In the two years since Russia launched its full-scale invasion of Ukraine in February 2022, the issue of financial support for Kyiv has never been more critical. Given how long it took the EU to approve a new long-term aid package, and that the United States has still not done so, an obvious solution is to confiscate the $300 billion of Russian assets currently frozen in the West and hand them over to Ukraine. But while helpful in financing Kyiv’s war needs and morally justified, such a move would also carry some risks.
Ukraine and the West agree that Russia should not get its assets back until it stops the war, gives up all the territory it has occupied, and pays reparations. Western governments are hesitant to ask their taxpayers—already suffering from inflation and an economic slowdown—to chip in for Ukraine’s war effort when it could theoretically be funded by enemy resources.
This idea has many supporters, above all Washington (after Kyiv itself). The White House is backing a bill that would allow Russian assets frozen in the United States to be seized and used to help Ukraine. The precedent for this is the seizure of Iraqi assets in 2003.
Yet the bulk of Russia’s frozen assets are not in the United States but in Europe: primarily Germany, France, and in particular Belgium, where more than half of all Russia’s frozen assets are held by the depositary and clearing house Euroclear. But with no precedent to follow, European governments are reluctant to seize assets from a country with which they are not officially at war.
Above all, they fear that doing so would deter sovereign wealth funds, central banks, corporations, and private investors from the Global South from investing in European assets. A potential outflow of investment in euros would have serious consequences: a rise in borrowing costs and inflation, as well as a fall in tax revenues.
On closer inspection, these threats may be exaggerated. Those with reason to reconsider their investment strategy are likely to have done so back in February–March 2022, following the freezing of Russian assets. At the time, there was no capital outflow to speak of because there were no viable alternatives to Western assets and currencies.
Two years later, there is still no sign of panic dumping of foreign assets from Europe and other Western countries. But unlikely as such an outcome is, its consequences would be so devastating that Europe’s central banks understandably want to wait and make careful calculations.
There are also legal concerns. Russia would inevitably challenge the seizure of its assets in court, and as long as the case is pending, the funds would remain frozen for Moscow and Kyiv alike. Barring national courts from hearing such cases, as some U.S. senators have proposed, risks undermining public confidence in the legal system (though so does failing to punish an aggressor for violating international law).
The economic argument against seizure is trickier to dispute. Moscow has warned that if the West seizes its assets, it will retaliate by confiscating the remaining Russian assets of companies from what it terms “unfriendly countries.” Western investors in the Russian economy have already paid the price for the freezing of Russia’s assets: their funds are now trapped in Russia. Russia’s 2022 ban on capital withdrawals has effectively performed the function of a currency reserve. There’s no need to fight the effects of capital flight when the capital can’t fly in the first place.
Some might say that there is nothing to worry about: after all, losing an investment is a calculated risk in high-yield investing in emerging markets, especially when, as in Russia’s case, the threat of sanctions has existed for years. Yet this argument, which is based on a fundamental principle of capitalism—that there is no profit without risk—has a major flaw.
For many systemically important Western firms, writing off Russian assets would spell disaster. Take Euroclear, used by foreign investors to buy Russian stocks and bonds. If its clients’ assets were seized, it could face a slew of lawsuits and even bankruptcy.
Bailing out companies like Euroclear would ultimately cost European governments even more than direct aid to Ukraine. An exchange of frozen assets is therefore the most logical solution, but so far no one is willing to break the deadlock.
Even if Russia’s frozen assets were seized, it is not clear how they would be transferred to Ukraine. The easiest option is to sell all the bonds and hand over the money. But that could cause a steep rise in the price of military equipment, as well as reduce demand for European debt, increasing European governments’ costs and maybe even forcing them to cut spending on defense and Ukraine.
Alternatively, under a plan reportedly already circulating among G7 nations, the assets could be used as collateral for bonds. Ukraine’s allies would first demand that Russia repays the debt, and if it refuses to do so, the frozen assets would be confiscated, according to the Financial Times. Selling the bonds would raise funds and the flow of money could be regulated. It would also avoid many of the risks described above, as officially Russia’s assets would remain unappropriated until the bonds are repaid.
The difficulty is finding someone to buy those bonds. Central banks are unlikely to step in: that would effectively be akin to printing money and a return to the quantitative easing policies of the 2009 financial crisis and the COVID-19 pandemic. For their part, commercial banks are unlikely to buy the bonds without guarantees (in effect, debt securities) from Western governments. Thus, transferring Russia’s frozen assets to Kyiv this way would prove costly for the West and its taxpayers. But if Ukraine’s victory means the West’s security, then perhaps this is only fair.
For now, an interim plan has been agreed: a 100 percent tax on all income generated by frozen Russian assets. Russia is unlikely to respond by nationalizing assets, nor foreign investors to divest of their holdings in euros. But this will only raise $5–6 billion a year.
Given the magnitude of the risks involved, European governments are unlikely to yield to U.S. pressure to seize Russia’s frozen assets anytime soon, and that may be for the best. For now, European and American leaders continue to advocate for new long-term aid packages for Kyiv, despite having domestic difficulties. The main challenge in supplying arms to Ukraine is limited production capacity, not funding.
The long-term prospects for aid, however, are uncertain. They will largely depend on the outcome of the upcoming election cycle. If at any point necessity begins to outweigh risk, discussion about appropriating Moscow’s assets will surely resurface, and Russian resources may end up being seized. But until that happens, it may make more sense to keep this card in reserve.
