Putin Broke It, and Now the Question Is: Who Is Going To Pay?

Using Russian reserves frozen in the West to defend and rebuild Ukraine would be a bold move by America and its allies.

AP/Josh Reynolds, file
Senator Graham at Boston, June 13, 2022. AP/Josh Reynolds, file

Putin broke it. American and European taxpayers pay for it. Turning Colin Powell’s aphorism on its head, that’s the real message from last week’s G7 summit in Italy.

Of course, the $50 billion loan to Ukraine was announced with great fanfare as a “bold” move. With the details far from hammered out, the loan looks like financial recycling. The loan will be serviced by interest earned on $280 billion in Russian reserves frozen in Western banks since Russia attacked Ukraine over two years ago. Most of the estimated $3.5 billion in annual interest earnings come from Russia’s investments in Western treasury bonds

The loan comes with big risks. Every six months, the 27 members of the European Union have to unanimously vote to retain the sanctions regime. A veto by one member, say Hungary, could leave taxpayers in America and Europe holding the bag. And chances are high that Ukraine could default. Yesterday, in negotiations with private holders of  Ukrainian foreign currency bonds, Ukraine asked investors to take a 60 percent haircut.

Critics say Western countries should take a truly bold step: confiscate all the impounded Russian reserves and use them to pay Ukraine for its war and rebuilding costs. There is a precedent. In 1990, Saddam Hussein invaded Kuwait. At the prodding of President George H. W. Bush, the United Nations collected $52.4 billion from Iraq for war reparations. 

“There’s $300 billion sitting in Europe from Russian sovereign wealth assets that we should seize and give to Ukraine,” Senator Graham told CBS’s “Face the Nation” before the G7 summit. “Go after Putin’s assets, wherever they’re at, all over the world. Go on the offensive.”

The need is there. Last February, the World Bank calculated that Ukraine will need $486 billion to rebuild over the next decade. Since that estimate was made, Russian cruise missiles destroyed half of Ukraine’s power generating capacity. The New York Times surveyed Ukraine from east to west and concluded earlier this month that 210,000 buildings have been damaged or destroyed. The tally from the Kyiv School of Economics is: 250,000 buildings, including 3,800 schools, 426 hospitals, 348 churches and 31 shopping centers.

America, Britain and Canada say all of Russia’s frozen overseas assets should be seized. Two months ago, President Biden signed into law the REPO Act, formally the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act. This provides for seizing frozen Russian reserves in the US. But American banks hold only $5 billion, less than 2% of the total. In 2018, after a round of sanctions, the Kremlin pulled most of its money out of American banks.

The challenge is Europe — and the breakdown of deposits on the continent. Almost 75 percent of Russian reserves are frozen with Euroclear, a Brussels-based, privately held clearinghouse. After talk flared this spring about a total confiscation, the Kremlin issued thinly veiled threats.

Two weeks ago, while talking about Russia’s nuclear arsenal, Vladimir Putin mused openly  about its potential impact on Europe’s “small and densely populated countries.”

Slightly smaller than Maryland, Belgium ranks 29th in size in Europe. With almost 12 million people, Belgium is Europe’s second most densely populated major country, after its northern neighbor The Netherlands.

Although still in embryonic form, the $50 billion loan plan elicited howls of rage from the Kremlin last week. Russian Foreign Ministry spokeswoman Maria Zakharova said Russia has full ownership of all interest earnings. On Friday, shortly after the leaders of America, Britain, Canada, France, Germany, Italy, and Japan announced the loan, President Putin told Russian diplomats: “Despite all the chicanery, theft will certainly remain theft. And it will not go unpunished.”

The former Russian prime minister, Dmitry Medvedev, responded to the loan and new American sanctions by calling on Russians to inflict “maximum harm” on Western societies and infrastructure. “Every day we should try to do maximum harm to those countries that have imposed these restrictions,” Mr. Medvedev wrote to his 1.3 million followers on Telegram. 

He added: “Harm their economies, their institutions and their rulers. Harm the well-being of their citizens, their confidence in the future.” In recent months, European police officials have reported an upsurge of sabotage, including arson, that they believe is Russia-directed.

Advocates of total confiscation are undaunted. They say Ukraine needs $100 billion a year to withstand Russia’s onslaught. Foreign financial support could be shaken by elections in coming months in America, Britain and France. If Ukraine’s lines fail to hold, a defeat could mean 10 million refugees flooding into Western Europe, and European nations scrambling to build armies almost from scratch.

“As Russia continues to move to a permanent war footing and Ukraine faces a sizable future funding gap, Mr. Putin is betting that he can wait out the coalition until Ukraine runs out of money and bullets,” Secretary Yellen, warned last week in an opinion piece in the New York Times.

London-based Ukraine analyst Timothy Ash wrote last week in an essay titled “G7 Can’t Beat Russia on the Cheap” that “European bureaucrats, Russian lobbyists, and Western business interests have fought tooth and nail to ring-fence these assets so that they cannot be used to fund Ukraine’s defense and post-war reconstruction.” 

“An accurate description of the status quo is that Western taxpayers are bearing the full burden of the war, while the assets of Russian taxpayers are being protected,” wrote Mr. Ash, who analyzes emerging markets for RBC BlueBay Asset Management. “The choice is clear. Unless all frozen Russian assets are confiscated and given to Ukraine, Ukraine will lose the war, and the cost for the West will be much higher.”

Nigel Gould-Davies, writing for the London-based International Institute for Strategic Studies, sounded a similar note. “Imagine a future historian writing that Russia defeated Ukraine and imperiled Europe,” he observed, “while Brussels held huge sums of the aggressor state’s money that might have prevented this — all for the sake of monetary policy.”

Mr. Goud-Davies concluded that “To avert this damning judgment, Europe needs strategists, not accountants.” 

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