A Good and a Bad News from Europe Rise Many Questions, but Highlight a Hope for Ukraine
A Call to Action
A Foreword
This post is a call to action. An action in support of Mrs. Kaja Kallas’ ideas to help Ukraine and the world democracy as a prospective High Representative of the EU on Foreign Policy. Most of the subscribers to my blog are journalists in big global media, politicians or experts at think tanks in the U.S., Europe, China or Australia and each one who finds her ideas promising may help their popularization by analyzing them publicly or in any other relevant way. My call to action is aimed at everybody who thinks that the fate of Ukraine is connected organically nowadays with the fate of world democracy. I shall not try to explain what links the two fates, because I absolutely believe that who thinks honestly on this link knows no worse than me what the word is about. I also believe that we all have a moral duty not to allow Mr. Trump to turn out for the liberal democracy that Mr. Gorbachev has already become for the communist system.
Mrs. Kallas is among my blog's subscribers, but this initiative is entirely my own and has nothing to do with her personally.
I thank everyone who shares my wish and kindly ask for tolerance towards some fragments in the post repeating arguments from my earlier writings.
The Good News
It is that at last somebody named the situation with true words in the right place. It is done also when the Ukrainian President is acquiescent that his country's fate in 2025 depends fully on Mr. Trump’s honesty and wisdom. Mr. Zelensky nowadays does not think with a longer outlook on the future and between different horizons. Europe, too, even if it does not want to admit it openly.
But the European Union (EU) should directly use $300 billion of frozen Russian Central Bank assets to finance the recovery of war-torn Ukraine, according to Kaja Kallas, the candidate for the EU's top foreign policy position. Finally, some high-positioned EU official said a meaningful thing about the problem with the frozen Russian assets abroad. It can be turnaround stuff. Nevertheless, it is a bit wide of the mark according to the war fatigue mood in the West. Or it is reasonable and on time just because of this fatigue.
Kallas, the former Prime Minister of Estonia appointed as the EU's High Representative, said that member states should abandon any doubts regarding the direct use of these assets, citing Kyiv's "legitimate claims" to the funds following Russia's invasion.
"I will not use the word confiscation, because it’s really using the assets in a legal way," Kallas told European Parliament members during her confirmation hearing in Brussels on Tuesday.
Her candidacy must be approved by the European Parliament before she can succeed Josep Borrell.
"We recognize that Russia has a legitimate claim toward us, because we have their assets. But Ukraine also has a legitimate claim toward Russia because, every day, they are destroying Ukraine," Kallas noted.
She clarified that Russia might have the opportunity to "claim back" assets as part of a settlement, but added, "I doubt, considering what is going on, that there is anything left over after the reconstruction of Ukraine."
To taxpayers who oppose EU member states paying for Ukraine's recovery, Kallas said: "We shouldn't. Those who are destroying Ukraine are paying for it." This statement makes me smile, however.
Kallas added that Estonia's initiative to allocate 0.25% of its gross domestic product to Ukraine should be adopted by other member states. But who cares about it?
She also called for EU sanctions on Russia to be indefinite, rather than renewed every six months, until all 27 member states decide to lift them. "It would be better if it were the other way around," Kallas said.
Russian assets
This year, the Group of Seven reached an agreement to seize profits generated from frozen Russian assets. However, the plan does not provide for outright confiscation. Some countries have considered the potential legal consequences and the risks to the euro, while others, including the U.S. and the UK, support bolder options such as direct asset confiscation. But neither the U.S. nor the UK have confiscated anything so far even though they hold relatively small chunks of the total assets.
