Elisabeth Braw
CEPA
May 29, 2024
The world’s most powerful democracies are moving ever closer to expropriating more than $300bn in Russian assets to aid Ukraine. This comes at a price.
Any G7 decision to channel funds to Ukraine — the current proposal would use frozen funds as collateral for loans — faces resistance from some smaller European countries who say this would violate the rule of law. This may be overcome, but Vladimir Putin’s resistance will not be as easy to wave away; he has signed a decree that allows Russia to seize US assets in the country if US authorities act first.
The frozen $300bn is a massive sum. The European Union (EU) previously suggested that this be used to help Ukraine’s reconstruction when the war ends since the alternative would be that the victim – Ukraine – would have to finance the reconstruction through loans, or that Western governments would have to help.
Seizing frozen Russian assets would be a massive step by the West, and not uncontroversial. That’s because seizing assets belonging to foreign governments, business, and citizens is far more dramatic than freezing them; unsurprisingly, it’s also very rare.
But the US has concluded that this is now necessary. In April Congress passed a law allowing the President to “seize, confiscate, transfer or vest any Russian state sovereign asset in the US.” When G7 finance chiefs met in Italy last week, they appeared to have found an elegant compromise; their deliberations reportedly included plans to seize the anticipated interest generated by the frozen Russian assets. This may raise as much as $50bn to begin with. Such a move would, of course, have to be agreed and then signed off by the countries’ heads of government.
Vladimir Putin, as always, seems ready for the fight. While the West holds Russian sovereign assets, the Kremlin has few Western holdings to seize in return. But Russia is home to lots of assets held by Western companies or individuals who stayed on after Russia’s February 2022 all-out invasion of Ukraine. On May 23, the Russian President signed a decree allowing their confiscation.
Whether Western assets in Russia amount to anything near the $290bn claimed by the Kremlin is uncertain. What is clear is that firms like BP, which left after February 2022 and took a $25bn charge to its accounts, or the Norwegian Sovereign Wealth fund, which also left after the all-out invasion, may actually have gotten a far better deal than those that hesitated.
These days, firms wishing to leave the country are forced to sell their holdings to local buyers at an obligatory 50% discount, plus a 15% exit tax. If they manage to find a buyer and file the ever-increasing paperwork, that is. Such are the hurdles to leaving that many Western companies are
now resigned to staying, the Financial Times reports. Many, of course, may never have been serious about leaving in the first place.
And now they all have to accept that they may face geopolitically motivated expropriation. Earlier this month, Russia seized more than €700m ($757m) from three Western banks after a construction project fell apart as a result of Western sanctions. (The seizures follow earlier expropriations of companies including Carlsberg and Danone.) Though this was court-sanctioned, it was also a clear signal from the Kremlin; it has the power to harm any Western company it chooses at any moment it wishes.
That’s why the decree Putin has just signed is so significant. The document allows Russian courts to take compensation for those whose assets were “unjustifiably” seized in the US. It can then order compensation to be transferred in the form of US assets or property in Russia. In other words, if the US seizes frozen assets belonging to a Russian company, Russian authorities can recoup those assets by seizures from a US outfit in Russia.
Real estate appears to be particularly at risk, which is hardly surprising since although companies have taken pains to reduce other assets in the country, you can’t move real estate. And now it may simply be seized.
These are the leftovers of globalization’s merry days. Companies that invested in Russia and believed in it up until recently because, well, business is business, are not just stuck in the country. They may lose their assets there too.
Elisabeth Braw is a Senior Fellow at the Atlantic Council.