When Russia invaded all of Ukraine on February 24, 2022, it came as an unexpected shock to almost everyone, despite repeated and provocative-sounding US intelligence warnings. The massive Russian troop concentrations at Ukraine’s borders looked to most observers as a tactical gamble to win concessions. The strategic aim to annihilate the whole of Ukraine, a sovereign country, seemed so improbable that I bought a Russian corporate bond a week prior to the assault, thinking to profit from now-heavily-discounted prices sooner or later.

Well, I was wrong. Sanctions levied upon Russia were massive. In no time, most of Russia’s banks were excluded from the international payment system SWIFT, and western banks, afraid of violating sanctions which came in quick and fast, decided to err on the side of caution. Russian debtors, even those not sanctioned, could not process their coupon payments anymore, no matter how much they wanted to pay. As a result, my corporate bond became a stranded asset, with payments arriving often many months late, if at all. To sell them even at a steep discount was tricky.

Assets of Russia’s Central Bank, i.e. the foreign currency reserves of the Russian Federation held in bonds and cash reserves, were “frozen”. The bulk of it, €190 billion, were immobilised at Euroclear, Europe’s depository system, $67 billion of it in the US and £37 billion in the UK; $27 billion worth of assets denominated in yen and other national currencies were arrested in their respective jurisdictions.

It did not take Russia long to replenish its currency reserves. The sanctioning of Russia’s exports, mostly oil, gas and metals, proved ineffective. Countries which did not want to take sides, like India, Turkey or the Emirates, kept buying Russian oil. And China, which did side with Russia, needed not to worry anymore about cheap supply of fossil energy and metals for years to come. Transport infrastructure linking both countries are expanding in a special ‘Belt & Road’ initiative.

Europe and the US continued buying Russian energy and metals (some European countries still buy Russian gas), afraid to create choke points for their own economies. Import sanctions were circumvented via third countries with ease.

As Russia is raking in income, our support for Ukraine’s economy and its war efforts proved more costly than we calculated. Sadly, we have no other choice but to support Ukraine. Russia’s imperialism, resurrected by Putin’s regime, will not stop its expansionist desires until it is defeated at the battlefield. Any ill-defined ceasefire is nothing but a pause. The next step will be Moldova, the Baltic countries and control over Eastern Europe Stalin-style. Putin’s aim is to resurrect the Soviet Union.

Both the sanctions as well as the arrest of Russian reserves proved consequential. Sanctions have altered well-established trade routes and increased inflationary pressures. The weaponisation of reserve currencies has eroded their standing. As a result, the Chinese yuan is increasingly used to settle trade payments, albeit from a low level. Gold is regaining significance as a means of exchange and a store of value as it cannot be traced, monitored and tattered in the way fiat currencies can.

Given how significant the outcome of the war in Ukraine is for Europe’s and US’ security, it was surprising how callously the Republican-dominated US Congress had withheld financial support for Ukraine. The $60 billion, now approved after almost a year of squabbles, is less than a rounding error for America’s $28 trillion economy.

Yet America treated the war it had done nothing to defuse and thought of as critical for its standing in the world with cavalier attitude. To secure Trump’s re-election was considered more important for many. The fact that money dedicated to Ukraine’s defence would exclusively benefit American defence contractors counted for little. The message of encouragement sent to China in its designs on Taiwan even less: America may start a war at the drop of a hat, but will never carry through with it.

Russia’s assets were accumulated in a rightful way. It’s not Mafia money- Andreas Weitzer

The penny-pinching towards Ukraine led to discussions if it wouldn’t be easier to just take Russia’s frozen money and gift it to Ukraine. The blueprint was Saddam Hussein’s foreign reserves, seized when the US illegally invaded Iraq. Yet these assets were later exclusively used for the reconstruction of Iraq, and the US was a war party in this conflict. The expropriation of Russia’s reserves without commensurate compensation by countries not even officially at war with Russia would be a measure without precedent. It would be a grave violation of property rights, the cornerstone of our legal system. The rule of law, the impartiality of justice would suffer. In a best-case scenario, years of court disputes would follow.

Europe, concerned about the Euro’s status as a reserve currency and its ability to issue low-cost debt in future, rightly hesitated. Perhaps just the interest income of Russian foreign currency bonds should be used? But there’s precious little difference between capital ownership and interest rights. Both are private, or sovereign, property. Without commensurate compensation, it must not be expropriated. After all, Russia’s assets were accumulated in a rightful way. It’s not Mafia money, even when owned by a country ruled by thugs. And what to do if one day, hopefully, the war is over? Will we continue to withhold Russia’s property?

It was also muted that Russia’s assets could serve merely as collateral for Ukraine debt. It would change little. Collateral which is legally untouchable is no collateral.

Daleep Singh, deputy security adviser in the Biden administration, has come up with a seemingly more digestible idea, which the G7 countries (the rich world) will discuss and perhaps adopt next month. Russia’s bonds and the interest income derived from them will not be touched. Yet many of the foreign currency bonds owned by Russia have matured, their principal idling on Euroclear’s accounts. According to its statutes, Euroclear has the right to invest unemployed funds to compensate for the extended, administrative costs of safekeeping. Assuming that €190 billion plus could thus be invested at an interest rate of five per cent, it would yield approximately €3 billion per annum. It is small change in the great scheme of things, but it could be meaningfully scaled up with a bit of financial engineering: assuming a very long war, why not sell 10 or 20 years of future interest receipts as a bond or a loan at the present value of roughly €30 billion (10 years) to €60 billion (20 years)?

Legally, the interest income accrues to Euroclear, or any of the other depositories. It would have to be appropriated by a tailored, special purpose tax on Euroclear. And some money would have to be set aside for administrative costs and as loss provision for future legal disputes. But it could work.

We will see how the G7 discussions will proceed. Europe will have to secure the agreement of its 27 member states. Austria, my country of birth, might be hard-pressed. According to our civil law, the “fruit” derived from someone’s property is the rightful possession of the property owner, not the unsolicited grower. The outcome will hinge on the legal small print of Euroclear’s modus operandi.

Andreas Weitzer is an independent journalist based in Malta.

The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.


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