EU plans to spend earnings from Moscow’s frozen assets in western bank for Ukraine war | Opinion Analysis News

The sanctions have spooked many rising economies, who see that earning the west’s wrath could place at risk their own forex reserves and trade, and they could move away from dollar as currency of trade settlement

The war between Russia and Ukraine has entered its third year. (Photo: Reuters)

Bengaluru: In what could cause convulsions in the global financial structure, the EU is planning to fund Ukraine’s war needs with earnings from Russian assets seized by the European countries under the western sanctions against Moscow.

The Russian assets frozen in the west since the Ukraine war began in February 2022, include money belonging to the Russian state, bonds, securities, and personal wealth belonging to Russian corporate entities and individual citizens.

$300b of Russia’s assets frozen

With war-bound Ukraine demanding more and more aid in cash and weapons, western backers of Ukraine are now agonising over the pros and cons of outright sequestration of Russian assets which amount to about $300 billion in financial institutions of US, UK and members of the European Union (EU), or the earnings on such assets.

Most of it, around $170 billion is stuck in the Belgium-based bank – Euroclear, which is the premier provider of settlement and related securities services for cross-border transactions involving domestic and international bonds, equities, derivatives and investment funds.

With the Ukraine war costing $100 billion a year, European governments are agonizing over the pros and cons outright sequestration of Russian assets, or utilising the earnings on such assets to fund Kyiv’s war efforts.

Consequences of seizing Russian assets

The idea, which was floated right at the onset of the war in February 2022, has been debated at length by the governments and legal experts. However, the proposal has come up against many obstacles. First, such sequestration or appropriating the assets of a sovereign country would be violative of international laws, and could lead to Russian retaliation in the form of seizure of assets belonging to western companies which quit Russia in the wake of sanctions.

Second, the banks which hold the Russian money and securities are also baulking at the thought of the governments laying their hands on such assets, as that could land them in costly litigation. Western banks are “risk-averse” as Euroclear describes itself, and they could be quailing at the thought of ruinous legal cases, as well as the loss of faith among investors and depositors.

Interest earned to be used for Ukraine war

But the Western leaders are now seriously considering the sequestration of the earnings route. The Russian assets are said to have earned between $3-5 billion since they were frozen, and the EU is eyeing these earnings to support a tottering Ukraine. German Chancellor Olaf Scholz has argued that the earnings from Russia’s frozen assets in the EU “does not belong to anyone”, and that they could be used by the EU to purchase weapons for Ukraine.

With Ukraine’s position in the battlefield becoming dire, early this week, EU foreign policy chief Josep Borrell suggested seizing the frozen Russian assets and spend 90% of them to buy munitions for the Ukraine army, and spend the rest to subsidise Kyiv’s defence industry.

Hungary likely to block the move

Scholz said there was “broad” agreement over the plan to use interest earned by the Russian assets, but Hungary, which has opposed the Western support to Ukraine, is likely to block it. Russia has warned that any appropriation of its assets would amount to theft. It has stressed that seizing the funds or any similar move would violate international law and undermine Western currencies, the global financial system, and the world economy.

That warning has been echoed by many western experts, who have warned that the proposed move by the west could be risking the pre-eminence of the dollar as the global reserve currency, as countries could stop trusting western financial institutions, and payment gateways such as Euroclear, and start convert their dollars into other currencies such as Yuan.

Dollar as weapon?

The US sanctions and freezing of Russian cash abroad has already caused deep concern among many economies, which are worried about the west weaponising the dollar. Already many countries, including India, have begun to trade in mutual currencies. In that sense, the sanctions could end up hurting the West more than Russia, and drive a global trend towards moving away from the greenback.

There is worldwide wariness about US control over the global economy through the dollar. There is no international oversight on the US printing of the dollar, and countries across the world began pondering over the advisability of keeping all their eggs in one basket – the greenback – in the light of the 2009 global recession, and began diversifying to a basket of reliable international currencies.

Currency swap deals

More interestingly, many rising economies, worrying over the future of the dollar, have decided to shield their economies to the vagaries of the dollar’s volatility rooted in the US’s gargantuan foreign debt – $34 trillion. China, the trade rival of the US, has been touting de-dollarisation, and floating of a BRICS currency to replace dollar in world trade settlement.

Last November, China and Saudi Arabia, one of the US allies, signed an agreement to trade in their currencies. The People’s Bank of China (PBOC) and the Saudi Central Bank (SAMA) signed a three-year currency swap agreement for a maximum value of 50 billion yuan (US$6.97 billion), or 26 billion riyal.

According to the agreement, the Saudis would accept Yuan for its exports, and China would accept Riyals for its exports. The central banks of both countries would open EEFC accounts and settlement would be made through swap rate, which is the difference of the value between the two currencies.

China-Saudi trade has boomed over the last three decades, with and stood at $68 billion in 2022. China is the biggest importer of Saudi oil, at 21.7% of the West Asian country’s oil sales abroad. The impetus for the currency swap deal would shield China’s trade from financial sanctions and disrupt the global market for oil

As for India and Russia, both countries have begun trading in their respective currencies, with Russia, which has a trade surplus, agreeing to accept payment in rupees. Already, Indian rupee has become the accepted currency in trade with neighbours such as Nepal, Sri Lanka and Bangladesh. According to Twenty-two other countries like UAE, Germany, Singapore are working out modalities for such a trade.

The dollar could remain the accepted global currency for a conceivably long time, but the increasing trade in mutual currencies would eventually weaken its position, unless the US sits down with the emerging economies to work out a new, and more democratic global financial architecture.

But Europe “stealing” Russia’s billions, as Moscow sees it, could erode dollar’s standing and reputation, and that should bother US and its allies.

(Disclaimer: The views expressed in this article are those of the author alone. The opinions and facts in this article do not represent the stand of News9.)