Could seizing Russian assets help rebuild Ukraine?

Inot 2011 Viktor Vekselberg, a metal magnate and Kremlin insider, visited the design team of the Tango, a $90 million yacht he had commissioned, to oversee its construction. His attention to detail proved his downfall. When Mr Vekselberg faced US sanctions in 2018, his overseas assets were frozen, but not Tango, which was held through a shell company registered in the British Virgin Islands. Then two shipyard engineers remembered the 2011 meeting and warned the FBI. A money transfer trail confirmed that Mr. Vekselberg did indeed own the Tango. On April 4 this year, Spanish police, acting at the request of the United States, seized the boat in Mallorca.

Netting the Tango was a coup for KleptoCapture, a task force set up by Joe Biden, the US President, to track the assets of oligarchs blacklisted by the West after the invasion of Ukraine by Russia. The EU captured some $7 billion in art, boats and property; Italy has seized a $700m superyacht believed to be linked to Vladimir Putin; America owns about $1 billion worth of ships and planes. Add to that the portion of the Russian central bank’s foreign exchange reserves that have been subject to Western sanctions, and nearly $400 billion in assets have been frozen.

According to the Kyiv School of Economics, the total economic damage to Ukraine so far could amount to $600 billion. For many, therefore, the idea of ​​seizing Russian assets, selling them and using the proceeds to compensate the victims of Mr. Putin’s assault seems irresistible. Charles Michel, the head of the European Council, for example, argued that “it is extremely important not only to freeze the assets, but also to allow their confiscation, to make them available for the reconstruction of Ukraine”. The idea has won support from politicians everywhere, from Canada to Germany. But there are two big obstacles to the plan: the practical obstacles to freezing assets and the legal obstacles to seizing them.

First, consider the practical aspects of the asset freeze. Central bank foreign exchange reserves are a relatively simple objective. More than half of Russian reserves are held in the West and have been subject to sanctions. So far, however, this giant reserve is “hampered”, not technically frozen: transactions with the central bank are prohibited, but its funds are not legally blocked. That means Western countries are one step closer to being able to seize the money, says Adam Smith of Gibson Dunn, a law firm. Ukraine’s allies may decide to take this step, as the United States did when it froze Afghan central bank reserves last year after the Taliban entered Kabul.

Private assets, on the other hand, are more difficult to target. Russia’s stock of foreign direct investment amounts to some 500 billion dollars, a colossal sum. But few things are prone to freezes, says Rachel Ziemba of cna, an American think tank. One problem is that it is difficult to know where the investment is located: its indicated destination is often Cyprus, which tends to be only an intermediate stage. Efforts have therefore focused more on individuals.

Here too, the search for assets is tricky. Anders Aslund, a former adviser to the Russian and Ukrainian governments, estimates that Russians under sanctions hold some $400 billion in assets overseas. But, he says, only $50 billion is frozen. One of the reasons for this mismatch is that, having been the target of sanctions following Russia’s 2014 invasion of Crimea, the savviest oligarchs now hide their foreign assets behind 20-30 layers of shell companies. Some physical assets have been moved to friendlier territory. More than 100 Russian private jets landed in Dubai in the weeks following the invasion.

Moreover, while the sanctions are handed down by governments, enforcement falls to the private companies – from banks to marinas – that serve the wealthy. Not everyone has the expertise to see through tycoon obfuscation. Whoever freezes assets may also have to deal with them, further draining resources. The property must be maintained; yachts cost 10% of their value in annual maintenance.

However, all the difficulties of freezing pale in comparison to the difficulties of confiscation – the next step if Russian assets are to be used to rebuild Ukraine. In Western democracies, seizure of foreign property on the basis of nationality or political opinion is illegal. This does not mean that there are no precedents for the expropriation of public and private property. But they took place at extraordinary times and when certain strict criteria were met.

When it comes to individuals, the typical condition for forfeiture is a criminal conviction – not just for any crime, but for those deemed to warrant seizure. The confiscated assets must either be determined as an instrument of the crime or linked to the proceeds thereof. Such things can take years (and lots of money) to prove in court. It is unlikely that the obstacle will disappear anytime soon: a bill tabled in the we The Senate in April that would have granted the president the power to confiscate the assets of oligarchs was soundly rejected after the American Civil Liberties Union warned it would likely be struck down by a court.

