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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Lee Buchheit is an honorary professor at the University of Edinburgh Law School.
In comparison with certain issues of international law, the question of how many angels can dance comfortably on the head of a pin looks like a bricks and mortar problem. Rarely has this been more visible than in the pearl-clutching legal response to the proposal that the roughly $300bn of frozen Russian assets be mobilised for the benefit of Ukraine.
The G7 countries have frozen those accounts and the European Union has announced that they will remain frozen until Russia pays full reparations for the damage caused by its illegal invasion of Ukraine. Given the likelihood that Vladimir Putin will publicly acknowledge his dreadful mistake in invading his neighbour and offer full recompense for the injuries caused by that mistake, this is tantamount to saying that the Russian assets will remain frozen until the Crack of Doom.
But any suggestion that the Russian assets be confiscated and made available for the benefit of Ukraine induces acute anxiety in certain politicians and their legal advisers. Never mind that any sober economist will tell you that there is little or no financial difference between freezing an asset for a prolonged period of time and seizing that asset outright. Never mind that from the standpoint of the owner of the asset, there is no difference at all between delaying the return of the asset until the 12th of Never and confiscating the asset at the outset. The trained legal mind still perceives a difference.
It’s clear that if Ukraine had possession of the more than $300bn of Russian assets immobilised by sanctions in G7 countries, Ukraine would immediately apply those monies to defray (in part) the damages caused by Russia’s illegal invasion. And no one — apart perhaps from Russia and a few of its votaries — would question for a moment Ukraine’s moral and legal entitlement to do so.
But Ukraine does not have control of the frozen Russian assets, and some of the G7 countries seem reluctant — for both legal and practical reasons — to confiscate those assets and turn them over to Ukraine. Euroclear, where most of the assets sit, is certainly not keen.
What Ukraine does have, however, is an indubitable claim against Russia for war reparations. While the precise amount of that claim will eventually need to be determined by an internationally-recognised body of some kind, the size of the claim grows every day that the war continues. It’s already estimated to exceed by a wide margin the aggregate size of the frozen Russian assets.
The problem is therefore one of legal geography. The party holding the claim against Russia for reparations (Ukraine) does not control the Russian assets that could be applied to settle that claim. And the parties physically holding the frozen Russian assets (the G7 countries) do not themselves have a legal claim against Russia for the damages caused by the invasion.
There are two possible ways to cure this misalignment — move the assets into the hands of the party with the claim or, alternatively, move the claim into the hands of the party holding the assets.
The former would require the G7 countries first to confiscate the Russian assets before turning them over to Ukraine, a step some of those countries seem disinclined to take.
The alternative approach would be to move the claim for reparations into the hands of the people physically holding the Russian assets, the G7, thereby positioning Russia’s debt to be set off against Russia’s claim against the G7 for the return of the frozen assets.
A Ukraine Reparations Loan could accomplish this. Here’s how it could work: The G7 countries would participate — in amounts to be agreed among themselves — in a syndicated loan to Ukraine. As collateral for that loan, Ukraine would pledge its entitlement to receive war reparations from Russia. Once the amounts of those reparations begin to be assessed by an internationally recognised body, the G7 can commence foreclosing on its collateral — Ukraine’s entitlement to the reparations.
That foreclosure would leave the G7 holding a “due from” Russia in the amount of their syndicated loan to Ukraine and a “due to” Russia corresponding to the frozen Russian assets. When Party A owes money to Party B at the same time that Party B owes money to Party A, the chemistry is right for what lawyers call a self-help remedy; the two debts are set off against each other.
Ukraine will not need the full $300bn all at once. The Reparations Loan could therefore provide for drawdowns by Ukraine in instalments. This would also leave the G7 in control of the timing of disbursements and the use of the proceeds of each drawing.
To keep the Reparations Loan from eroding Ukraine’s debt dynamics, the Reparations Loan would be structured as a “limited recourse” obligation, meaning that the G7 lenders would look only to their collateral security (the reparations claim against Russia) as the sole source of repayment of the loan. But because the G7 will always be holding Russian assets at least equal in value to their loan to Ukraine, there should be no net credit exposure for the G7 lenders as long as the set off mechanism functions as intended.
The lion’s share of the frozen Russian assets are held in Belgium (because Euroclear, where most of the assets are booked, is domiciled in Belgium). The Reparations Loan would therefore need to incorporate a procedure by which the G7 countries that hold frozen assets larger than their respective shares of the Reparations Loan can purchase economic interests in the exposure of the other G7 lenders, such that the set-off mechanism can operate to recoup the full amount due under the Reparations Loan.
Fortunately, such a procedure — known as a “sharing clause” — is an invariable feature of syndicated commercial bank loans and can easily be incorporated into the Reparations Loan.
Yes, participation in a Reparations Loan would almost certainly require legislative approval in each of G7 countries. But whatever skittishness some countries may have about confiscating the property of a foreign state and turning it over to a third party (Ukraine), the calculus surely changes dramatically when the Russian assets are used to satisfy a debt owed by Russia directly to your own taxpayers.
