Russian Assets in Ukraine and Abroad: Can They Be Confiscated?

October 26, 2023
How does Ukraine’s need to protect sovereignty and territorial integrity transform the international legal frame of asset seizure?
Photo credit: Tetiana Khutor

How to nationalise Russian assets in Ukraine and to make "Evil powerless if good is not afraid"?

  • UkraineWorld asked Tetiana Khutor, Head of Institute of legislative ideas think tank. Key points in our brief, #UkraineWorldAnalysis

Why are Russian assets not being confiscated in the West?

The confiscation of Russian assets in favour of Ukraine is a step that requires the resolve and political will of Ukraine's Western partner countries. The events of recent weeks give hope that the issue will soon be resolved.

From a legal point of view, property rights are inviolable. This is a universally recognised principle. However, this principle gives way to the need to protect sovereignty and territorial integrity from military aggression. This falls under the umbrella of a legitimate countermeasure.

In international law, countermeasures are defined as measures that would otherwise be considered a violation of a state's international obligations (such as the obligation to respect the property rights of others), and are recognised as permissible.

This is due to the fact that they are taken in response to another state's gross violation of international law and are intended to force the latter to return to civilised behaviour. This is precisely the situation in which the civilised world and Russia currently find themselves.

As for the economic side of the issue, financiers oppose the confiscation of Russian assets, fearing the weakening of the world's two major currencies, the euro and the dollar, and the withdrawal of foreign capital from the country.

In contrast, experts argue that these concerns are exaggerated for several reasons.

  • First, by freezing assets, the "shock effect" has already been formed. Following that, political risks are factored into the cost of capital placement services, and confiscation will have little effect.
  • Second, in order to deviate from the two major world currencies, equivalent alternatives must be available. However, there are few alternatives, to put it mildly.

The Chinese yuan is a candidate for this role, but keeping reserves in the currency of a country where the rule of law is not respected carries political risks that are likely to be even greater than those associated with the current situation. To date, China's share of global payments is less than 3%.

It is necessary to ensure the unity of partner countries, especially the G7 countries, in holding the aggressor financially accountable. After all, the more countries that back the idea of confiscating Russian money, the more durable this decision will be in terms of international law and geoeconomics.

What mechanisms could be used to recover these assets?

The specific mechanism for recovering these assets is determined by the characteristics of a country's state system (for example, a presidential or parliamentary republic). In any case, this should not be done through the courts, as Russia may invoke jurisdictional immunity in this case.

Therefore, the decision on confiscation must be made by the respective country's president, government, or parliament - the acts of these bodies cannot be limited by the concept of foreign state immunity.

An example of the application of a similar mechanism is the decision of President George W. Bush to seize Iraqi oil revenues deposited in US financial institutions and subsequently transfer them to the UN Compensation Commission, which was made in response to Iraq's invasion of Kuwait.

The legal basis for such actions was a special law (International Emergency Economic Powers Act or IEEPA), which grants the President special economic powers to respond to an "atypical and extraordinary threat" to national security, international politics or the economy that originates in whole or in part from abroad (50 U.S.C. 1701(a)).

It is worth noting that experts believe that the same law already allows the US President to take similar measures against Russia without the need for any amendments or changes.

Ukraine is adamant about implementing the Global Compensation Mechanism. This mechanism calls for the establishment of three components: a Register of Damages, a Compensation Commission, and a Compensation Fund. The Fund will most likely be filled with confiscated Russian money.

An international agreement signed by as many countries as possible should serve as the legal foundation for this. The signatures of the G7 countries, which hold the majority of these funds (approximately $280 billion), are especially important.

How can Russian assets in Ukraine be nationalised?

Ukraine also has a specific law titled - "On the Basic Principles of Compulsory Seizure in Ukraine of Property Rights of the Russian Federation and its Residents".

According to this law, the decision on nationalisation (in the terminology of the law, "compulsory withdrawal of property rights of the Russian Federation and its residents") is made by the National Security and Defence Council and enacted by a presidential decree. Ukraine's Cabinet of Ministers has submitted a draft decision.

Furthermore, the Verkhovna Rada must approve the presidential decree by passing a relevant law no later than six months after the end of martial law.

Under this procedure, two banks that were subsidiaries of Russian financial institutions were nationalised in Ukraine.

  • These are the International Reserve Bank (100% of the authorised capital belonged to the Russian Sberbank) and Prominvestbank (99.772644% of the shares belonged to the Russian state-owned company VEB.)

This recovery has already resulted in the transfer of almost UAH 26 billion to the budget.

At the same time, there are still many Russian-owned objects in Ukraine that are subject to recovery for the state's revenue. Therefore, efforts in this area should be stepped up.

Ukraine is actively using the tool of recovery of private Russian assets. It is applicable to those who actively participate in the aggression. Almost $500 million in assets have already been recovered, including those of Russian oligarchs such as Deripaska, Shelkov, and others.

What is the procedure for the reinvestment income transfer mechanism?

As of today, this is probably the most realistic measure in the relatively short term. Belgium can serve as a model to emulate.

Belgium is home to the international depository Euroclear, which holds approximately 125 billion dollars in Russian assets frozen in its accounts. These assets generate income. And since the income is also frozen and cannot be transferred to Russia, the depository reinvests it, and thus receives profit from the income.

In 2022, Euroclear reported €821 million in income from frozen Russian funds. And in the first half of 2023, the amount of such income has already reached €1.74 billion.

During a meeting with Volodymyr Zelenskyy, Belgian Prime Minister Charles Michel announced the establishment of a special fund in Belgium to transfer €1.7 billion to Ukraine. This fund will be financed by taxes levied on income from Russian fund reinvestment.

Given that Belgium manages its own budget revenues, the mechanism is relatively simple in this case. Therefore, it did not require EU approval or the adoption of special legislation in accordance with international law.

Leaders of Western democracies have repeatedly expressed support for the idea of using the proceeds of Russian assets for Ukraine's needs. At a summit in Brussels in June 2023, EU leaders agreed to gradually implement a plan to tax excess profits from immobilised Russian assets, with the European Commission initially stating that it would submit a proposal this summer. The plan, however, has not yet been presented.

In October of this year, representatives of the G7, the world's seven strongest economies, issued a joint statement at the World Bank and IMF conference in Marrakech, announcing that they would consider ways to use the funds received from frozen Russian assets to help rebuild Ukraine.

However, despite the fact that the idea has been widely recognised, only Belgium has announced the first effective steps toward its implementation. Therefore, there is still room for further promotion and advocacy of this initiative in order for it to be implemented as soon as possible.

Nevertheless, it should be understood that our ultimate goal is to transfer all frozen Russian assets in order to compensate Ukraine for the damage suffered.

After all, as former US President Ronald Reagan famously stated, "Evil is powerless if good is not afraid."

Daria Synhaievska, Analyst at UkraineWorld

Tetiana Khutor, Head of Institute of legislative ideas think tank