President Volodymyr Zelenskyy has said that Ukraine knows how to use Russia's frozen assets. He proposed transferring the full $300 billion to Kyiv. "Frankly, these are Ukrainian funds," he said. However, it is not quite certain how well Ukraine knows how to use the funds considering the following:
1. It needs them to build their own powerful defense industry prior to saving anything for post-war recovery programmes. Nobody beyond the close circle of people around Mr. Zelensky keeps access to a piece of reliable information about whether this is the way the Ukrainian leaders currently think after the Victory Plan of the Ukrainian President introduced recently in the West has been mainly prioritizing increased military deliveries and quick NATO’s entry;
2. No doubt that many Western arms manufacturers will not be willing to sell or license military technologies to Ukraine even if the latter would be solvent and able to pay for them;
3. It is not clear how efficiently the assets can be managed under the control of Kyiv.
According to World Bank estimates, by the end of 2023, Ukraine’s total economic, social, and other financial losses from the war amount to $486 billion. At the end of 2024, obviously this sum should be higher. But for building a national defense industry with a capacity to satisfy war needs any stake of about $50 – $60 billion will suffice. Nobody in the West is prepared to back the country with it right now, regardless that it will reduce significantly the annual weaponry assistance size for the West. Item 2 above says enough why it is so among other reasons. Then Ukrainian liberty and the world democracy stability depend really solely on the mercy of Trump&Co. Does that bring hopes as big as the chance a self-isolated America ever be great again? Perhaps, Mrs. Kallas’ view is more realistic in the same aspect, I dare to think. And I shall be glad if somebody else shares this opinion. Only with such a hope I continue to write the piece.
The Bad News
The bad news is that the media market success logic has always been the best censor. Much better than a political administrator can be. The world mainstream media omitted Mrs. Kallas’ words referring to the frozen Russian assets in the West most often than not in these days. Yahoo is a proper example in that sense. Some even found her thinking as ‘hawkish’ if they mentioned more details about Mrs. Kallas pitch in Brussels, avoiding any analyses focused on the heart of the matter. Excluding Financial Times, I was not been able to find another reputable mainstream media which had ever made an in-depth analytical consideration of the problem with the Russian frozen assets potential use in favour of the global democracy strengthening. But I found easily a lot of words about how their eventual confiscation may threaten the euro and the EU's financial stability and even the dollar's trustworthiness. It is not so strange after the war fatigue and Trump’s type of patriotism strongly define the public expectations to which the media adjust its revenue capacity. Which censor is more efficient than the instinct for keeping this capacity always vivid? Never mind, that the same instinct stifles another one – for freedom, dignity and democracy preservation. No wonder then that many young people in the West and even more in the East do not value too high democracy nowadays. It simply comes in surplus to them. The instincts clearly point out why it is so. But has modern democracy become really so dysfunctional as to compete only with the survival instincts of people? Some call similar dysfunctionality greed and fear-based behavior which is a banal social mutation of our nature to hope. The dominance of this mutation is not a piece of good news, because it makes any democratic sustainability liable to manipulation, i.e., to a gradual passing away. One day much of the profiteering related to it will also pass away because it would turn out to be in surplus to the social needs at that moment if the democracy has already been sold out. Again in line with the concept of media market success.
Questions
Of course, the questions about the euro exchange rates and EU financial stability as well as the dollar trustworthiness are important even beyond their overestimation in the case of the Russian frozen assets confiscation. The next notes aim to prove that some forms of use by Ukraine of the assets cannot cause serious troubles.
The bulk of Russia’s frozen assets are not in the United States (it holds about only $ 5 billion) but in Europe: primarily Germany, France, and in particular Belgium, where more than half of all Russia’s frozen assets are held by the depositary and clearing house Euroclear. However, with no precedent to follow and still hoping in the Russian Western perspective, European governments are reluctant to seize assets from a country with which they are not officially at war.
Above all, they fear that doing so would deter sovereign wealth funds, central banks, corporations, and private investors from the Global South from investing in European assets. A potential outflow of investment in euros would have serious consequences: a rise in borrowing costs and inflation, as well as a fall in tax revenues.
On closer inspection, these threats seem exaggerated. Those with reason to reconsider their investment strategy will likely have done so back in February–March 2022, following the freezing of Russian assets. At the time, there was no capital outflow because there were no viable alternatives to Western assets and currencies. More than two years later, there is still no sign of panic dumping of foreign assets from Europe and other Western countries. Even so, the politicians in Germany, France, and Italy appear to be more prudent than wise.
There are also legal concerns. Russia would inevitably challenge the seizure of its assets in court, and as long as the case is pending, the funds would remain frozen for Moscow and Kyiv alike. Barring national courts from hearing such cases, as some U.S. senators have proposed, risks undermining public confidence in the legal system (though so does failing to punish an aggressor for violating international law).
