The Schrödinger’s cat of Russian foreign reserves

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The political stand-off in the US has a blameless casualty in Ukraine. It has caused uncertainty to rise about the political staying power of sending American taxpayer money to the country (the just-minted Speaker of the House of Representatives is a sceptic) and those doubts have inevitably spread to the rest of the west. One might think this would sharpen incentives to finally make use of the Russian state’s own money — the central bank reserves immobilised in the west — for Ukraine’s defence and reconstruction. But one would, it seems, be wrong. Today I consider the reason why.

Separately, do take Chris Giles’s new central banking newsletter for a spin (or just sign up to receive it weekly). We marked the launch with a webinar featuring some of the FT’s best central bank watchers, and me. Subscribers can watch it here.

A year and a half after they blocked Russia’s access to its central bank reserves, the leading western powers have sunk into a strange stupor over what to do next. Rather than preparing the ground for a legal seizure, the only recent movement in the G7 consensus has been towards supporting a windfall tax on the securities depositories’ unusual profits from storing Moscow’s captive cash. But that rather underlines the resistance to seizing the assets themselves.

Canada has been the one relatively bright spot, and looks likely to be so again. Last year it legislated to provide for the seizure of the assets of a state that has committed serious breaches of international peace, security or human rights. A new bill, like the previous one crafted by Senator Ratna Omidvar, is now working its way through the Canadian legislative process to refine last year’s reform to remove conflicts with the country’s state immunity laws. If passed, Canada should be commended and its example followed.

But any political push to make Russia pay for its crimes is dulled by a simple problem of information. It remains a scandal that western publics still don’t know where and in what amounts Russia keeps foreign reserves in their countries. I have estimated before that the amount kept in jurisdictions of the sanctioning coalition against Russia’s war on Ukraine comes to between $345bn and $415bn — somewhat more than the $300bn number bandied about by the sanctioning coalition’s governments.

Not before time, governments that had blocked Russia’s access to foreign reserves decided earlier this year that it would be good to collect first-hand information about how much and where it was rather than rely on outdated Central Bank of Russia public reports.

(How could they block this access without knowing where the reserves were, you ask? Because they have not technically “frozen” the reserves, just made it illegal to engage in any reserve management transactions with the CBR. The assets have not been made “untouchable” but “nobody is allowed to touch them”, as one official explained it to me.)

Collecting this information could not have been very hard to do. Reserves consist largely of deposits with other central banks or government bonds (one-third and two-thirds respectively, in the CBR’s case), so sanctioning countries can find out how much Russia holds with them with one phone call to their central bank and another to the securities depository that handles their bonds.

But with very few exceptions, they are not telling us, their citizens, what they have found. Switzerland is the only country I’m aware of that has issued a formal government declaration: it says the CBR holds SFr7.4bn ($8.2bn) of Russian “reserves and assets” in Switzerland. Even Switzerland could go further, by specifying the form the assets take. France and Belgium have revealed numbers in ministerial comments to the press. France’s finance minister said last year that €22bn had been immobilised there; it’s the only G7 country to have been even this specific. The Belgian prime minister said in May that Belgium was holding about €180bn. This largely refers to assets held through Euroclear, the Belgian securities depository.

Otherwise, few countries want to publicise anything. Not even Canada. And this perpetuates a deeper confusion about what it means for a reserve asset to be “located” somewhere. Take Omidvar’s welcome efforts: her own defence of her bill speculates that most of the roughly $16bn the CBR said it had in Canada at the end of 2021 was spirited out to Belgium “in a pre-emptive move, I imagine”. I presume the Canadian government has suggested something of the kind. But if so, this smacks of confusion at best and obfuscation at worst.

A reference to Belgium is much more likely to reflect the ambiguity in defining where a financial asset is “located”. Apart from gold, central banks do not hold physical treasure — what I think of as the pirate chest fallacy. The financial assets making up the bulk of reserves are claims on other governments, so what does location actually mean?

For one type of foreign reserve assets — deposit accounts with other central banks — this is easy to define. Given what the principal reserve currencies are, we are talking about accounts with the Federal Reserve, European Central Bank, Bank of Japan, Bank of England, Bank of Canada and the People’s Bank of China. These are located in those central banks’ respective countries. In the eurozone, they are located in (some of) the 10 countries whose central banks provide reserve management services on the ECB’s behalf.

But what about securities — such as government bonds, the go-to reserve management asset? Take a French or Canadian government bond held in custody through Euroclear, based in Belgium. Should we think of these as “located” in France/Canada or in Belgium? This conundrum is not academic nor innocent; the obfuscation it causes weakens public pressure for doing something about Russian state assets.

Why is the French €22bn number so different from what the CBR itself said it had in France on the eve of Russia’s full-scale invasion? The best explanation is that France only counts CBR deposits at the Banque de France and that the rest is made up of French government bonds. The CBR may have categorised these as “in France” but Paris may reasonably enough consider them “in Belgium”. The same explanation is likely for the reserves “in” Canada.

There is no single right way of categorising these locations. We should have no double-counting, of course (these bonds are either in Belgium or the debtor government’s country, not both). But we should above all avoid double non-counting. Like Schrödinger’s cat, neither alive nor dead, there is a risk of treating Russia’s assets as being located in neither place, or nowhere at all. That way lies the abdication of responsibility.

Economically and politically, the important thing is that both possible locations must assume responsibility. In the Canadian example, categorising the CBR reserves as “in Belgium” does not remove the Canadian link. Canadian government bonds are simply Ottawa’s commitment to pay their holders in future, and those future payments could be denied. Even bonds that have already paid coupons or matured into cash retain a Canadian link: Euroclear and other securities depositories are almost certain to keep this cash in its original currency (to currency-match the blocked claim of the CBR), and that means a correspondent account in Canadian dollars in a Canadian bank and ultimately a claim on Canada’s central bank. That, too, is within the reach of Canadian authorities. (Similarly, Belgium could intervene directly against Euroclear.)

All of this is hopelessly complicated to weave a political narrative around. But it could be cut right through if the western sanctioning coalition systematically published the nature of the reserves. Then the debate would focus on the heart of the matter: Moscow must pay for its crimes, and it has more than $300bn sitting with us. The quickest way to get to this would be to append to the Canadian bill a requirement to publish. Other countries would then have no excuse not to follow.

Other readables

• My colleague Soumaya Keynes has reviewed UK Labour shadow chancellor Rachel Reeves’s new book — and found a number of passages that don’t seem entirely, er, original.

• Ever since the awful Hamas attack on Israel nearly three weeks ago, I have thought that the Israeli response must be conditioned not just by the laws of war and humanitarian protection, but also by what a realistic future plan for Gaza could be. I am finally starting to see intelligent commentary about what this would mean. The New York Times has pointed out that the UN Truce Supervision Organization’s peacekeeping mandate from 1948 remains valid. And in the FT, John Sawers advocates an international administration for Gaza.

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