To win the war against Russia, monetary support will be as important to Ukraine as will be the delivery of weapons. But Ukraine’s government is running an approximately $5 billion monthly deficit, and its foreign currency reserves are being substantially depleted. As one commentator put it, “The current pace of losses means that Ukraine will be shortly on the verge of financial collapse if aid inflows are not sped up.” Financial aid from the United States, and to a lesser extent Europe, have thus far met the needs. However, no quick conclusion to the war is likely, as the recent announcement by the United States Department of Defense providing “mid- and long-term” capabilities to Ukraine has underscored.
Ukraine thus faces the very significant future financial requirements of a multi-year war which, combined with rising domestic demands on Western governments, means that establishing an alternative source of guaranteed funding has become increasingly important. To that end, Western governments should coordinate on — and then each enact — national legislation that allows them to utilize on behalf of Ukraine the approximately $300 billion currently held by those countries of Russian national reserves.
Russia — and not the taxpaying publics of the United States and its allies — should bear the financial burden of its war against Ukraine.
The proposed legislation should say, in substance: “The [head of government] is authorized to seize the assets of an aggressor nation that has undertaken an armed attack in violation of the United Nations charter as requested by the nation under attack and to utilize the seized assets, including by transfer or other effective mechanisms, in support of the nation attacked.”
The proposal is intended to tie the seizure authority to the concepts behind the United Nation charter’s prohibition of the “use of force against the territorial integrity or political independence of any state.” Effectuating its implementation would be one reasonable method of collective self-defense, and, as such, authorized by the UN charter.
In the current circumstance, Ukraine would be utilizing the same type of authority as the United States has done under the Trading with the Enemy Act, and seeking support of those holding Russian assets as part of collective defense. In addition, the proposed legislation is analogous — though broader in scope and different in method — to the policies behind the international law on countermeasures which authorizes significant responses to illegal actions undertaken by an offending nation. Similarly, the international law on reparations authorizes an entity to receive compensation when harmed by the unlawful actions of a government. For example, UN General Assembly resolution 60/147 provides that a “State shall provide reparation to victims for acts or omissions which can be attributed to the State and constitute gross violations of international human rights law or serious violations of international humanitarian law,” including “any economically assessable damage.”
There have, of course, already been multiple discussions about seizing Russian assets on behalf of Ukraine. In the United States, there are differing views as to whether such seizure is already authorized under the International Emergency Economic Powers Act. The administration has taken the position, as articulated by Treasury Secretary Janet Yellen, that it does not “now” have such authority. Partly in consequence, the Congress is currently reviewing methods to seize assets owned by Russian oligarchs under sanctions.
However, neither of these approaches — via IEEPA or against oligarchs — would meet Ukraine’s financial requirements. First, the United States does not hold anything near to the majority of Russian national assets, which rather are held by Germany, France, Japan, the United Kingdom, Canada, and Austria. Those nations — with the exception of recent legislation in Canada — do not have statutory authority comparable to IEEPA, so any effective action against the great majority of Russian assets would require new legislative enactments. Second, while seizing the assets of sanctioned oligarchs may be morally correct and politically desirable, the amounts available are likely far too limited to resolve Ukraine’s financial requirements.
Two arguments are generally raised in opposition to the adoption of legislation authorizing the seizure of Russian assets. First, that it would undercut the stability of the international financial system for central bank assets to be seized, and second, that doing so would undercut the role of the dollar as the main international reserve currency and, in particular, encourage China to establish an alternative system. Neither bears close scrutiny.
As to the impact on the stability of the international system, it should be apparent that numerous of the already established sanctions are specifically designed to undercut Russia’s involvement in and use of that system. Even more clearly, however, the proposed legislation would only come into play if the nation whose reserves are being taken has acted in violation of the UN charter, and only at the instance of the country attacked. In such circumstances, utilizing seized assets in support of the attacked country would be an element in helping to reestablish international stability, not to undercut it. Moreover, the number of times the international financial system would be called upon to respond to aggressive inter-state warfare undertaken in violation of the UN charter hopefully would be few.
As to undercutting the role of the dollar in the international system, particularly by China, several factors suggest that the proposed seizure of Russian assets would not have such consequential effect.
First, the proposal is not that the United States act unilaterally, but rather that it do so in coordination with the other countries holding the majority of Russian reserves. Coordinated action would mean that key countries would be in support of the action (as Canada has already demonstrated) and thus not be likely to see it as a reason to depart from use of the dollar.
Second, China is already undertaking to establish international payment mechanisms that utilize the renminbi rather than the dollar. But the renminbi is subject to Chinese currency controls and a government that is far from a free market paragon. The control maintained by the Chinese Communist Party makes the renminbi a questionable store of value — nor is it a useful medium of exchange for those who wish to trade with the West, where dollars (or euros, yen, pounds or Canadian dollars) are required. The renminbi only has an approximate 2 percent share as an international payment currency as compared to the dollar’s roughly 80 percent for inter-regional transactions, and that share is likely to rise only slowly.
Finally, some have raised the issue of China choosing to terminate its holding of U.S. government debt, currently roughly $980 billion of the overall U.S. debt of roughly $30 trillion. As the figures suggest, however, China hardly is a dominant factor in the U.S. government debt market. Moreover, while theoretically it could choose to sell all or most of its dollar holdings, that would be unlikely to have lasting impact in the foreign exchange markets which process more than $6 trillion on a daily basis.
In sum: The importance of assuring that Ukraine has the capabilities required to prevail against Russia is reflected in the recently adopted NATO Strategic Concept which states that a “strong, independent Ukraine is vital for the stability of the Euro-Atlantic area.”
The United States and its allies have already undertaken a variety of collective efforts, such as through the Ukraine Defence Contact Group, to ensure Ukraine succeeds militarily. A comparable collective agreement to enact legislation authorizing seizure of Russian national assets would be a key element of “unwavering support for Ukraine’s independence, sovereignty, and territorial integrity.”
Franklin D. Kramer is a distinguished fellow and on the board of the Atlantic Council and a former assistant secretary of Defense for international security affairs.