The economic argument against seizure is trickier to dispute. Moscow has warned that if the West seizes its assets, it will retaliate by confiscating the remaining Russian assets of companies from what it terms “unfriendly countries.” Western investors in the Russian economy have already paid the price for the freezing of Russia’s assets: their funds are now trapped in Russia. Russia’s 2022 ban on capital withdrawals has effectively performed the function of a currency reserve. There is no need to fight the effects of capital flight when the capital cannot fly in the first place.
Some might say that there is nothing to worry about after all, losing an investment is a calculated risk in high-yield investing in emerging markets, especially when, as in Russia’s case, the threat of sanctions has existed for years. Yet this argument, which is based on a fundamental principle of capitalism—that there is no profit without risk—has a major flaw.
For many systemically important Western firms, writing off Russian assets would spell disaster. Take Euroclear, used by foreign investors to buy Russian stocks and bonds. If its clients’ assets were seized, it could face a slew of lawsuits and even bankruptcy.
Bailing out companies like Euroclear would nominally cost European governments even more than direct aid to Ukraine (especially when the aid is modest). An exchange of frozen assets is, therefore, the most logical solution, but so far, no one has been willing to break the deadlock; nonetheless, Ukraine may gain in the exchange some 10 – 15 billion US dollars as a marginal lump sum. Furthermore, it is unthinkable to assume that the EU may choose to undertake a 40 – 50-year debt on perhaps one-third or half of the Western investment size in Russia and then compensate partially its greedy (or why not slightly adventurous) investors there on account of the debt before handing out to Ukraine all the frozen Russian assets. This undertaking will burden the EU with about 0.0000001% of its GDP as of 2022 data. But again, there are no parties in Europe ready to pay such an ‘enormous’ debt weight, regardless of the fact, that annually a similar sum is extended from the EU budget to Victor Orban as regular subsidies.
Further, even if Russia’s frozen assets were seized, it is unclear how they would be transferred to Ukraine. The easiest option is to sell all the bonds and hand over the money. But that could cause a steep rise in the price of military equipment, as well as reduce demand for European debt, increasing European governments’ costs, and maybe even forcing the governments to cut their minimalistic spending on defense and Ukraine.
As you can see, there are many, many fears, too many fears, indeed mainly in Europe, garnished with a little bit of greed. Exactly as it was the situation with the media. Besides, the West is scared also to consider instead of handing over the money investment of a large chunk from it into building a weapons manufacturing hub somewhere let us say on Polish territory. Initially, this hub may work to overcome the systematic weapons shortage of the Ukrainian army supplies, and then in a post-war situation, the residue of its funding would cover the entire eastern flank of NATO re-arming cost. Obviously, here, the key setback comes from protectionist precautions related to numerous corporate licences and brands in the EU NATO member countries (e.g., the French missiles of 155 mm calibre) and the possibility of the same brands getting shrunk their global markets one day, if competing with the hub production output. After all, who cares in the West about immediate European security before a strategic competition threat? That is why the EU NATO members intend to set up a separate fund of 100 billion euros, raised from European taxpayers. Unfortunately, the member countries still have invested almost nothing in it.
Perhaps among the European fears the most absurd one is attributed to the legal grounds of the Russian Central Bank assets' seizure. A lot of European politicians are afraid that Russia will claim an eventual seizure decision in some national court and it could honour the claim because the courts are independent of politicians in the democratic world. Strangely, nobody among these politicians talks about what will happen if the seizure decision is taken by an independent transnational tribunal established by G7 countries outside the UN jurisdiction, and thus its decisions are unreachable for Russian and Chinese veto in the UN Security Council. Can any national court proclaim the tribunal decision nil and void? If the answer is ‘no’ then we have the opposite type of answer to the question of whether any legal body could adjudge sovereign assets confiscation when there are no international law norms on the matter. In this case, confiscation is possible due to the fact, that if there are no codified legal norms in a certain branch of law to be applied. Then there are legal principles applicable in all legal domains. Such a principle is that no one can practice its sovereignty to the detriment of another’s sovereignty. A specially designed international tribunal may enforce namely this principle on Russia for its aggression in Ukraine and confiscate Russian Central Bank-frozen assets in the West because no legal norm, available or not yet available, can ever contradict the application of common legal principles.
