Russia’s attack on Ukraine in February 2022 contravened the most important principles of the UN charter. The G7 must continue giving strong economic, political, and military support to Ukraine, enabling it to defend itself. This benefits the Ukrainian people and is critical to the long-term security of G7 countries themselves.
But confiscating $300 billion of sanctioned Russian state assets to help pay for this support is a more complex question. It is not certain that the benefits to the G7 will outweigh the costs it will bear. Financing support for Ukraine through normal public expenditure, at least for the time being, is likely to be the better option.
The main benefits of asset confiscation are relatively well defined and quantifiable. First, G7 governments could use the proceeds to pay for Ukraine’s immediate needs (such as arms supplies) or make them available over time for long-term reconstruction finance.
This would make a significant dent in future expenditures: total bilateral support to Ukraine stood at some $278 billion as of January 2024, ahead of the latest US package. The cost of reconstructing Ukraine has been estimated at nearly $500 billion (although much of this will be financed by the International Financial Institutions and private sector).
Moving now to confiscate the assets could also lock in financial support for Ukraine ahead of the uncertainties of a potential Trump presidency in the US.
Second, confiscating state assets would increase the definitive price that Russia is paying for its aggression. It is highly unlikely to persuade Russia’s president to end the war – losses to the Russian military and damage caused by economic sanctions are already enormous. But it could help deter other countries from contemplating similar actions – at least those with assets within the reach of G7 governments.
Against this are uncertain but potentially very large costs.
First is the impact on global financial markets of moving from indefinite freezing of the assets to outright confiscation.
At present, there is no practical alternative to the US dollar and other fully convertible Western currencies as a location for the bulk of the world’s $12 trillion in foreign exchange reserves.
China’s renminbi can potentially work as medium of exchange or unit of account, but the combination of capital controls and the perceived risk of political interference by Chinese authorities rules it out as an international store of value – whether for use by China itself or other countries.
High volatility and the threat of regulatory suppression rule out crypto currencies, while physical mass and lack of financial return make gold impractical.
But permanently confiscating $300 billion of Russian foreign exchange reserve assets (2.5 per cent of the global total) held in countries which are not at war with Russia would increase the risk perceived by several other countries. Significant examples would include China, India and Saudi Arabia, which are currently very substantial holders of such assets.
They would fear that at some point they could be subject to similar measures, even though the likelihood that they will cross the political threshold set by Russia’s attack on Ukraine might be low.
This ‘chilling’ effect is likely to be higher the greater the legal precedents set – particularly if some G7 countries make changes in their laws that significantly alter the implementation of sovereign immunity. The legalities of repurposing sanctioned state assets are far from straightforward.
And it will likely result in higher yields on Western currency assets and an acceleration in efforts to develop alternative means to facilitate international transactions and store value.
The size of these impacts is extremely hard to judge. But even a very small additional general risk premium, of say 5 basis points, on G7 government debt of $60 trillion would cost $30 billion a year. And if this continued indefinitely the total net present value (NPV) cost to the G7 would easily exceed the savings from repurposing sanctioned assets.