Kremlin Financial Retaliation? Empty Threats

The Putin regime realizes its war of aggression will be seriously affected if financial assets are handed to Ukraine. But it’s impotent.

It’s no surprise the Kremlin has reacted angrily to news that at least $164bn (and probably much more) in frozen Russian taxpayer funds will likely be used to bolster Ukraine’s defenses. The money will keep Ukraine fighting for at least another two to three years. 

In time-honored style, the regime has responded with high-volume bluster. It threatened retaliation by fully seizing what it claims is as much as $215bn in Western derivatives and foreign investments under its jurisdiction. 

There are good reasons to treat these threats with the contempt they deserve. Firstly, Russia has nothing like the sum it claims, and secondly, those assets it does control belong to Western companies too greedy to stay out of Putin’s Russia and too stupid to get out in time. Their failure is a matter for company boards, not Western governments.  

Russia has already been confiscating Western assets under its jurisdiction — and selling to Kremlin stooges for peppercorn prices. Brands from Carlsberg to Danone, as well as Western bank assets, have already been taken. 

All Western companies with assets in Russia long knew what kind of regime they were dealing with and what the risks were. They were long warned by their own governments. They overstayed in Russia, earned windfall profits from these activities, and now have to bear the consequences. 

Because remember here that if a decision is taken not to use immobilized Central Bank of Russia (CBR) assets to fund Ukraine so as to protect Western business interests in Russia, then it will be Western taxpayers who then have to write the check. Clear moral hazard.  

Assets stuck in Russia are far outweighed by Russian assets offshore. These total around $500bn in total — both state and private — now frozen offshore, while I estimate much, much less than this is stuck in Russia. 

Furthermore, if Russia does plough ahead with seizures, it’s entering very choppy waters. 

The sums identified by the Kremlin are almost entirely private sector assets, not the state-owned CBR assets. There is a clear legal cause to seize the CBR assets — the so-called countermeasures clause, where a state’s sovereign immunity only holds when it acts in accordance with international law.  

Russia, through its all-out invasion, has driven a coach and horses through legality, and this allows the lifting of Russia’s sovereign immunity and claims for damages. And note that the West is stopping just short of seizure, intending instead to reinvest CBR assets pending future agreement over reparations. 

So it’s hard to see any Russian justification for seizing Western private sector assets belonging to companies that have taken no action to the detriment of Russia. There is simply no cause.  

But there is a price. The implications for Russia’s long-term development will be dire; this action would represent the greatest attack on private sector property rights since the end of the Soviet Union. It will stall future investment into Russia from Western companies, but also others, including the Chinese, for years to come. 

The impact on Westen companies will anyway be somewhat limited, as much of the assets and derivatives mentioned consist of securities marked down to close to zero on Western firms’ balance sheets. In effect, they are written off already.  

The Kremlin’s game is twofold. It hopes to reinforce those Western governments in a permanent lather of anxiety about Russian threats, almost regardless of their plausibility. And it seeks to bolster the behind-the-scenes lobbying by large foreign direct investors to pressure home governments to derail the transfer of funds to Ukraine.  

Western governments should not bend to any such lobbying.  

If it succeeded, then German, British, Italian, and other European taxpayers will have to stump up instead. In these days of tight budgets, that would be likely to cause a harsh public backlash. 

Happily, the campaign to seize Russian money — led by a number of people, including this author on these pages — appears now to have a real head of steam.  

European Commission President Ursula von der Leyen, German Chancellor Friedrich Merz, and the British government (which holds an additional $32bn in Russian assets) now publicly favor a reparations bond or loan.  

CBR funds immobilized at Euroclear or other Western financial institutions will be used to fund loans to support Ukraine. These 30-year, zero-coupon instruments will remain the property of the CBR, alleviating concerns over forced seizure and risks therein of a confidence hit to G7 reserve currency status.  

But rather than being held in Bunds, Gilts, or US Treasuries, the money will be held as loans to Ukraine. Russia could be repaid in full in the event that 30 years from now, it has agreed to pay reparations to Ukraine. Or the loans could be subtracted from the Kremlin’s reparations bill. For over three years now, we have argued for such a solution, and finally, G7 leaders appear to be listening. 

European governments and taxpayers have a common interest in having their national security put first, regardless of private sector investors who simply made a bad choice. And as for Russia, at least there will be some measure of justice for the destructive despotic entity run by Putin and his goons. 

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By Timothy Ash. Timothy Ash is a Senior Emerging Markets Sovereign Strategist at RBC BlueBay Asset Management and is an Associate Fellow at Chatham House on their Russia and Eurasian program.  Article first time published on CEPA web page. Prepared for publication by volunteers from the Res Publica - The Center for Civil Resistance.