Using Russian Assets for Ukraine: a Tempting but Tricky Move

The West wants to dig into Moscow's pockets to provide aid to Ukraine, but tapping frozen Russian assets is not that simple.

The complex issue is on the agenda at this week's meeting of finance ministers of the Group of Seven wealthy democracies.

The United States initially supported seizing the frozen Russian assets outright, but it now backs the European proposal to just grab the interest that they generate.

While US Treasury Secretary Janet Yellen welcomed the plan at the G7 meeting in Stresa, Italy, she said Thursday that allies should continue their "collective work on more ambitious options".

But using the billions of dollars sitting in Western accounts faces several obstacles that have been the subject of debates by legal and geopolitical experts.

- How much are we talking about? -

The European Union and G7 nations have frozen some 300 billion euros ($325 billion) of Russian central bank funds.

Assets such as the villas and yachts of some Kremlin-linked oligarchs have also been seized.

While there is no comprehensive tally, the Ukrainian think tank Institute of Legislative Ideas, which says it has consulted official sources, puts the total at $397 billion.

"It is a tempting idea to seize the windfall," said Frederic Dopagne, an international law professor at the University of Louvain.

The World Bank estimates that it will cost more than $486 billion to rebuild the country, devastated by two years of war.

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With Russia’s full-scale invasion approaching the 1,000-day mark, 3.7 million people have already been displaced inside Ukraine and around 6.7 million have fled as refugees, according to UN figures.

- Where is the money? -

A large chunk of the funds -- 185 million euros' worth -- has been frozen by Euroclear, an international deposit organisation based in Belgium, French Economy Minister Bruno Le Maire said Wednesday.

That gives Europe an important role in deciding whether and how to use the blocked assets.

The remainder is held by the United States, Japan, Britain, Austria and Switzerland, according to the Institute of Legislative Ideas.

- What's the holdup? -

Assets held by central banks are protected by "immunity from execution", a legal principle that prevents one state from seizing another's assets.

Additionally, the right to private property theoretically obstructs the permanent confiscation of assets held by individuals.

Reluctance to seize the assets stems from the fact that the reallocation of blocked funds to a victim state "has never been used"," Dopagne said.

Some legal experts, however, say such a move would be justified as a "proportional response" to the impact of Russia's invasion of Ukraine on the global economy.

A close example was the $52.4 billion in reparations that Iraq paid to Kuwait after the 1990 Gulf War, but those payments were overseen by a UN body created specifically for the case.

A more recent case was the freezing of Afghan central bank assets by the United States after the Taliban returned to power, but the move was done with the aim of distributing the funds to the country's population, not to another nation.

Nicolas Veron, a senior fellow at the Washington-based Peterson Institute for International Economics, warned that seizing Russian assets could set a dangerous legal precedent.

"If we were at war, everything would be different. But we are not at war with Russia," Veron said.

Some caution that other countries, such as China, could withdraw assets from Western nations over concerns that they could also be seized in a conflict.

Russia has threatened to retaliate against the West's private interests in the country.

Russian President Vladimir Putin on Thursday signed a decree allowing the confiscation of assets inside Russia belonging to the United States, its citizens and companies, to compensate those hit by Western sanctions against Moscow.

- What action has taken place? -

EU countries on Tuesday formally approved using the profits from frozen Russian central bank assets to arm Ukraine.

The EU hopes the move will generate between 2.5 billion and three billion euros a year to help Kyiv.

The United States has pushed the G7 to grant Ukraine up to $50 billion in loans secured by interest on the assets.

The details have not been finalised, including whether the debt would be issued by the United States alone or G7 countries as a whole.

European leaders have been divided about the issue, citing technical challenges including regarding the sharing of risk.

A decision has been punted to the G7 meeting of heads of state and government in mid-June in Puglia, Italy.