As Russia's war against Ukraine continues to wreak havoc regionally and globally, the people of Ukraine and their allies are showing remarkable resolve and courage. Nearly two years after the full-scale Russian invasion began, it is clear, however, that the international community can and should be much more helpful.
G7 countries and governments around the world are showing incredible generosity in supporting the Ukrainian war effort, but in some quarters there are now signs of growing fatigue. And Russia, apparently, was counting on such a development. The United States and the European Union failed in December to commit to providing another $100 billion in aid to Ukraine, so the idea of seizing Russian assets frozen by Western countries has been floated again as a potential solution.
Although confiscating these assets would boost Ukraine's morale and improve its financial position, authorities on both sides of the Atlantic are cautious. As The New York Times recently reported, senior US officials fear that setting such a precedent would discourage other countries from depositing their funds at the Federal Reserve Bank of New York or even holding them in dollars.
However, those who think that other governments might be concerned about their assets in the US for fear of future confiscation are ignoring several key points. Confiscation of Russia's frozen assets would have no effect on assets owned by other states and would not change the situation in countries that are not planning to start a major war. Moreover, if Western countries do not confiscate these funds, it will signal to governments waging brutal wars of aggression that they can violate international law and at the same time enjoy all its benefits in order to avoid punishment for their actions. On the contrary, the G7 leaders must send a clear signal: no country can do this. By deterring other countries from violating international law, such confiscation would play the role of a peace measure.
If it were real, the alleged negative impact of the seizure of Russian assets on the willingness of other countries to deposit funds in the US and Europe would become visible at the beginning of 2022, when these funds are frozen. Capital did not flee either from the USA or from Europe. Part of the reason for this is that the current financial system has very few safe alternatives. If some governments are actually afraid to keep their assets in the US, Europe or Japan, then where will they keep them? Even if they ignored issues like capital controls, would they feel safer depositing their money with, say, Chinese financial institutions?
In addition, if potential "rogue" countries decided to transfer their deposits in the US to European and Japanese institutions, the financial impact would be negligible. Many economists say that the arrival of this capital in Europe or Japan would be a disadvantage rather than an advantage. Moreover, many economists believe that the inflow of such capital does not bring benefits but costs. According to that logic, there would be a strengthening of the currency, which makes it difficult to export goods and compete with imports, which destroys jobs.
Yes, some financial institutions could suffer losses. But most of the funds held in the US are reserves deposited with the Fed that do not directly benefit Wall Street. The same is true of Euroclear, the Belgian financial institution that holds most of Russia's assets.
There is another, related argument against confiscation of assets: it can only be done once, because once it is done, no country will hold its reserves or other assets in the US or the EU. But even if this argument were correct, it is not convincing: a tool that cannot be used is essentially useless, and it is difficult to find a better time to use it than now.
Finally, Russia must be held accountable. Although it cannot fully compensate Ukraine for all the damage it has caused, it should at least pay for the physical damage and reconstruction costs. When someone commits a wrong (action that causes harm to another person), the perpetrator is obliged to pay compensation. It is not uncommon for such a person's assets to be seized to ensure that obligations are met in full. The same principle applies to states. While asset forfeiture is usually a complex process, the Russian case may be an exception because the assets to be seized are already frozen.
Legal experts may say that it is better to offer loans to Kiev and use frozen assets as collateral, as this would force Russia to choose between directly compensating Ukraine and seizing its assets. But these technicalities are best left to lawyers. The reality is that Ukraine needs money right now, that money is controlled by the West and it is simply unconscionable not to use it to help it win the war and then rebuild. It is unreasonable to expect taxpayers and donors in Europe, the US and Asia to bear the costs of rebuilding Ukraine when Russia itself can make a significant contribution - and even against its will.
However, the specific use of seized funds is a secondary issue. While 90% of US security aid to Ukraine is spent in the US, seized Russian assets could be used to bolster Ukrainian forces on the ground and finance the massive reconstruction efforts that will be necessary.
Should we say that the confiscation of Russia's frozen assets will not absolve the West of its obligation to provide military aid to Ukraine? There is no recovery without victory. And the fact that rebuilding Ukraine could end up costing $1 trillion, or three times the value of Russian assets, may soften those who still resist using these funds to finance the country's reconstruction.
Of course, no amount of money will ever be able to compensate for the colossal damage that Russia's aggressive war has done to the Ukrainian economy and its people. However, the frozen Russian assets can be seen as the first installment of reparations that the Kremlin will sooner or later be forced to pay.
J. E. Stiglitz is a Nobel Prize winner in economics and a professor at Columbia University; was the chief economist of the World Bank (1997-2000)
A. Kosenko is an assistant professor of economics in the School of Management at Marist College
Copyright: Project Syndicate, 2024. (translation: NR)
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