FP: Unintended consequences of freezing Russian assets

Using Russian money for Ukraine reconstruction seems attractive but has major implications, writes ‘Foreign Policy’. Freezing, e.i. seizing, the Russian central bank’s reserves comes with economic, financial, and geopolitical implications that must be weighed to reach a balanced decision on this difficult debate. Must be taken into account:

• Definitions matter: Russia’s central bank seizing reserves would not be a sanction. Sanctions are temporary policies that inflict economic pain in order to change the behavior of their targets. Sanctions are both sticks and carrots, and if they are successful they should be lifted. Specifically, sanctions on Moscow seek to reduce Russia’s ability to wage war, for example by curbing the country’s revenues from hydrocarbon exports. Thus, freezing Russian assets does not meet the definition of sanction.
• Seizing Moscow’s assets will not make a big financial difference to the Kremlin. Russia’s central bank’s holdings are already frozen, and as long as the war continues, there is no chance the Kremlin could gain access to them.
• Freezing Russian assets is unlikely to boost global de-dollarization efforts. A major argument for those opposed to seizing Russia’s reserves is that such a move would accelerate efforts by emerging economies to move away from Western currencies (a move also known as de-dollarization ). This is only partially reassuring: de-dollarization is a long-term, structural trend that predates sanctions on Russia.
• Transferring Russia’s reserves will require cooperation from Euroclear. Russia’s stablecoins are mostly made up of European government bonds held in electronic form. Three-quarters of these assets are held by Euroclear, a Belgian company that acts as a trusted depository for global securities. Euroclear and three other Western companies — Clearstream in Luxembourg, DTCC in the United States and Jasdek in Japan — dominate the global market for such services, which lie at the core of the global financial market infrastructure. In practice, transferring Russia’s reserves to Ukraine would require Euroclear’s cooperation.
• Weaponizing Western financial channels like Euroclear promotes financial fragmentation. If Euroclear were to facilitate the seizure of Russian reserves, emerging economies could note that, like SWIFT, Western securities depositories have become unreliable. Non-Western alternatives to Euroclear, such as China’s securities depository and clearing, may become more attractive to non-G7 economies, leading to financial fragmentation.
• Financial fragmentation weakens the long-term effectiveness of sanctions. The risk of further erosion of confidence in Western financial channels explains why the United States does not want to act alone when it comes to seizing Russia’s reserves: Washington would prefer to diffuse the potential blow that such a move would have on the same. Ideological allies will suffer losses. The bigger picture is that financial fragmentation comes with massive consequences. Over time, the rise of alternative financial mechanisms risks rendering Western sanctions ineffective.
• Seizing Russia’s reserves threatens to increase resentment against Western states. Yet this approach also reflects growing resentment toward Western countries. The debate over Russia’s reserves is closely watched around the world and may fuel this trend, with policymakers in many emerging economies expressing serious reservations about seizing these assets.
• Freezing of Russian assets could lead to perceptions of double standards. The intense disputes that have emerged over the legality of seizing Russia’s reserves show that such a move is not straightforward under international law. Whatever their outcome, these fights fuel a growing perception that Western states are happy to change the rules-based order if it suits their preferences, for example by creating new legislation that would allow Russia to seize reserves. prepared, as Canada has already done. For these critics, it reinforces the sense that the West is adopting double standards in Ukraine, reacting far more strongly to the war on its doorstep than to wars elsewhere.
• Seizing Moscow’s stockpile could set a precedent that could be used by Beijing or others. Western countries are on the right side of the moral argument for supporting Kiev, not to mention that a Russian victory would be a disaster for those who support Western liberal values. However, there is no reason to believe that in the future, China, India, or other emerging economies will not assume that they too will be involved in whatever conflict may arise between them and Western states (for example, around Taiwan). Are on the right side. If Western democracies have previously set a precedent by seizing Russia’s assets, how will these states manage to convince anyone that China or India have no right to seize Western assets if they wish?

…However, confiscating the Russian central bank’s foreign exchange reserves would have enormous economic, financial, and geopolitical unintended consequences.

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