Payback time: The West studies how to make Russia foot the war bill

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Western governments are starting to sketch out ideas from asset seizures to an oil tax to collect the hundreds of billions of dollars required for reconstruction of Ukraine’s shattered cities, airfields and factories.

There is little doubt that the war bill will be astronomical after Russia’s assault on February 24. The Centre for Economic Policy and Research gave a €200 billion to €500 billion estimate for the costs, but these financial projections are spiraling every day the war and ensuing devastation grind on. Kyiv pegs the damage at closer to $1 trillion, when the loss of potential economic growth is factored in.

Ukrainian President Volodymyr Zelenskyy is warning Russians that they will have to get used to the word “reparations.”

“We will restore every house, every street, every city,” Zelenskyy vowed in a video address last month. “You will reimburse us for everything you did against our state, against every Ukrainian, in full.”

Wresting that money out of Russia’s grasp raises a series of tortuous legal problems. While EU officials are studying whether assets belonging to sanctioned oligarchs — like yachts and oil paintings — could be targeted and channeled to the reconstruction effort, those sums are modest compared with what is needed. Russia’s central bank reserves of hundreds of billions abroad are a tempting target, but foreign assets are protected under international law, and confiscating them would require a feat of legal engineering that’s never been successfully pulled off before.

Stephan Schill, professor of international and economic law and governance at Amsterdam Center for International Law, which hosts the War Reparations Center, said there were “significant legal hurdles” to a big raid on the reserves.

“There is international law that puts property of foreign states under special protection,” he added.

Other options include forcing the Russians into a reparation deal as part of a peace settlement. This could follow the model used after the Iraqi invasion of Kuwait in 1990 and carve out a set slice of oil revenue to pay for reconstruction costs.

In a less confrontational approach, the EU budget chief pitched a Marshall plan for Ukraine that would see Europe dole out billions in an effort to bring Kyiv closer to the EU’s fold, much like the U.S. did with Europe after World War II. Finally, European financial institutions say there should be a role for low-interest loans to Kyiv, but others caution this would pile too much of a debt burden on the crippled state.

Vaulting ambitions

Snatching Russian hard currency within reach is tempting, but complex. Seven countries participating in sanctions against Russia held nearly half of all Russian foreign reserves of $585 billion as of June 2021, according to the Russian central bank. Since then, foreign reserves have increased to $640 billion.

While this is still almost certainly shy of the required sum, it would cover a significant chunk of it.

Under this scenario, the U.S., U.K., EU countries, Canada and Japan would need to arrange the seizure and confiscation of the nearly $300 billion held in their territories.

“The money is there, it will require national legislation to authorize the central banks to use this money, which is now frozen,” said Robert Litan, nonresident senior fellow in the economic studies program at Brookings Institution.

Litan points to a 2005 U.N. resolution which says that “states should endeavour to establish national programs for reparation and other assistance to victims in the event that the parties liable for the harm suffered are unable or unwilling to meet their obligations.”

According to Litan, “it establishes the principle that if an aggressor nation, like Russia, is unable or unwilling to provide reparations, then there can be some other mechanism.”

While that resolution would provide the potential legal grounds for action, this kind of seizure has never been done before. The closest potential precedent — a U.S. effort to use $7 billion of frozen Afghan central bank assets to provide humanitarian aid to Afghanistan — is still underway. The payment scheme will take months to set up and could be legally challenged. Separately, groups of relatives of the September 11, 2001 attacks on the United States made competing claims for reparations on the same Afghan funds, with U.S. courts yet to rule on the issue.

Any attempt to swipe Russian assets in a similar manner would prove even more complicated, owing to the number of jurisdictions involved.

France, the country where Russia kept the largest share of its foreign reserves after China, said that frozen assets can’t be used to that end, according to a French treasury spokeswoman. A German treasury spokesperson declined to comment.

Separately, countries could seize and confiscate assets frozen via sanctions against individuals.

