Western efforts to support Ukraine in its defensive war against Russia are subject to significant domestic debate. Additional U.S. military aid faces an uncertain fate in Congress, and the Biden administration has avoided escalating sanctions on Russian energy exports. Europe, meantime, is at loggerheads over whether it should send Taurus missiles to Ukraine. Yet, one possible tactic is gaining traction on both sides of the Atlantic: confiscating Russia’s approximately $300 billion in frozen reserves in the West and redeploying them to the benefit of Ukraine. While seizing another country’s reserve assets in wartime is fair game, doing so against Russia would be a mistake.
The concept of “Russian official assets” or “Russian reserves” conjures up the image of a saver who earned his holdings over time through the exchange of labor or goods for money. This idea is not entirely misleading; sovereign and private assets do share some commonalities. They both result from an exchange of something of value. Russia acquired most of its reserves by selling energy products to the West, which it does through a network of state-owned enterprises.
Leaving aside private and state-owned intermediaries for the sake of simplicity, when Russia sells a barrel of oil to the West, the West receives the barrel of oil, and in exchange, Russia receives money, typically in the form of bank deposits in the West. Russia then converts most of these bank deposits into sovereign debt instruments like government bonds, which can be a more efficient way to hold reserves, as they carry the credit risk of the sovereign rather than that of a riskier bank and can be more useful for currency management and other macroeconomic functions. While a sovereign debt instrument represents an asset for Russia, its value is based on the promise by the debtor country to pay.
For private holders of government bonds, the promise of the sovereign to pay is sacrosanct. That’s why the Fourteenth Amendment prohibits the United States from defaulting on Treasury obligations and the Fifth Amendment’s takings clause protects against seizure of private property without just compensation. This inviolable promise generates enormous advantages for the United States, supporting the world’s deepest and most liquid capital markets.
But sovereign property rights are different than private property rights, which is why the takings clause is limited to private property. Another key distinction is that exchanges between sovereign nations (other than barters) necessarily involve the seller of the good acquiring money. Money is a creature of government. Therefore, if a seller accepts dollars, euros, or another currency in exchange for its property, the bargain doesn’t end at the exchange, because in order to realize economic value from the money, the seller needs to abide by the rules set by the buyer. This seller’s dilemma applies to all assets it continues to hold subject to the buyer’s jurisdiction, including government bonds or bank deposits.
Sovereign relations are governed, ultimately, by power, though advocates of international law might wish it otherwise. Indeed, international law itself provides a sort of get-out-of-jail-free card in the law of countermeasures, which authorizes states to respond to acts of other sovereigns. This concept underpins the international legal case for the seizure of Russian state funds and their transfer to Ukraine.
Nevertheless, the only law that matters in the United States is the law of the United States. International law can sometimes become U.S. law when the government chooses to internalize international law pursuant to its constitutional system, but it is the act of internalization—of making a domestic law—that creates legal obligations, not the existence of international law.
Seizing foreign countries’ reserves isn’t a new concept under U.S. law; in fact, the U.S. government recently seized $7 billion of Afghan reserves following the Taliban takeover of Afghanistan. Though the many permutations of the structure of Russian reserves may create some discrete domestic legal hurdles—including valid questions over the extent of the president’s authority under the International Economic Emergency Powers Act—generally speaking, the president has wide latitude, which is why the Biden administration was able to allocate $3.5 billion of Afghan reserves to a nebulous plan to support the Afghan people.
Support is strong in Congress for seizing Russia’s reserves. The bipartisan REPO Act, which recently passed the Senate Foreign Relations Committee, would further buttress a seizure against potential legal challenges. Similarly, the doctrine of sovereign immunity does not apply in this context, as it only grants sovereigns like Russia immunity from the judicial process in the context of private litigants, not action by another sovereign like the U.S. government, which could also occur outside of the judicial process.
Important economic policy issues are also at stake. Many economic and foreign policy commentators have claimed that imposing sanctions poses a threat to the dollar as the world’s reserve currency. But the decision to hold assets in a particular currency or jurisdiction depends on a range of economic, political, and security considerations. Some economic evidence suggests that the use of sanctions actually boosts faith in the dollar. The reason: holders of U.S. assets must provide assurances to market participants that they will not engage in behavior that might subject them to sanctions, which engenders greater confidence in their economies. That is why, despite growing use of U.S. sanctions, the dollar will remain the world’s reserve currency for the foreseeable future.
Yet, even if the United States can seize Russian reserves, the question remains whether it would be wise to do so.
First, as a practical matter, the impact of seizing Russian reserves in the U.S. would be minimal; only an estimated $5 billion in Russian state assets are held in the United States. Most Russian assets are held in Europe, which is why any seizure should be conducted in concert with the Europeans.
Second, it is important to consider that Ukraine need not directly benefit from the economic windfall resulting from a seizure. Determining whether it is in U.S. interests to provide particular resources to Ukraine is separate from the question of whether or not to seize the assets. Retaining the economic windfall would help the U.S. make up for the unwise divestiture requirements of the initial sanctions package, which effectively provided a benefit to Russia, as Moscow was able to acquire financial claims from international investors at fire-sale prices. If Congress doesn’t want to transfer additional U.S. resources to Ukraine, it’s reasonable to ask why the executive branch should do so unilaterally.
Third, and most importantly, how would the seizure of reserve assets fit in with the West’s broader Ukraine strategy? Western allies have been sitting on frozen Russian assets for more than two years while Russia’s battlefield situation has slowly improved. As a general rule, a country should seek to maximize its leverage when its adversary is weakest. The time for the United States and its allies to confiscate Russian assets and hand them to Ukraine would have been at the opening of the war—before Russia captured Ukrainian territory and incurred significant costs that made backing down more difficult. Reportedly, the G-7 believes that it could take another year to implement a plan to hand Russian reserves to Ukraine. Meantime, Russia will likely keep making military progress. Seizing reserve assets is unlikely to change the balance of power, which is ultimately more a function of military capabilities than of financial resources. Additionally, since Ukraine owes approximately $20 billion on outstanding bonds, the windfall may actually end up benefitting Ukraine’s creditors rather than its war effort.
Seizing Russian assets would not be as effective in reducing Russia’s access to real resources as other sanctions measures. For example, targeting Russian energy exports—by enforcing the prohibition on the provision of Western services to Russia’s energy exports under the oil price cap or imposing secondary sanctions on Russia’s energy sector—would do more to reduce Russia’s warmaking capacity. Yet the United States has clearly prioritized stable energy markets over measures that could prove effective against Russia. The fear of increasing oil prices during an election year has reportedly kept the Biden administration from sanctioning Russian oil and also motivated it to urge Ukraine not to strike Russian refineries.
The plan to confiscate Russian reserves, while refraining from using more powerful coercive tools, lacks any strategic grounding. But this should be expected, as the Biden administration has not clearly articulated its desired end state for the conflict.
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