Will the West use frozen Russian assets against Russia?

With the advent of the Russia - Ukraine war in February 2022, much of the West, particularly the United States and the European Union, seized billions of dollars worth of Russian assets. These assets ranged from individual bank accounts of Russian billionaires to real estate and other financial investments. 

In January 2024, Ukrainian President Volodymyr Zelenskyy told the BBC at the World Economic Forum held in Switzerland that there is approximately $300 billion worth of frozen Russian assets which can be used to rebuild Ukraine and ensure that Western taxpayers are not the only ones paying for the defence of Ukraine. Talk of such actions is not new, as Western leaders have suggested this move even in the early months of the conflict.

It may seem like the ideal solution to the war depending on your political views, however, it is not that simple. To understand this, one must first ask why governments 'park' their wealth in Western institutions like banks, government bonds, real estate, etc in the first place.

Western financial institutions are generally more stable compared to a developing economy. Often, these assets are held in currencies denominated in USD- the world's reserve currency along with the GBP and Euro. They are also more secure than a developing nation's banks. This security ranges from physical safeguarding and low volatility to even cybersecurity.

These financial institutions offer investment opportunities in the form of corporate bonds, stocks and other financial instruments, which have historically appreciated in value. Governments keep their assets not just for these opportunities but also to diversify their assets. 

These institutions also have a comparatively higher global presence compared to a developing economy's smaller banks, making it more convenient for international transactions.

Finally, Western financial institutions are subject to strict financial scrutiny and operate within a robust legal framework which ensures they manage their funds with strict compliance, which is not often the case in a developing jurisdiction's banks.

Each of these points has one element in common - trust. 

Western governments using the frozen Russian assets will undoubtedly diminish the trust and confidence of other world governments. They may reconsider investing/depositing significant portions of their assets in Western banks due to the risk of asset seizures. However, there are a few key factors to consider before drawing conclusions.

Firstly, in this conflict, Russia has been the aggressor as they invaded the sovereign state of Ukraine in breach of established International Law. Russia may argue against using their seized assets on many grounds, particularly sovereign immunity. 

Sovereign immunity is a legal doctrine that presumes governments are not capable of committing legal wrongs unlike individuals or private entities. However, this is the weakest argument against using seized Russian funds for Ukraine, as the sovereign immunity doctrine is based on the norms of International Law, which they are clearly in breach of.

There is also a legal framework issue as there must be existing laws that allow the use of seized Russian assets. For example, during the Gulf War, Iraqi assets seized by the coalition forces were used to compensate Kuwaiti victims of the war. This was because as per US laws, this action was legal. However, the EU lacks such laws and may take a long time to pass them.

It has become an open secret now that Western governments have turned a blind eye to the law firms that facilitated the transfer of Russian Oligarch funds into their jurisdiction. For context, London is touted as the money laundering hub or capital of Europe by many leading academics of Financial Crime. It is often argued that if this transfer of wealth was done by the books legally, it would have never been this easy. 

The West often boasts about its strong 'rule of law' but why couldn't it prevent the billions of dollars of laundered Russian funds in the past few decades? These funds should not have entered their jurisdiction in the first place and should have been seized long ago.

Most importantly, using the seized Russian assets may raise fear among other governments, such as the Gulf States, China or Latin America, and they may withdraw their invested funds from Western markets. This is particularly concerning if one considers for example, that China alone has invested around $8 billion into US treasury bonds. This may collectively destabilise the US Dollar - the world's reserve currency. 

Calls to stop the usage of the frozen assets may come from inside the house itself - the private mega corporations themselves. Investment companies such as Blackrock have their own plan to rebuild Ukraine worth $400 Billion in loans, banking giant JP Morgan has already allocated $1 billion this year to about 25-30 projects for Ukraine's reconstruction.

The bigger stakeholders may be the Western Defense industry. They hold vast lobbying power within their governments and can leverage that to keep the war dragging on as it profits them generously. Of the $61 billion aid package approved by the US Congress, around $48 Billion will go straight to the pockets of US defence and aerospace arms manufacturers. The details of other EU defence manufacturers getting orders are not yet disclosed.

One aspect that cannot be ignored is that Russia has already forced the sale of Western businesses such as Starbucks and McDonalds to domestic entities, thereby ending Western business operations in their jurisdictions. So, in terms of seizure and utilisation of hostile nation assets, has Russia not fired the first economic shot?

Unfortunately, there is no straight answer to this complex dilemma. However, if the Western governments can unite and set their differences aside, the possibility of using frozen Russian assets to rebuild Ukraine and even possibly fund the Ukrainian defence forces may not be impossible.

Furthermore, utilising the frozen Russian assets against them sends a strong message to other authoritarian regimes globally about the economic repercussions of attacking other sovereign states. A strong economy funds a nation's armed forces, without which, invasion of sovereign states is not feasible.

Barrister Shafqat Aziz. Sketch: TBS

Shafqat Aziz is a Barrister-at-Law at the The Honourable Society of Lincoln's Inn. He has a Master of Laws from Nottingham Trent University. [email protected]

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.