The so-called freeze-and-seize task force set up by the European Commission had grabbed €29.5 billion as of Friday, including yachts, helicopters, real estate, and artwork belonging to oligarchs and people affiliated with the Kremlin worth around €6.7 billion.

According to EU officials, diplomats and Ukrainian officials, talks are taking place on whether these assets — or the proceeds from their sale — could be devoted to Ukraine’s reconstruction. They caution, though, that confiscation can only happen legally under limited circumstances, and that it will depend on national criminal law in each country.

“Our task force may serve as a platform to explore whether and to what extent the frozen assets can separately be subject to freezing and confiscation if they meet the standards of the relevant national criminal law. This is an ongoing discussion in the framework of the task force,” an EU official said.

Even if that attempt succeeds, however, it would only cover a limited amount of Ukraine’s needs.

Percentage on the petroleum

A more consistent revenue stream would be for Russia to pay reparations as part of a peace settlement.

This could impose a tax of a set percentage on Moscow’s oil export revenue, as was done with Iraq’s oil exports to pay reparations for its invasion of Kuwait.

According to Torbjörn Becker, director of the Stockholm Institute of Transition Economics and lead author of “A blueprint for the reconstruction of Ukraine,” an e-book published last week by the CEPR think tank, it could be in Russia’s interest to pay a tax if it were lower than the discount at which it is currently being forced to sell its oil due to an effective embargo from Western buyers.

“If the tax is not more than the discount they’re already sort of having on selling their oil, that would make sense from their point of view as well,” he said.

However, the United Nations Compensation Commission, which was set up to deal with these issues, wound up two months ago, and any new U.N.-brokered deal would need to bypass Russia’s veto at the Security Council.

“If [the Compensation Commission] had still been in place, it might have been possible to agree to a new program through a procedural decision without Russian approval,” said Martti Koskenniemi, professor of international law at the University of Helsinki. A fresh attempt would need to go via the General Assembly, he said. “I don’t think it’s the most likely outcome, but it’s the politically desirable outcome,” he added.

Russia could also be forced to pay reparations out of its own pocket as part of a treaty. But extracting harsh concessions from a defeated Russia may not be politically desirable. Exacting conditions demanded by the Allied powers after World War I are largely viewed by historians as playing a key role in setting Germany on the path to World War II.

“In my view it’s unrealistic unless the ‘victorious powers,’ to use that Second World War vocabulary … would dictate the peace treaty to the Russians. I am not sure of the wisdom of even thinking in those terms,” said Koskenniemi.

‘Marshall Plan of the 21^st century’

Even before forcing the Russians to pay, there are other options out there. International financial institutions providing finance on cheap terms will likely play a role. The European Reconstruction and Development Bank will “absolutely” be involved, Beata Javorcik, the bank’s chief economist, said, adding that private investments will also be key.

“I think this is going to be particularly important in the context of reconstruction of Ukraine, because the needs will be great,” she said.

Similarly, the European Investment Bank is keen to play its part. “In particular in view of the move of Ukraine toward EU accession, EU institutions and the EIB as the bank of the EU will have to play a major role,” said Lionel Rapaille, director of neighboring countries at EIB.

However, funds from development banks and institutions like the International Monetary Fund would come as loans, which could saddle Ukraine with a huge debt financing bill.

“If you think about where Ukraine is today, it already has substantial debts. So if you add to that pile of debt you would only have a debt crisis down the road. This is why it has to be grants and not loans,” said Becker.

”And then it’s a matter of who puts in the money for the grants,” he said.

The obvious answer is for the EU to do it. Budget Commissioner Johannes Hahn last week pitched a Marshall plan for Ukraine to be run by the EU together with international partners.

“It has to be a global effort and it could be something like this, a Marshall plan of the 21st century to help the country to recover, and to recover quickly.”

Referring to the Ukrainian bid to join the bloc, he added: “It might also lead to a faster approximation of the European Union.”

Johanna Treeck contributed reporting.