Kyiv has consistently argued that Russian assets, frozen in the wake of the invasion, should be transferred to Ukraine as compensation for the resultant damage. But seizing the Russian Central Bank's assets might shake confidence in the European financial system. Economist Vladislav Inozemtsev proposes an alternative: establish a «Ukraine Recovery Fund,» funded with loans backed by World Bank guarantees. These guarantees would match the value of the frozen Russian assets. If Russia declines cooperation, these loans could be continually reissued, leading to their drastic depreciation over time.
Why can't you just confiscate the Russian Central Bank’s frozen assets?
One of the West's first (and most significant) responses to the Kremlin's aggression against Ukraine was the freezing of the Bank of Russia's foreign currency reserves, which at the time were held in Western jurisdictions. The exact amount of the seized funds is still unclear: Russian authorities claim $300 billion or slightly more, while Western sources mention €300 billion (a country-by-country breakdown gives a result of $282 billion in only seven major jurisdictions). Either way, the sum exceeds the significantly smaller frozen private funds belonging to individuals and businesses.
The Ukrainian authorities have maintained their demand for these funds to be confiscated from Russia and allocated to Ukraine, aiming to offset estimated damages ranging from $411 billion to $1 trillion. However, given the ongoing conflict and uncertainty about Ukraine's future borders, the seized Russian assets are unlikely to fully cover the losses. This means that they could theoretically be handed over to Kyiv with immediate effect — but there are legal obstacles to such a step.
Officially, the Bank of Russia operates independently from the Russian government and the president, thus evading direct accountability for their actions. Furthermore, its interactions with private banks, where reserves are deposited, are governed by contracts with these entities. Withdrawal of these funds would be construed by the foreign clients of European banks as evidence that the security of their finances hinges on the actions of their respective governments. Given that Europe holds vast sums of foreign clients' funds, totaling trillions in dollars and euros, this could erode trust in the continent's financial system and even weaken the global standing of the euro. Ultimately, the long-standing narratives of upholding property rights in Europe would be overshadowed if such confiscation were to occur, as stressed by Swiss President Ignazio Cassis a year ago in Lugano during a conference on Ukraine's reconstruction. With this in mind, the European Commission asserts that “once the sanctions are lifted, the [Russian] Central Bank assets will need to be returned.”
Confiscating Russian funds would erode trust in the European financial system
Why will Russia likely not pay reparations?
Given these circumstances, Western authorities and experts have focused on two fronts. On the one hand, first Ukrainian and then many other politicians declared the necessity to secure reparations from Russia at the end of the war — a goal which, in my perspective, appears entirely unrealistic. Achieving such an outcome would require a situation reminiscent of the aftermath of the 1991 Gulf War. During that time, Western nations operated in accordance with UN Security Council Resolution S/Res/678(1990) dated November 29, 1990, leading to the occupation of a substantial portion of Iraq by a coalition force. Following the nation's formal surrender, the United Nations Claims Committee was established to evaluate the extent of the damage incurred. This assessment determined the monetary value ($52.4 billion) to be awarded in favor of 1.5 million claimants — including governmental bodies, corporations, and individuals — along with the repayment schedule. Remarkably, the final installment from the Iraqi government was received 31 years after the war's conclusion — on January 13, 2022.
The prospect of Ukrainian or NATO forces advancing toward Moscow and the United Nations instituting a reparations protocol is remote, which makes expectations of reparation payments unlikely (similar recent instances of reparations occurred when conflicts concluded under UN supervision). On the other hand, experts are exploring avenues for the retrieval of the funds through intricate and occasionally obscure legal procedures. They're leveraging somewhat incongruous precedents and capitalizing on the prospect of reclassifying Russia's actions from warfare to genocide. Such a reclassification could potentially shift decision-making authority from the UN Security Council to the General Assembly, which has previously indicated its support for reparations. However, even in this situation, a stronger reason arises to back choices that still depend on the Western countries' parliaments and governments. These authorities have strong doubts about whether such a move is practical and well-thought-out.
The prospect of Ukrainian or NATO forces advancing toward Moscow and the United Nations instituting a reparations protocol is remote
How should Russian funds be used to rebuild Ukraine?
Last October, in an attempt to propose at least some solution to channel some of Russia's assets to support Ukraine, I suggested that they could be placed in European or U.S. bonds, depending on the currency of the agreement, and the interest could be transferred to Ukraine. Two months later, the same idea was voiced by representatives of the European Commission, but it has not been realized to this day. The only consequence of the discussion was that Belgium, acting solely on goodwill, sent about €100 million to Ukraine, sourced from Belgian banks as taxation on the profits they accrued from housing Russian assets. Otherwise, the Europeans are still discussing options for the placement of the funds, guarantees of their safety and related issues, which may continue for several more months.
