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 $164 bn (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.
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.
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.