The absurdity related to the fears about the legal grounds of the Russian Central Bank assets' seizure is so ridiculous that it even excludes the chance to solve the problem within the existing law and legal entities without setting up any specialized tribunal. Such an option comes from the possibility of issuing bonds linked with the Russian Central Bank assets but avoiding their formal confiscation.
One type of these bonds may be issued if the holders of Russian Central Banks assets jointly order that the assets be reinvested into Ukrainian war bonds. This reinvesting does not impair the sacrosanct character of the Russian sovereign assets. That is why such a strategy would lower the risk of a market reaction and the chances of success of inevitable Russian lawsuits. Kyiv has issued war bonds since shortly after Russia’s full-scale invasion—primarily in the domestic currency, the hryvnia, but also with Ukrainian law dollar bonds. Further innovation can make these an ideal investment for the frozen Russian assets. The proposed new class of war bonds would be structured as catastrophe bonds. Cat bonds, as they are known, provide interest to the buyer in exchange for them taking the risk of losing the principal if the trigger event defined within occurs. They most frequently are structured to provide capital for natural disaster recovery as well as to distribute the risk. The market for private Cat bonds has expanded rapidly and the market for government Cat bonds is growing as well. The World Bank even sells pandemic catastrophe bonds. Ukrainian war Cat bonds could have their trigger set at the cost of future damage to the country from Russia’s invasion. They should be structured to lower the risk of legal challenges from lawyers acting on the Kremlin’s behalf — i.e. only for future damages and with market pricing, including interest. Investing into Ukrainian war bonds that include triggers to damages already incurred would be legally dubious. However, there are ways to limit Russia’s future returns and turn them to Ukraine’s advantage. Interest payments on these bonds should not be in cash, but payment-in-kind (PIK), in the form of additional war bonds — mitigating against the risk that Russia is left earning cash interest claims at the end of the war and retaining the financial incentive against further aggression. These additional bonds should also be denominated in hryvnia to force Russia into buying Ukrainian goods or hard currency on money markets and thus, expand Ukrainian export opportunities. Russians will probably not make such purchases. Then another option to explore is to link bond payouts to Ukraine’s postwar GDP performance. Given the damage already inflicted on Ukraine’s economy, such a link could capture the consequences of Russia’s earlier actions. Ukraine had successfully issued such debt before the war. Finally, Russia should not be able to take any upside until it stops its aggression and pays for the damage it caused. The PIK interest may mean Russia is left with nominal claims, but under existing sanctions, these will remain frozen. The West has pledged not to lift sanctions until Russia makes good on all damages to Ukraine caused throughout the war. Thus, investing Russia’s frozen funds into the Ukrainian Cat-War Bond also incentivises the West to maintain its commitment. Besides, directing Russia’s frozen assets into Ukrainian war catastrophe bonds addresses many of Europe’s concerns about the seizure and increases the cost to Russia of continuing its conflict there. Every bomb, missile, or drone Putin launches towards Ukraine would effectively also be blowing up Russia’s wealth while providing Kyiv with funding to resist and recover from the onslaught.
There is another option for bond issues correlated with the Russian Central Bank assets (without confiscating them directly), but it bears a higher intrinsic risk. Therefore, it is less effective in practical terms although if there were a bit stronger political will in the West to help Ukraine securities as reparations bonds or bonds pending on the collateral of the Russian Central Bank assets could do good work.
Conclusive notes
Greed and fear are very strong and influential social factors. That is why Mrs. Kallas’ idea about the Russian assets’ full use in favour of Ukraine has only a slim chance of coming into practice. But Ukraine and the global democracy currently cannot invest realistically more in stopping Putin’s ambitions. In fact, this is the cheapest investment. It is an investment against the future world of Putin, comrade Xi and the other autocrats, regardless of their ideology if it would be utilized first for building a supplemental European defense industry. Thinking so, I hope that my call to action will not fall in the virtual space as just one more naïve itching coming from personal vanity. I shall be grateful to everybody for their generous sharing of it within any useful context!