Following the 2022 invasion of Ukraine, the EU and the US imposed extensive sanctions on Russia. These measures aim to weaken Russia's ability to finance its war efforts and indirectly support Ukraine. Western governments are exploring ways to implement permanent asset seizures. However, experts urge that European countries, where most of these assets are located, lack the legal grounds for confiscation. Such a move could undermine trust in the dollar and euro as reserve currencies, damage the Western banking system, and question the Western coalition's commitment to a law-based order.
In 2022, the EU, USA, Japan, and Canada froze approximately $300 billion in Russian sovereign assets. Around $4-5 billion of these are under U.S. jurisdiction. G7 countries, the EU, and Australia have frozen €260 billion of the Russian Federation's Central Bank assets. Most of these assets are stored in Euroclear, the central depository registered in Belgium, mainly in securities, including European government bonds.
According to the EU Council, Euroclear and other central depositories can reinvest funds generated from coupon payments on bonds owned by the Central Bank of Russia, dividends on equity securities, the redemption of bonds at maturity, or the return of deposits placed by the Central Bank of Russia in financial institutions such as Euroclear Bank.
On May 21, 2024, the Council of the EU allocated the net earnings from managing Russian sovereign assets to funds supporting Ukraine. Similarly, on 24 April 2024, the U.S. Congress passed the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act (REPO), which President Biden signed into law on 25 April 2024.
The REPO Act is intended to help rebuild Ukraine while promoting international cooperation and holding Russia accountable for its war against Ukraine. It authorizes the seizure of Russian sovereign assets in the United States, including foreign currency reserves, to provide financial assistance and compensate for damages from Russia's aggression.
The consequences under international law
The decision to confiscate assets has caused significant concern, particularly among countries in the global South, which see these actions as prioritizing political power over legal principles. Western and Russian authorities and major financial institutions like the World Bank and IMF have expressed concerns about the legality and risks of such actions.
Christine Lagarde, head of the European Central Bank, warned in April 2024, while speaking before the Council for Foreign Relations in Washington, D.C., about the high risks and potential violations of international law, advising careful consideration of options.
She criticized using proceeds from frozen Russian assets, arguing that it could undermine trust in the euro as a global currency and cause greater losses for the EU than the potential benefits for Ukraine. Other critical voices have also stated that confiscating sovereign assets may undermine market confidence, especially if such confiscating measures are targeted at assets held by central banks.
While it is undisputed that states are obligated under international law to make reparations for internationally wrongful acts, confiscation measures could undermine the principle of state immunity, which is enshrined in customary international law. The Permanent Court of International Justice (PCIJ) affirmed in the Factory at Chorzów case that "it is a principle of international law, and even a general conception of law, that any breach of an engagement involves an obligation to make reparation."
The more recent Articles on State Responsibility for Internationally Wrongful Acts (ARSIWA) state that "the responsible state is under an obligation to make full reparation for the injury caused by the internationally wrongful act." Therefore, Russia is required to provide complete compensation for the harm inflicted on Ukraine.
However, confiscating the State's assets is prima facie incompatible with the law of state immunity, which protects them due to their assumed sovereign purpose. This is more so regarding central bank assets, which are assumed to be used or intended for non-commercial purposes, rendering them immune from enforcement measures.
Two significant treaties, also largely considered customary international law and thus binding on non-parties, outline these immunity rules. The 2004 United Nations Convention on Jurisdictional Immunities of States and their Property (UNCSI) stipulates in Article 18 that pre-judgment measures like attachment or arrest cannot be taken against a state unless the state has explicitly consented or allocated the property for a claim.
The rationale behind strict enforcement immunity rules is that interfering with a state's property hinders its ability to manage its affairs and pursue public purposes. States often hold significant portions of their national wealth in foreign reserves, and control over these assets is seen as an exercise of sovereign authority.
The International Court of Justice (ICJ) has clarified that enforcement immunity for state property in foreign territories goes beyond jurisdictional immunity. Even if a court has lawfully ruled against a foreign state, it does not automatically permit enforcement measures on that state's property within the forum state or another state.
Generally, enforcement immunity applies to property used for public purposes rather than private ones. However, central banks benefit from significant protection under state immunity laws. For instance, Article 21(1)(c) of the UNCSI asserts that the central bank or monetary authority property is immune from all constraint measures unless the state consents or allocates assets to satisfy a claim. It is widely recognized that central bank assets are immune, irrespective of whether the bank is a governmental department or a separate entity, and are presumed to be used for public or non-commercial purposes.
Although well-intentioned, the West's plans to confiscate Russian assets to provide reparations or assistance to Ukraine face significant legal challenges. Criminalizing transactions involving sanctioned Russian assets reduces their economic value but does not alter ownership. Customary laws of warfare allow for the confiscation of enemy state property and countermeasures against responsible states. Still, these measures do not apply to either the EU or the other G7 countries, as Russia has not attacked them.
Legally, freezing assets is different from confiscating them. Confiscation requires judicial action, which is impeded by the principle of sovereign equality. Therefore, Russian Central Bank (RCB) assets are protected from legal proceedings in other states unless Russia explicitly waives this immunity. For example, assets blocked under Council Regulation 833/2014 are justified as countermeasures but cannot be definitively taken under current laws.
G7 and EU attempt to circumvent legal issues with innovative Ukraine loan backed by frozen Russian asset interest
The G7 countries made a decisive move at their Summit in Italy, held from June 13 to 15, 2024. Given the international law implications and intricacies that the mere confiscation of the Russian sovereign asset could entail, they concluded a pivotal agreement. They unequivocally supported Ukraine by utilizing frozen Russian assets in the form of a loan backed by interest accrued by those frozen assets.
This was done instead of their de facto confiscation, in order to help prevent the potential challenges under international law regarding that kind of action. The G7 nations have agreed to provide Ukraine with a $50 billion loan, secured by the interest generated from frozen Russian assets. This will be approximately $3 billion annually to support defense, reconstruction, and economic recovery.
In the G7 nations' view, this loan, rather than being a direct asset confiscation, is structured as a commercial loan. The G7 nations are confident that this will mitigate legal challenges and ensure adherence to international law. The European Union will manage the frozen assets and the generated interest, ensuring compliance and technical feasibility. In taking this initiative, the G7 has made it clear that it is committed to supporting Ukraine and holding Russia accountable.
However, this strategic move does not eliminate the potential challenges that Russia could raise under international law. In fact, using interest generated from frozen Russian assets to fund the loan to Ukraine could prompt Russia to bring a host of legal challenges. Russia will likely argue that the interest, like the principal, de jure belongs to them under international law.
Moreover, state immunity, a cornerstone of customary international law, offers robust protection for sovereign assets from seizure and use by other states. Using the interest might, therefore, violate this principle. Russia might also invoke bilateral investment treaties (BITs), claiming that using interest amounts to indirect expropriation without due process and compensation.
Finally, settled international legal precedents protect sovereign assets and their generated interest. Russia could, therefore, argue that the current measures undermine established international norms.
Summary
In conclusion, while the motivation to support Ukraine and hold Russia accountable is understandable, balancing these objectives with the imperative to uphold international legal standards is crucial. Any action to confiscate Russian Central Bank assets (or use the interest generated by them) must be carefully considered to avoid setting a dangerous precedent that could weaken the rule of law, destabilize the global financial system, and lead to further international disputes.
Mark R. Ludwikowski is a regular contributing columnist on international trade for Reuters Legal News and Westlaw Today.
