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Reparations for Post-war Ukraine?

April 1, 2023 | Expert Insights

According to estimates, the prolonged conflict between Ukraine and Russia has caused over $650 billion in damages to the Ukrainian economy. Naturally, the West, which has largely been footing the bill of waging war on behalf of an impoverished Ukraine, is now worried about how to muster resources to rebuild Ukraine as and when the war comes to an end.

Not surprisingly, like Kaiser’s Germany after the infamous Treaty of Versailles of 2019, Putin’s Russia is being looked at for making good the damages that a war initiated by Kremlin has caused. To facilitate such an eventuality, the West has already identified substantial Russian assets which can be used as reparations.

Background

The Western allies have frozen a total of $58 billion in assets belonging to sanctioned Russian oligarchs and $300 billion in assets belonging to the Russian government, but the location of only around $100 billion is known. Notwithstanding the difficulty of discovering and taking assets, legal measures exist to seize the assets of sanctioned Russian oligarchs.

It may be recollected that last November, the UN General Assembly adopted a resolution calling for Russia to pay war reparations to Ukraine. The resolution was co-sponsored by nearly 50 countries and sought the establishment of an international mechanism for compensation for damage, loss and injury, as well as a register to document evidence and claims.

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Analysis

The confiscation of around $58 billion in blocked oligarch assets, which could then be delivered directly to Ukraine, has been presented as a viable solution. The REPO Task Force, controlled by Western partner states' finance and justice ministries, has frozen the $58 billion worth of assets belonging to Russian billionaires. Recent measures against Konstantin Malofeev and Viktor Vekselberg illustrate that the United States already possesses the legal authorities and methods necessary to seize and transfer the assets of sanctioned oligarchs. REPO member states with the right to seize assets must repeat the same procedures for the remaining $58 billion stashed within their borders.

Furthermore, the seizure of Russian state assets is suggested until Russia agrees to reimburse Ukraine for its losses. The allies have contributed large funds to support Ukraine's fight against Russian aggression. State assets may be frozen until Russia agrees to pay; if Moscow fails, they may be seized as collateral.

Yet, there are legal obstacles to taking Russian government assets. Establishing evidence of the involvement of oligarch assets in international money laundering and sanctions violations is a substantial challenge to this idea, which could reduce the total amount of forfeitable cash.

Taking Russian state assets is impeded by substantial legal obstacles. EU member states can only confiscate assets if there is evidence of a specific criminal act, which excludes blocked sovereign assets. New legislation would be required to seize Russian state assets, needing unanimity among the 27 EU member states, which might lead to internal disagreements and tensions within the EU and the United States. Consequently, there is no legal basis for the United States to seize Russian government assets, which presents legal issues.

Former senior U.S. officials claim that the U.S. has legal justification under the 1977 International Emergency Economic Powers Act (IEEPA), a United States federal law authorizing the president to regulate international commerce after declaring a national emergency in response to any unusual and extraordinary threat to the United States which has its source in whole or substantial part outside the United States. But this precedent is no longer applicable because the U.S. is not involved in armed hostilities with Russia, and there is no UNSC Chapter VII Resolution.

Private banks would also be involved in the asset seizure procedure, necessitating additional processes and a new government direction to the private sector. The confiscation of assets might exacerbate the situation and be perceived as a substantial escalation by third-party nations, thereby accelerating the ‘de-dollarization trend and reducing the future effectiveness of U.S. economic statecraft instruments.

A big concern is that it could lead to internal debates and tensions inside the European Union and the United States at a time when Western unity is essential to confront Russian aggression. EU member states can only confiscate assets if evidence of a specific criminal act exists. In this case, taking Russian state assets would require new law and consensus from twenty-seven EU member states, which could be difficult and time-consuming.

While the moral justification for transferring Russian sovereign assets immediately to support Ukraine is compelling, the legal obstacles that may postpone aid delivery for years cannot be ignored.

In the long-term, seizing foreign assets parked in the U.S./ Europe could make these countries unattractive destinations for parking huge foreign reserves, which would derive these western economies of substantial foreign investments. Furthermore, if the war ends in the next one year, Ukraine will urgently need thousands of billions of dollars for its reconstruction within a short period, while legal hurdles could potentially delay the outflow of reparations by years, if not decades. This could prevent other central banks from utilizing the dollar as a reserve currency in the future. This could accelerate the previously emerging ‘de-dollarization’ trend and reduce the future effectiveness of U.S. economic statecraft.

Another financial avenue being looked at is IMF. In its seventy-seven-year existence, the IMF just authorized a $15 billion loan package for Ukraine, marking its first loan to a country at war. The loan may be swiftly disbursed and administered due to the established transmission and monitoring systems between the IMF and Ukraine. In addition, Russian government assets might be pledged as collateral for Ukraine's IMF debts.

Assessment

  • The dilemma facing the West is that over the last few decades, they have been the magnet for attracting huge hordes of funds by oligarchs and warlords all over the world, giving their banking systems a great deal of liquidity. The powerful private financial institutions would not be happy that to punish the Russians, this golden goose is sacrificed. Herein lies the biggest challenge for western policymakers.
  • Unless totally defeated and economically rendered at the mercy of the West, Moscow is unlikely to willingly accede to western demands. If a policy regime takes place if Mr Putin is unable to convince his people, and the oligarchs, that the war made political and economic sense, then the new incumbents of the Kremlin may be better inclined to meet the western demands. A UNSC resolution could have done the trick, but the Russian veto will never allow it, even if Mr Putin is no longer in power.
  • Theoretically, the West has enough Russian funds at hand to commence the reconstruction work the moment fighting ends in Ukraine. The question is, if these nations have prospered under the rule of law, will their systems allow the transfer of these seized funds by tweaking existing rules and regulations and creating precedents which can be dangerous in the future?