Western leaders are therefore working instead to expand the list of crimes justifying seizure. In April, the Biden administration introduced a bill that would add evasion of sanctions and export controls to the list of offenses punishable by the Racketeer Influenced and Corrupt Organizations Act, which passed. in 1970 to suppress gangsters and allow ill-gotten gains to be seized. On May 25, the European Commission presented plans to make it easier for member countries to confiscate assets belonging to people suspected of violating sanctions.

Each proposal faces a tough political battle. Although most Republicans support the Russia bashing, few want to give Mr Biden a victory before the midterm elections in November. The EU will not have the power to tell member governments how to use the proceeds of liquidated assets. Some countries will be wary of confiscation: Germany may need to amend its constitution, which guarantees private property; Cyprus and Malta, which serve as hubs for Russian money, are unlikely to support seizures.

Confiscation of state assets, meanwhile, would force Western governments to designate Russia as a hostile power or call for regime change, which they have so far avoided doing. As a general rule, the doctrine of “sovereign immunity”, enshrined in a UN convention, protects foreign states from local lawsuits. But some laws, especially in America, allow the government to seize foreign state property without trial in certain cases.

One such law is the International Emergency Economic Powers Act (ieepa), which provides legal support to current freezes. It does not explicitly grant the president the power to “acquire” assets, i.e. change who owns them. But an exception, added in 2001, allows for some acquisition in cases where America is engaged in “armed hostilities” with another country. This was used by George W. Bush to seize assets from Iraq after he invaded the country in 2003. Today, however, America is at pains to point out that its arms shipments to Ukraine do not does not mean that it is in armed conflict with Russia. Saying otherwise could become “the real reason for the war”, notes Antonia Tzinova of Holland & Knight, another law firm.

Seizures can happen outside ieepa. The US executive branch has the power to transfer control of certain foreign state assets when it changes which it considers the legitimate government, as it did in 2019 when it confiscated Venezuelan assets after having recognized Juan Guaidó as president. But America has so far not called for Mr. Putin’s departure. In rare circumstances, Congress can also waive the immunity of sovereign states, allowing their assets to compensate plaintiffs in a national trial. Some of the frozen Afghan assets are currently being set aside while the courts hear from the families of the victims of the September 11 attacks. However, for this to apply to potential lawsuits against Russia, America would have to declare it a terrorist state. The EU, for its part, does not even address the issue of sovereign assets, points out Jan Dunin-Wasowicz of Hughes Hubbard & Reed, a law firm. Their mentions are obviously absent from his proposals.

International tribunals do not seem to be a fruitful route either. One possible forum is the International Court of Justice, but neither Russia nor Ukraine has consented to its jurisdiction, with very few exceptions, says Astrid Coracini of the University of Vienna. A newly created body, similar to a commission set up by the UN seeking reparations from Iraq after the invasion of Kuwait in 1991 would require Russian consent.

So creative ideas arose. One is to target the billions of dollars Russia receives every day for its energy exports, rather than its stock of assets. In a meeting of gIn May, 7 American countries proposed to levy a tariff on Russian oil, the product of which could then be sent to Ukraine. But reaching an agreement even within the EU will be a big challenge.

Another scheme would funnel Russian oil payments into escrow accounts at international banks, as happened with Iranian crude in the 2010s. The accumulated bounty, worth around $100 billion, is became available again for Iran after the lifting of sanctions in 2016; this time the West could demand that part be given to Ukraine. An insider suspects the idea is being considered in Washington. There is no guarantee, however, that Russia wouldn’t simply stop selling to the West. Meanwhile, applying the measure elsewhere would require violators to be threatened with “secondary” sanctions – something the West has so far avoided.

All of this suggests that attempts to seize Russian assets as the war rages on will struggle to avoid one of three pitfalls. Unless Western countries abandon the protections they offer foreign individuals and states, they risk spending many years in court. If they abandon them, however, the trust that underpins their economies and societies could be jeopardized. More creative ideas, meanwhile, could invite Russian retaliation and anger the rest of the world.

This does not mean that the Russian treasure will remain untouchable forever. Most reparations tend to be agreed after the war is over, often as a condition of unfreezing assets. Mr. Putin still seems far from contemplating peace. If he does succeed, however, letting funds go to Ukraine could be the price he will have to pay to see some of his own assets – including, possibly, a multimillion-dollar superyacht – to return to his place.

About Pamela Boon

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