March 7, 2023
Timothy Ash
CEPA
The West invariably plays by the rules while our enemies break them. It’s time to bend them, a little.
Russia’s aggression against Ukraine has caused immense human suffering alongside a catastrophic hit to Ukraine’s stock of capital and its productive capacity. Estimates suggest the economic losses might be anywhere from $500bn-$1 trillion and counting, as Russian missiles continue to rain down.
So who will pay for the immense cost of reconstruction?
The West might hope that Russia will eventually foot the bill, given its naked belligerence and refusal to withdraw. However, that likely will require Russia’s defeat, an acceptance that its aggression has failed, and an agreement to a schedule of reparations. It is hard to imagine Russia accepting any such outcome as long as Putin, or anyone like him, is in office.
Western taxpayers might also be asked, but they have already stumped up around $150bn from 2022 to January 2023, with more to come. Where is the politician with the courage to suggest that they shoulder an additional sum of perhaps $50bn-$100bn a year for a decade to reconstruct Ukraine? Any such move would risk a populist backlash at home, which would play to Putin’s agenda of dividing the West.
Western government officials have spoken about the private sector stepping up, but with concerns around Ukraine’s debt sustainability, and the security setting, along with past experience of rebuild/recovery stories, like Iraq or Haiti, it’s just not credible to think that the private sector can provide the funds quickly enough or at the scale required.
Happily, and unavoidably, this brings us to the final remaining option. The Putin regime’s disastrous decision to store large amounts of its wealth in the West is one that Russian officials and their master no doubt regret. There is an estimated $400bn in frozen Russian assets sitting unused in Western bank accounts (in February, the EU began mapping just how much is held within the bloc).
Initially, it was hoped that these assets would be quickly diverted for the use of Ukraine, both to win the war and then fund reconstruction. However, it now seems like a plethora of legal hurdles has been raised by lawyers and Western treasuries.
In general terms, the case against their use rests on the argument that it would set a terrible example, representing an attack on private property rights and sovereign immunity.
The argument around the defense of private property rights and rule of law seems ridiculous. There can be no doubt at all that Russia is stealing and destroying private property in Ukraine. It
is therefore liable to pay recompense. Why should Western taxpayers foot the bill for Russian actions?
The lawyerly argument against the use of Russian funds is myopic and partial. Much of the money stored in the West is dirty, as extensively detailed by Oliver Bullough and others. The idea that it suddenly becomes clean when it reaches the vault of a bank in London is ridiculous. Obviously, oligarchs claim clean legal bills of health in their countries of origin, no doubt double stamped and signed, but what meaning do these assurances have when there is no rule of law back home? And that’s precisely the logic of Western sanctions against Russia’s super-wealthy (that they aid the regime) which forms the core of our attack on Vladimir Putin’s friends and allies.
The “primacy of procedure over morality” is not new; it’s what led the Bank of England to hand 23.1 tons of Czechoslovak gold to the Nazis after its invasion of March 1939, and what led the Allies effectively to cooperate with Germany using the Bank of International Settlements (BIS) throughout World War II.
There will always be those who want to keep the financial lines of communication open to our enemies even during the very worst conflicts. They should not be. It is no huge step to declare Russia a kleptocratic, terrorist state, and to automatically deem its funds and assets subject to seizure.
If laws need changing, then change them. Putin has declared that this is now a war against the West, and in many ways he is right. It’s more than reasonable to remove our gloves in the defense of Western liberal democracy. And to remember that if we lose this war, there will be no rule of law to defend. Putin is waging an existential battle against our very system of government.
Western treasuries deploy another argument — that confiscating Russian assets and allocating them to Ukraine would risk global market disruption as other autocratic regimes such as China and in the Gulf rush to exit Western jurisdictions for fear of similar treatment.
Perhaps, but it’s doubtful. Surely they would have left after Russian assets were frozen? And, of course, the best way to avoid asset freezes and confiscation is not to invade other countries, and to steer clear of genocide and war crimes. The message of inaction is far worse; that the West is willing to handle such tainted assets regardless.
It will take time to change the laws of many Western countries. There are however urgent financial steps that can be taken in the interim.
First, allow frozen Russian assets to be used as collateral so that Ukraine can borrow to fund its defense and for post-war reconstruction. G-7 governments can pledge these assets, and offer assurances that laws will be changed to ensure the release of the underlying assets/capital. Insurance can be bought as protection for the event that legal amendments fail/are delayed.
Second, G-7 countries can issue requisition bonds in exchange for Russian funds frozen in Western banks. The Russian state would get a par asset in exchange, while the underlying assets
are distributed to Ukraine. The West would make a promise to repay the bonds to Russia on the proviso that it accepts any future peace terms, and pays reparations in full. Russia’s property rights are not therefore denuded.
At a recent financial conference, a participant made the observation that Putin never plays by the rules, but the West always does. We need to start getting creative to ensure Ukraine’s victory and our own rule of law. This is perfectly possible.
Timothy Ash is a Senior Emerging Markets Sovereign Strategist at RBC BlueBay Asset Management. He is an Associate Fellow at Chatham House on their Russia and Eurasian program.