Lastly, it's important to highlight the statement from the leaders of the G7 nations during the Hiroshima summit. They declared their intention to keep the frozen Russian assets on hold until Russia compensates Ukraine for the harm it has caused. Given the unlikelihood of this happening anytime soon, a situation arises that allows us to propose a plan for immediately using these funds to benefit Ukraine.
To begin with, the G7 countries need to formalize their commitment to uphold sanctions against Russia until reparations are paid. This should be achieved through a legally binding international agreement that establishes clear financial liability for its violation, covering the entirety of the withdrawn funds until the damage is properly repaid. The agreement should also extend to involve the European Union and/or individual EU states where Russian assets are frozen, even if they aren't G7 members (examples include Austria, Belgium, and the Netherlands), along with Switzerland, which isn't part of either the EU or the G7.
The G7 countries need to formalize their commitment to uphold sanctions against Russia until reparations are paid
The next step should be the creation of the Ukraine Recovery Fund, the founders of which will be all the signatory countries and organizations — and Ukraine itself. The government of Ukraine, as a potential beneficiary of reparations and the party demanding their payment, should appoint the Fund as the sole operator of these payments: if Russia decides to pay for the damage, the Ukraine Recovery Fund — and only the Fund — will be the recipient of the money. Once this infrastructure is in place, the following steps are possible.
The G7 countries and the European Commission should then audit the frozen Russian funds and the conditions of their placement in depository banks (when sanctions are lifted, banks must return both the principal amount and the income accumulated in accordance with the terms of the contracts in force at the time of the sanctions). Given that the sanctions were imposed in February 2022 and the first Federal Reserve (Fed) and European Central Bank (ECB) rate hikes took place in March-May 2022, we can assume that the effective yield on deposits was close to zero.
After completion of the audit, banks should then be offered to issue loans to the Ukraine Recovery Fund. The size and currency of these loans should mirror the frozen Russian assets held in these banks. The interest rate for the loans should be established at the level outlined in previous agreements, along with an additional 0.1% annually. The ECB and the participating central banks should exempt lending banks from setting aside provisions for potential loan losses. Additionally, entities like the World Bank can supply a guarantee for these loans, with corresponding assurances obtained from the countries that are founding members of the Fund.
With the money collected, the Fund can start issuing loans to the Ukrainian government and to individual companies that have suffered losses from the Russian invasion and are working to rebuild the country's destroyed economic sectors. In this case, the Fund would exercise control and guidance over the utilization of funds, effectively making the program a modern-day variation of the Marshall Plan.
A financing plan that functions like a credit line but with almost no interest (the interest for the initial five years could be managed from a different credit source within the same Fund), in my opinion, is ideally suited to the needs of post-war reconstruction. This plan would essentially apply the concept of co-financing that's already used in the European Union for less developed regions. It would also help to avoid corruption and make sure the money is used efficiently for various economic and infrastructure projects.
At the same time, the scheme will not violate anything that the Western authorities currently fear: Russian assets will still be frozen and not seized; there's no direct tie between these assets and the money allocated to the Fund; and Ukraine can make use of the funds in a relatively short time frame. If Russia agrees to pay the amounts demanded by Ukraine, they would be credited to the Recovery Fund as the reparations administrator, and immediately debited to creditor banks, which, with the consent of the authorities of the Fund's founding countries, would unfreeze Russian assets for the corresponding amount (this is likely to increase the willingness of future Russian governments to pay reparations, as these payments would effectively acknowledge the loss of long-frozen funds, and might also serve as a condition for halting a series of reparations payments to Ukraine).
If Russia agrees to pay reparations to Ukraine, assets to that extent could be unfrozen
If Russia rejects this proposal, the reissuing of loans could stretch on indefinitely, causing the frozen Russian assets to significantly lose their value over the course of 20-30 years. To put this in perspective, consider that the $13.3 billion granted by the US in 1948 through the Marshall Plan is now worth more than $173 billion in today's currency. This fact makes “closing” the scheme even more feasible.
I'm not implying that the suggested plan entirely resolves all financial and legal complications tied to Russia's frozen assets. However, I believe that maintaining the current state of affairs is the least favorable and, dare I say, the most devious scenario. At present, Western countries that seized Russian assets ostensibly for Ukraine's benefit are essentially utilizing them for their own gain — generating profits for their financial systems and revenues for their budgets, all while witnessing a notable depreciation of the seized funds in recent years.
With a bit of imagination, one might even argue that the West is effectively lending money to Ukraine from these assets (the total sum of financial and military aid since the war's commencement hasn't come close to the value of blocked Russian assets) under market conditions, all the while not displaying any particular enthusiasm to ensure that the entire sum serves the purpose of rebuilding the nation. I hold no illusions that sharing my proposal will single-handedly solve this problem, but I would consider my mission fulfilled if it can at least stimulate a more vigorous discussion on this subject.