What Hinders Confiscation of Russian Assets by the West

Since Russia's full-scale invasion of Ukraine, the United States, the United Kingdom, Canada, Japan, and the European Union have frozen over 300 billion euros worth of assets belonging to the Russian Central Bank. Additionally, about $30 billion owned by sanctioned Russian oligarchs is also "frozen."

Clearly, these assets are intended to be used for compensating the damages inflicted on Ukraine, and various options are being considered for this purpose.

However, the most powerful tools for confiscating Russian assets and, at the same time, the source of significant doubts lie within the European Union. More details on this are discussed in the article by the former head of the State Tax Service (2019-2020) and candidate of legal sciences, Serhii Verlanov, How to Claim Compensation from Russia: Challenges for Ukraine and the West.

There are already several examples of successful asset confiscation and their transfer to Ukraine.

Among them is the case of the sanctioned Russian oligarch Konstantin Malofeyev, the owner of the TV channel Tsargrad, in the United States. It's also worth mentioning Canada's intention to confiscate the Russian Antonov An-124 aircraft. The country has already initiated legal proceedings for its transfer to Ukraine.

In Ukraine, the process of confiscating sanctioned assets is ongoing as well. Despite the fact that 25.8 billion hryvnias might not seem significant compared to the damages caused by Russian aggression, it appears to prove that the confiscation of Russian assets is objectively the best way to ensure compensation for Ukraine.

However, opinions within the European Union significantly differ.

For EU countries, the most promising alternative to actual, full or partial confiscation seems to be the investment income from sanctioned Russian assets.

Most of the frozen Russian funds are located in EU countries (223.7 billion euros as of July 2023). The majority of these (196.6 billion) are blocked at the largest European depository, Euroclear (Brussels, Belgium).

These frozen assets are productive and generate profits. For example, in the first half of 2023, investment income amounted to 1.74 billion euros, and in 2022, it was 821 million euros.

Currently, real discussions are taking place within the European Union between the European Commission, the European Central Bank, and the national governments of the largest countries that handle the frozen Russian funds. This is regarding the possibility of using these funds to assist Ukraine.

According to information from Western media and analysts, the European Commission is considering a special tax on income received from frozen assets. The revenue from this tax is planned to be directed towards aiding Ukraine.

The main opponent of this approach is the European Central Bank, as the euro is the second-largest reserve currency in the world after the US dollar, in which sovereign assets are held.

Accordingly, according to experts from the European Central Bank, any intervention in sovereign assets could undermine the role of the euro as an international reserve currency, lead to the outflow of sovereign investments, and furthermore, cast doubt on the legal stability and reliability of the European financial and legal systems.

As a first reaction to the potential introduction of special measures regarding frozen assets, the possible withdrawal of Brazil's sovereign assets is being considered in light of concerns about sanctions from the EU due to the deforestation of the Amazon rainforest.

Some experts speculate that the mechanism developed for using income received from sanctioned Russian assets could be realised in the 12th package of EU sanctions. It is expected to be approved in the fall. At the same time, the adoption of legislative acts at the EU level that would introduce such a tax is being discussed.

There is also no unanimous opinion on the legal nature of such a tax.

Considering the ongoing discussions within the European Union, Ukrainian diplomats, politicians, financial experts, and lawyers should not stay on the sidelines. They need to actively participate in the work of the European Commission and the European Central Bank regarding the confiscation of income from frozen Russian assets and collaboratively find solutions in the interests of both Europe and Ukraine.