Europe is currently presenting an economic case for not confiscating frozen Russian assets to fund Ukraine. This simplistic view overlooks the strategic rationale behind this action.
A tense weekend of Ukraine diplomacy is in store. The 11-12 June Ukraine Recovery Conference, held in Germany, examined the country’s future reconstruction requirements.
The 15-16 June Summit on Peace in Ukraine, held in Switzerland, will attempt to find common ground on the way to an equitable and sustainable peace. Between them, on 13-15 June, there will be an annual G7 leaders gathering in Italy.
Russian Central Bank Assets Frozen
The G7 Summit is by far the most significant since it is a chance to let the resources that peace and recovery need.
The summit will determine what to do with the US$300 billion Russian central bank assets frozen in Western financial systems since February 2022. The transfer of these funds to Ukraine to compensate for the harm caused by Russia’s massive invasion of Ukraine would allow it to stop and end the conflict on favorable terms.
This will, in turn, make the right conditions for a smooth recovery. No issue is on this G7 agenda that could be more crucially important.
Canada, Canada, the United Kingdom, and the United States have expressed their support for the coordinated confiscation of assets belonging to Russia. However, it is the European Union where much of the cash is frozen.
The first concern for member states was that seizures could violate international law. However, several teams of top international researchers have found an unambiguous legal pathway to seizures under the established theory of state countermeasures and precedents for doing such.
Opponents of seizure have yet to explain their reasons in a way that is similar to forensically precise. Legal issues are now just excuses, not justifications for inaction.
The central question for policy is not “Can we?” but rather “Should we?”. This is a matter of economics. On April 1, Christine Lagarde, head of the European Central Bank (ECB), spoke out against confiscation, citing that it could lead to instability in the financial system and create a risk of currency to the euro. In essence, it would be costly.
Lower Currency Or Increased Inflation
It’s an accountant’s view and not a strategy. Even in narrow economic terms, it is not a good idea. The potential risks associated with a lower currency or increased inflation should be evaluated against the likely effects of a defeat for Ukraine due to the lack of resources.
A triumphant Russia could project its power across Europe. At the same time, an invading Ukraine will be unstable, and a weakened Europe will be in the midst of a massive crisis of credibility and security.
The economic turmoil that follows would be devastating. The ECB’s mission is to ensure price stability and support the EU’s economic policies.
The EU must support the use of Russian assets to avoid this catastrophe. Instead, the ECB is securing Russian assets, not European security. The Kremlin appreciated Lagarde’s “eloquent” remarks.
Economic Instbaility
However, worries about economic instability are exaggerated. Because investors didn’t leave the euro after Russia’s financial assets were frozen, there’s no reason to go in the present if money is transferred to Ukraine.
Also, Western self-deterrence in the economy has been ineffective before. The US Department of the Treasury has remained adamant about not fully sanctioning Russian sovereign debt out of fear of compromising the dollar’s global significance.
Once it did and the dollar was not affected, it was not a problem. Similar to the energy dependency that has long prevented the EU from imposing more severe sanctions against Russia.
After it decided to withdraw from Russian gas and oil, Europe adapted well after the first winter of increased prices for gas. It’s Gazprom and not the EU who has suffered a massive loss.
A Geopolitical Approach
The EU must decide between Lagarde’s narrow financial Europe and the broader geopolitical Europe that Ursula von der Leyen espoused in her first term as head of the European Commission. A geopolitical approach demands a distinct economic one integrating finance and trade into security.
The EU has honed the power of normative standard-setting during globalization. Yet, transferring Russian state funds to Ukraine is considered more dangerous than arming the country with weapons that can kill Russians. This is a perverse order of risk.
A different argument against the confiscation, as mentioned by Lagarde, is that frozen assets could be used as a bargaining chip in negotiations to end the conflict. However, this does not reflect the reality of Russia’s calculation.
The possibility of regaining its reserves will not cause Russia to abandon its plan to subordinate Ukraine. Russia has formally written off its assets. Its only concern is preventing the victim from gaining access to the funds. Instead of creating leverage, the refusal of the G7 to acquire Russia’s assets demonstrates naivete and insecurity.
What, Then, Will G7 Decide?
The EU will likely only accept the interest benefits generated from Russia’s assets. The amount will reach around $3 billion annually from 2025.
It’s more than sufficient but tiny compared to Ukraine’s present financial and military needs of around 100 billion dollars annually. This will not impact strategic planning.
A loan secured by the profits would offer an additional USD$50bn. However, this is short of meeting Ukraine’s and, consequently, Europe’s security requirements.
Imagine a historian in the future who writes about how Russia beat Ukraine and ruined Europe as Brussels was awash with the money of the state that could have prevented this, all in the name of the monetary policy. To avoid this scathing judgment, Europe needs strategists, not accountants.
