https://www.eurointelligence.com
May 11, 2022
We don’t think this idea will fly, but if it did it would be very dangerous. Josep Borrell, the EU’s High Representative, has proposed to sequester Russia’s foreign exchange reserves for the reconstruction of Ukraine. The idea has a superficial attraction. Russia can’t get to the money anyway, possibly never. So we might as well put it to good purpose. And the US had done it before, in Afghanistan. Various eastern European politicians have been demanding the same. Borrell is picking up on an idea that is clearly being discussed.
We are talking about money Russia mostly got from the west for selling oil, gas and coal, and other commodities. The money was obtained legally. When we take the money away, we are not returning the oil. Russia will no doubt construe it as an act as a theft. It is perfect legitimate to think about future restoration payments. But unilateral sequestration turns a legitimate goal into an illegitimate act.
Or at the very least, it constitutes a procedure that lacks an obvious foundation in international law. Herein lies a difference to the freezing of assets. Anybody who holds their foreign reserves in the EU knows that they are subject to existing national, European and international laws.
In those various laws, there is no legal foundation for the sequestration. FAZ asked a couple of international lawyers, who said they did not know of any legal basis. The law of occupation, for example, explicitly foresees restoration payments. But these payments have to be subject of a contractual agreement: a peace treaty.
Another lawyer pointed out that central bank reserves enjoy what is known in international law as immunity protection as they form part of the sovereign toolkit of the Russian state.
The freezing of central bank assets is based on national law, and constitutes a different category. The Russian state is still the beneficial owner of those funds. We are stopping them from using those funds to finance the war.
What is legal is not necessarily wise. We believe that the freezing of central bank assets will, in the long run, damage the reputation of fiat money in general, and the dollar and the euro specifically, because it constitutes a default on money’s primary function: to act as a means of transaction. Western policymakers with their customary short-term mindset are right that it won’t have any effects in the short term. The dollar is the global reserve currency for a reason, which is the willingness to absorb excess global savings. But other countries, like China, are now starting to look at the underlying policies that have given rise to the imbalances in the first place.
When we now go outside the outer parameters of international law, that process will be mightily accelerated. There is nothing quite like the prospect of a counterparty's default to concentrate an investor’s mind.