calculated, as most of the losses have occurred in occupied territories.

Photo: $384 billion of state assets are frozen, mostly the foreign exchange reserves of the Central Bank of Russia. Source: The Gaze, confiscation.com.ua

Photo: $114 billion in private assets, whose owners are closely connected to the Russian government, are also frozen. Source: The Gaze, confiscation.com.ua

Thus, even as of May 2024, the direct and indirect losses Ukraine has suffered due to Russian aggression exceed the frozen Russian assets by at least double.

As the infographic shows, $384 billion of state assets are frozen, mostly the foreign exchange reserves of the Central Bank of Russia. Additionally, $114 billion in private assets, whose owners are closely connected to the Russian government, are also frozen. Therefore, there is a potential to seize approximately $498 billion in Russian assets.

Necessary First Step

Governor of the National Bank of Ukraine, Andriy Pyshnyy, on the EU Council’s decision to confiscate profits from Russian assets in favour of Ukraine:

"We see that the lengthy discussion with the European Union regarding access to immobilised Russian assets is gradually moving into the practical realm and transforming into concrete decisions. Specifically, today's decision (21 May) will bring Ukraine about €2.5-3 billion annually.

It is clear that profits alone from Russian assets cannot objectively cover Ukraine's needs for defence enhancement and reconstruction. Therefore, today’s decision is an interim step. Considering that around two-thirds of immobilised Russian sovereign assets are under EU jurisdiction, we see significant potential for further work within the EU.

I am certain that this is the necessary first step from the EU, which will eventually lead us to the ultimate goal — the adoption of a decision by our partners to transfer or use all immobilised Russian assets.

We continue to communicate with partners in the EU financial sector and expect productive discussions at the G7 summit, which begins in a month. I truly believe that a political decision will be made, and international law will fulfil its duty, restoring justice. Russia must pay."

Photo: Considering that around two-thirds of immobilised Russian sovereign assets are under EU jurisdiction, we see significant potential for further work within the EU.”Source: FB/  Andriy Pyshnyy 

Building a Mechanism? Far Too Slowly

Germany's stance on the seizure of frozen Russian assets to aid Ukraine, and the income generated from these frozen assets, serves as a notable example. On 22 May, Reuters reported, citing sources in the German Ministry of Finance, that Germany is open to using the income from frozen Russian assets to support Ukraine's military efforts. This decision came a day after the EU Council made a similar ruling.

Firstly, it is worth noting that the German government remains cautious about US plans to use the frozen Russian assets themselves for Ukraine. "Our position remains unchanged: it is about the income from frozen assets, not the assets themselves," stated government spokesman Steffen Hebestreit in Berlin on 22 May. A representative of the German Ministry of Finance, as cited by the agency, also confirmed that it is exclusively about the income from frozen assets: "The existence of the Russian central bank's assets remains unchanged. This means that fundamental principles of international law, such as state immunity, are preserved."

However, this is still a positive step. If EU member states can quickly agree on the proposals from the European Commission and the EU High Representative regarding the use of income from frozen sovereign assets of the Russian Central Bank in the EU, Ukraine could receive the first funds from these sums by July 2024.

Why are EU governments so cautious about Russian state assets? The claim to respect international law seems at least cynical, as it resembles allowing a convicted criminal freedom of movement outside prison. Such a gentle approach to an aggressive authoritarian regime looks very odd after witnessing the actions of Russian forces in Ukraine.

Are there material reasons for this respectful attitude towards Russian assets? Absolutely. These are the private assets of European banks and corporations in Russia. Until recently, European banks and corporations harboured the false hope that the Kremlin would allow them to withdraw capital from Russia. Even partially withdrawing capital, as Russia has stringent capital withdrawal rules if a foreign company decides to exit. In effect, foreign companies and banks are hostages in Russia. If a company or bank decides to leave Russia, it can only withdraw a portion of its capital.

However, this week saw a case that underscores the draconian capital repatriation regime. On 20 May, it was revealed that the Arbitration Court of Saint Petersburg and Leningrad Oblast had taken interim measures in cases filed by RusKhimAlyans (RHA, one of the operators of the gas processing complex in Ust-Luga, Leningrad Oblast, a joint venture of Gazprom with another Russian company) against the guarantee banks for a contract with the engineering contractor Linde, which ceased operations in Russia due to sanctions.

This concerns the Russian subsidiaries of international banking groups Unicredit, Deutsche Bank, and Commerzbank AG. The amounts under arrest include funds and other assets totalling €785 million. These banks are currently projecting an air of composure, issuing statements about "negotiations and consultations," but the situation looks grim. For instance, Deutsche Bank claimed to be "fully protected by an indemnity agreement with the client." Previously, DB had reported in its annual report that it had set aside €260 million to cover the Russian claim. "We will need to see how this claim will be enforced by Russian courts and assess the immediate operational consequences in Russia," stated a Deutsche Bank comment published by Interfax-Ukraine.

Will the Russians limit the arrests to amounts proportionate to the court claims? It is not at all clear, and it rather resembles a broader hunt for banks. It is possible that once European financial groups lose their Russian subsidiaries, they will no longer rely on their governments, who are pursuing Russian assets.

We clearly see the acceleration of these discussions since summer 2023

Oksana Markarova - Ambassador of Ukraine to the United States:

“The USA as a country now supports confiscation of Russian sovereign assets. The REPO act adoption provided the President and Administration authority to do so in consultation with other G7 countries and the US is leading these discussions with all the partners. Treasury secretary Yellen made several public statements about it. The problem is that an insignificant amount of money remains frozen in accounts in the USA, while the majority of Russian funds are located in the EU and other countries outside of the USA.

We clearly see the acceleration of these discussions since summer 2023 and especially after the REPO act adoption and the use of the Russian assets for Ukraine is going to be a major topic of the G7 summit in Italy.

The majority of the European countries still did not come to the decision in the confiscation and only supports keeping them frozen and providing Ukraine with the windfall proceeds or other revenues from these assets. And there are several concerns these countries name as a basis for their indecision. Whether they are real or perceived consideration, it is essential for all countries to approve unanimous decision and move forward with confiscation as it is the right thing to do, the effective thing to do and just thing to do when Russia caused at least 486 bin worth of damages according to the World Bank RDNA report.”

Photo: Oksana Markarova: “The problem is that an insignificant amount of money remains frozen in accounts in the USA, while the majority of Russian funds are located in the EU and other countries outside of the USA”. Source: FB/ Oksana Markarova

The Estonian Route

While EU countries hesitate, Tallinn acts. On 15 May, the Estonian parliament passed a law allowing the use of Russian assets frozen under international sanctions to compensate for the damages caused to Ukraine by Russia's war, reports Postimees. This concerns €38 million in private assets held in Estonia and frozen by its government. But this is likely just the beginning.

It appears to set a precedent. However, one might argue it’s not the first, as in April, within a security law package, both the US Senate and House of Representatives approved a law granting the US president the authority to seize Russian assets in the US and transfer them to Ukraine.

So, yes, the situation is moving in the right direction. No, it won’t be too quick.