Seizing Russian assets to help Ukraine sets off White House debate

Damage seen after a Russian missile strike on an apartment complex in Sloviansk, in eastern Ukraine, on May 31, 2022. PHOTO: NYTIMES

WASHINGTON (NYTIMES) - The devastation in Ukraine brought on by Russia's war has leaders around the world calling for seizing more than US$300 billion (S$411 billion) of Russian central bank assets and handing the funds to Ukraine to help rebuild the country.

But the movement, which has gained momentum in parts of Europe, has run into resistance in the United States. Top Biden administration officials warned that diverting those funds could be illegal and discourage other countries from relying on the United States as a haven for investment.

The cost to rebuild Ukraine is expected to be significant. Its president, Volodymyr Zelensky, estimated that it could be US$600 billion after months of artillery, missile and tank attacks - meaning that even if all of Russia's central bank assets abroad were seized, they would cover only half the costs.

In a joint statement last week, finance ministers from Estonia, Latvia, Lithuania and Slovakia urged the European Union to create a way to fund the rebuilding of cities and towns in Ukraine with frozen Russian central bank assets, so that Russia can be "held accountable for its actions and pay for the damage caused."

Confiscating the Russian assets was also a central topic at a gathering of top economic officials from the Group of 7 nations at a meeting in May, with the idea drawing public support from Germany and Canada.

The United States, which has led a global effort to isolate Russia with stiff sanctions, has been far more cautious in this case.

Internally, the Biden administration has been debating whether to join an effort to seize the assets, which include dollars and euros that Moscow deposited before its invasion of Ukraine. Only a fraction of the funds are kept in the United States; much of it was deposited in Europe, including at the Bank for International Settlements in Switzerland.

Russia had hoped that keeping more than US$600 billion in central bank reserves would help bolster its economy against sanctions. But it made the mistake of sending half those funds out of the country.

By all accounts, Russian officials were stunned at the speed at which they were frozen - a very different reaction from the one it faced after annexing Crimea in 2014, when it took a year for weak sanctions to be imposed.

Those funds have been frozen for the past three months, keeping the government of President Vladimir Putin from repatriating the money or spending it on the war. But seizing or actually taking ownership of them is another matter.

At a news conference in Germany in May, Treasury Secretary Janet Yellen appeared to close the door on the United States' ability to participate in any effort to seize and redistribute those assets.

Ms Yellen, a former central banker who initially had reservations about immobilizing the assets, said that while the concept was being studied, she believed that seizing the funds would violate US law.

"I think it's very natural that given the enormous destruction in Ukraine and huge rebuilding costs that they will face, that we will look to Russia to help pay at least a portion of the price that will be involved," she said. "It's not something that is legally permissible in the United States."

But within the Biden administration, one official said, there was reluctance "to have any daylight between us and the Europeans on sanctions."

So the United States is seeking to find some kind of common ground while analysing whether a seizure of central bank funds might, for example, encourage other countries to put their central bank reserves in other currencies and keep it out of American hands.

Ukrainian artillerymen handling an American-made Howitzer artillery piece in Donetsk, Ukraine, on May 22, 2022. PHOTO: NYTIMES

In addition to the legal obstacles, Ms Yellen and others have argued that it could make nations reluctant to keep their reserves in dollars, for fear that in future conflicts the United States and its allies would confiscate the funds.

Some national security officials in the Biden administration say they are concerned that if negotiations between Ukraine and Russia begin, there would be no way to offer significant sanctions relief to Moscow once the reserves have been drained from its overseas accounts.

In explaining Ms Yellen's comments, a Treasury spokesperson pointed to the International Emergency Economic Powers Act of 1977, which says that the United States can confiscate foreign property if the president determines that the country is under attack or "engaged in armed hostilities." Legal scholars have expressed differing views about that reading of the law.

Dr Laurence Tribe, an emeritus law professor at Harvard University, pointed out that an amendment to International Emergency Economic Powers Act that passed after the Sept 11, 2001, terrorist attacks gives the president broader discretion to determine if a foreign threat warrants confiscation of assets.

President Joe Biden could cite Russian cyberattacks against the United States to justify liquidating the central bank reserves, Dr Tribe said, adding that the Treasury Department was misreading the law.

"If Secretary Yellen believes this is illegal, I think she's flatly wrong," he said. "It may be that they are blending legal questions with their policy concerns."

Dr Tribe pointed to recent cases of the United States confiscating and redistributing assets from Afghanistan, Iran and Venezuela as precedents that showed Russia's assets did not deserve special safeguards.

A grave in front of destroyed residential buildings in Mariupol, Ukraine, on May 31, 2022. PHOTO: AFP

But according to Professor Paul Stephan, a law expert at the University of Virginia, the examples of Afghanistan and Venezuela are not comparable because the United States did not recognise those governments as legitimate.

He also argued that Mr Biden would be escalating the conflict with Russia if he conflated cyberattacks with an act of war to justify seizing Russian assets.

"I would find that alarming," Prof Stephan said. "We've been trying to be stable, rather than destabilising, in this area."

He added that Congress could amend the law to clearly grant the United States the authority to confiscate Russia's assets, but that doing so was likely to lead to complex legal battles between the two countries.

Congress could be heading in that direction. In April, the House passed the bipartisan Asset Seizure for Ukraine Reconstruction Act that would allow the properties of sanctioned Russian oligarchs and companies to be liquidated, with the proceeds given to Ukraine.

But officials say it is one thing to seize the physical assets of oligarchs and another to seize the central bank reserves of countries.

As nations debate how to handle the Russian assets, Ukraine passed a law in May that allowed it to confiscate Russian property in the country and use the funds to replenish the national budget.

In an address to the World Economic Forum, Mr Zelensky urged others to follow suit by tracking down, freezing and seizing Russian assets.

"They should be allocated to a special fund," he said, "that would be used to help all of those affected by the war."

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