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Within days of Vladimir Putin’s full-scale assault on Ukraine, western capitals acted with remarkable determination in blocking Russia’s access to more than $300bn of foreign exchange reserves. In the 20 months since, however, the western sanctions coalition has got itself into ever more contortions trying to avoid the morally obvious next steps: seizing the reserves and deploying them for Ukraine’s benefit.
The ostensible justification is legal obstacles. But if those were really the reason for such timidity, western governments would have been doing all they could to overcome them: pursuing compensation claims under existing law, pushing legislative changes (as Canada, uniquely, has done), and endorsing prominent lawyers’ arguments that Moscow has no legal recourse against asset seizures after its violations of international law.
That this is not happening reveals the legal qualms as vicarious arguments for more self-interested objections to seizure. The most important is the fear that confiscating Russia’s assets will make other non-western countries pull their own reserves out of the west, in case one day the same treatment could be meted out to them.
The concern is that this could destabilise the global financial system and in particular diminish the dollar’s and the euro’s captive investors among central bank reserve managers. The European Central Bank has issued a strong warning to European policymakers against even taxing EU companies making windfall profits on blocked Russian assets — which seems the most that the sanctions coalition is currently willing to contemplate.
The argument looks superficially sound. But it unravels upon a closer look at the facts. If non-western governments were to react to seizure by pulling out their reserves, that horse would have already bolted on at least two occasions: the blocking order itself, and the G7 announcement that accounts will not be unblocked until Russia compensates Ukraine for its destruction.
Yet IMF data shows no subsequent shift of reserves out of the western fold. Where would they go? The largest reserves belong to Beijing, and reflect accumulated Chinese trade surpluses with western commercial partners. Claims on the west will remain denominated in western currencies and governed by its laws. If Beijing wanted to sell out of western assets altogether, it would struggle to find alternatives. The rest of the world is too small to house the scale of claims China wants to rack up.
Other large reserve holders do at least have an alternative to the west, namely to place their official savings in China. That would come at an economic cost: a non-convertible currency is no choice for prudent reserve management. Nor would it make much sense politically. However hypocritical or self-serving emerging countries may find the west, surely no one believes Xi Jinping is less tempted to weaponise financial dependence.
The only realistic prospect is that non-western economies decide not to accumulate such large reserves in the first place, and marginally diversify those they retain. There is some sign of the former. In 2022, global reserves fell by 8 per cent in dollar terms before recovering somewhat. Excessive surpluses being a source of international instability, this is not something to fear. And slow diversification is bound to happen anyway as the global economy changes.
The supposed cost of seizing Russia’s reserves, then, is limited. It must in any case be held against the economic gains. They include giving Ukraine the financial means to win, recover and become fit to join the EU. It would also set a salutary precedent, suggesting that a country that flagrantly attacks the international order cannot expect to enjoy its protections.
Other economic arguments are harboured in private. One goes: Europe knows from its history that exacting payments from a defeated wartime foe can make things a lot worse. A hundred years ago, war reparations imposed on Germany were so large that attempting to pay them destabilised the German economy.
But the transfer problem does not apply today. Russia’s reserves are accumulated surpluses from the past. Taking them would not require the Russian economy to produce impossible surpluses in the future. Call it the Weimar fallacy: there is no parallel here to the Versailles treaty’s mistakes.
That such thoughts circulate is a sign of the west’s unreliable intentions. However the war ends, calls to treat Russia “reasonably” will suddenly multiply. All the more reason to seize its reserves now.
