The screws are turning on Russia’s state assets

Greetings. There has been a momentous turn in Ukraine’s political fortunes since last week’s newsletter, even as the country continues to struggle on the battlefield. US lawmakers finally passed the $60bn-plus military aid for Kyiv which had been held up by Republicans for many months. My colleagues’ look behind the scenes at what made House of Representatives Speaker Mike Johnson change his mind is a must-read.

My focus today is on another legislative text included in the package of laws Johnson finally pushed through last weekend. This is the Repo Act, which expands the legal grounds for the US to seize Russia’s state assets and transfer them to Ukraine — a topic we analyse frequently here in Free Lunch. Below are my thoughts on what this and other recent developments mean.

The Rebuilding Economic Prosperity and Opportunity for Ukrainians Act (the text of which you can read here) inserts, as part of the bigger funding bills, a sharpening of US law on the government’s ability to seize Russian (and potentially Belarusian) state assets and transfer them to Ukraine for reconstruction purposes. I look at some specifics below; but it essentially puts beyond doubt the US president’s authority under domestic law to seize Russia’s foreign exchange reserves. Many prominent lawyers have argued that this authority was already present, but at least the matter is now put to rest.

It also sends an important political signal. In the context of the international impasse over whether to seize Russia’s reserves at present blocked in western jurisdiction, any evolution of the law matters. In short, the more legislative moves there are in the direction of permitting such seizures, the weaker becomes the claim that this is incompatible with international law.

And the Repo Act is not the only recent legal development in this area. Another is a resolution passed last week by the Parliamentary Assembly of the Council of Europe, which unites all European countries except Belarus and Russia. Recall that the CoE has already set up a “Register of Damage” caused by Russia’s illegal assault on Ukraine.

The new resolution builds on this by calling for the establishment of an international compensation mechanism. And, most importantly, it unambiguously says countries that have blocked Russia’s access to its central bank reserves in their jurisdictions should seize these assets and transfer them to the compensation mechanism. The resolution explicitly asserts the legality of such a move as a permitted “countermeasure” against Russia’s grave breach of international law.

What do these developments change in practice?

In the US, one important and near-immediate change is to bring much more knowledge about Russian state assets to light. Repo includes a requirement for financial institutions to report any holdings of Russian state assets to the Treasury, and for the administration to send Congress a partly unclassified report on the status of these assets. Within months, there should be much more public knowledge of what and where these assets are, something that has been inexplicably avoided by the US and other western governments to date.

The law also tells the president to work with allies to co-ordinate asset seizures internationally, and to support efforts to set up an international mechanism for compensating Ukraine for the damage caused by Russian President Vladimir Putin’s war. This dovetails nicely with the CoE resolution, which calls for the same. Repo does not prevent the US from going ahead of other countries, however, so as long as the president has “meaningfully co-ordinated” with G7 leaders. The White House and the US Treasury should use their new legal imprimatur with vigour.

Until now, the US approach has focused on finding alternatives to confiscation that would be more palatable to EU countries. It is time to set an example of asset seizure and dare others not to follow suit. The US could also play hardball: non-US institutions holding Russian state assets, most prominently Euroclear, need access to US correspondent banking. The administration could condition such access, for example, on splitting off Russia-related activity into separate legal entities, which would make it easier to eventually make Russia pay for its destruction.

But the most important impact of these two developments, I think, is how they expose the weakness of the arguments made by those who continue to resist forcing Russia to pay the compensation everybody agrees it owes. That includes European Central Bank president Christine Lagarde, who recently hardened her opposition to forcing Russia to pay from its blocked reserves, likening such a move to “breaking the international order that you want to protect”.

Those arguments are increasingly shown up as unsound in three different ways.

First, they are ever more glaringly inconsistent. The leading legal argument why confiscation is compatible with international law, which the naysayers keep resisting, is that this would be a so-called countermeasure permitted under international law against those who breach it, overriding any “sovereign immunity” Russia may claim for its protection. The CoE resolution explicitly endorses this position. And it was passed unanimously — with the support, in other words, of lawmakers from all member countries and from all their political families. That is to say, the governing parties of all EU countries have voted for a legal and political position some of their governments are trying to resist.

(That comes on top of the pre-existing contradictions I have pointed out before. It is the stated policy of G7 countries, and the EU with them, to keep Russia’s state assets blocked until it has fully compensated Ukraine. In fact, Repo makes this the law in the US. How can this be legal, if using those assets to enforce the compensation is not? How can international law offer more effective protections against moves on the property of a state than against that state’s severe breaches of the prohibition of aggression and war crimes? And how can there be a greater hurdle under international law against giving Ukraine Russia’s financial assets than there is against giving Ukraine lethal force to use against Russia?)

Second, international law is not handed down on stone tablets from on high. It is formed by how states choose to act and what they choose to permit. That continues to evolve. To the extent that there are doubts about what international law says about the assets of a state committing illegal aggression and war crimes, the evolution of international opinion and practice, as well as the explicit dialogue evinced by Repo between domestic legal developments and the international level, show that the law is clearly crystallising in favour of permitting confiscation in today’s circumstances.

Third, of course, EU countries too are makers of international law and not just passive takers of it. EU countries claim to agree that it would be morally and politically right to make Russia pay but that international law prevents this. For the reasons above, they are wrong about this, but even if they were right, this would be a disingenuous argument. For they are not doing as much as they could to find legally permissible ways to make Russia pay, nor are they doing all they can to make international law evolve so as to make it possible.

The position of EU G7 countries is unsustainable and will not be sustained. It would serve them better to realise this and act accordingly rather than be shamed into it by inevitable public pressure once others act. For now, the only question is whether they are more selfish than cowardly, or more cowardly than selfish. What is not in doubt is the bad faith with which their arguments are made.

Other readables

EU leaders must emulate the political boldness of Margaret Thatcher and Jacques Delors, I argue in my column on Enrico Letta’s report about the single market.

Is the global economy stumbling into the “tepid Twenties”?

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Ministers from Brazil, Spain, Germany and South Africa have called for an international minimum wealth tax on billionaires.

The Economist has a fascinating report from America’s shrinking places, and the challenges of getting out of an economic death spiral made worse by fiscal decentralisation.