How Frozen Russian Assets Could Pay for Rebuilding in Ukraine

The United States, European Union (EU), and other governments are considering whether to use seized Russian assets to fund Ukraine’s reconstruction and recovery, the cost of which could top $1 trillion. Although an end to Russia’s war in Ukraine could be years away, the country requires some critical infrastructure investments immediately. Conversation on multilateral fundraising is gathering steam as public support for aid to Ukraine in the United States, its largest donor, is waning among some groups. Meanwhile, some experts caution that expropriating sovereign Russian assets could carry considerable geoeconomic risks.

How much will Ukraine’s reconstruction cost?

Rebuilding Ukraine and helping its people recover is expected to cost hundreds of billions of dollars—potentially exceeding $1 trillion, depending on how long the war lasts, its intensity, and its geographic spread.

A recent assessment from the European Commission, the Government of Ukraine, the World Bank, and the United Nations estimated that at the one-year mark of the invasion, rebuilding Ukraine would cost $411 billion, with aid coming in from both the public and private sectors. This is more than double the size of Ukraine’s pre-invasion economy. The government says it needs some $14 billion to fund critical infrastructure projects in this year alone.

The governments of the United States, Australia, Canada, France, Germany, Italy, Japan, the United Kingdom, and the European Commission seized roughly $300 billion in Russian central bank assets not long after Moscow’s full-scale invasion of Ukraine last year, an extraordinary sum totaling about half of Russia’s foreign reserves at the time. Most of this money—more than $200 billion—is frozen in European accounts. These governments have also seized tens of billions of dollars in assets belonging to Russian oligarchs and private entities. 

What are countries doing with Russian assets?

The governments holding these impounded Russian assets are many of those whose taxpayers have been providing Ukraine with large military, financial, and humanitarian aid packages since the invasion began. For instance, the United States, by far Ukraine’s largest international donor, has directed more than $75 billion in assistance.

The allied governments agree that Russia is perpetrating an illegal war of aggression, and that Moscow should therefore be held responsible for footing the reconstruction bill. They are now considering various legal and financial mechanisms by which they can use these frozen assets to help support and rebuild Ukraine. But there is significant debate about how far to go, as well as the global financial and political consequences that confiscating the sovereign assets might have.  

United States. The Joe Biden administration has taken some modest steps; for example, earlier this year, it transferred to Ukraine more than $5 million in “forfeited assets” of a U.S.-sanctioned Russian oligarch. However, Treasury Secretary Janet Yellen said that “significant legal obstacles” stand in the way of confiscating the Russian government’s assets. A bipartisan group of U.S. lawmakers have introduced legislation aiming to give the president the legal authority to do so.

European Union. EU leaders are also weighing the bloc’s options, with recent discussion focusing on how to use or tax the massive interest income being produced by the seized Russian assets, rather than confiscating the underlying assets themselves. Analysts expect the frozen assets, the majority of which are held by the Belgium-based firm Euroclear, to produce more than $3 billion in accrued interest this year.         

Ukraine. Kyiv began a campaign to confiscate Russian assets a few months after the invasion, however significant legal and bureaucratic hurdles have reportedly hindered the effort. As of March, only two of more than nine hundred Russian state assets had been confiscated and transferred to the national investment fund. 

Are there historical precedents for confiscating sovereign assets?

Supporters of confiscating Russian assets say that the U.S. president can use emergency powers to transfer these sovereign assets into an escrow account dedicated to Ukraine’s recovery. They cite similar economic countermeasures taken by Presidents Ronald Reagan and George H.W. Bush against Iranian government assets in 1981 and Iraqi funds in 1992, respectively.

“Because the [United Nations] has established that Russia gravely breached the norms of international law and that this breach is a matter of common international concern, it has given member states standing to act. And it has established that Russia has a duty to compensate the states injured by its aggression,” write former U.S. Treasury Secretary Lawrence Summers, former U.S. diplomat Philip Zelikow, and former World Bank President Robert Zoellick for Foreign Affairs.

What are the risks?

Experts and those involved in these discussions are considering a number of potential downsides. The European Central Bank has privately warned the bloc’s leaders that efforts to leverage the Russian government’s seized assets could sully the euro’s international reputation as the second-largest reserve currency, raise borrowing costs for European governments, and hurt EU trade relations.

There are similar concerns in the United States with regard to potential harm to the U.S. dollar. However, some financial experts say there is little cause for alarm because foreign governments have for the most part already priced in these risks in their reserve allocations. They also note that there are few good alternatives to parking massive reserves in dollars or euros.

Other foreign policy analysts caution that Russian President Vladimir Putin could use Western confiscation efforts as a propaganda tool to stoke domestic support for the war and his embattled regime. They say Western powers should avoid replicating the reparations burden imposed by Allies on Germany after World War I, which contributed to the Weimar Republic’s economic woes and helped set the stage for the rise of fascism. “It is important to contemplate the development of Russia’s domestic and foreign policies once the war is over. At that point, mitigating ‘Versailles risk’ will be a central concern for all,” writes economic historian Barry Eichengreen for Project Syndicate.