As practice shows, the implementation of legislatively formalised decisions on the confiscation of sovereign assets can be difficult due to the lack of procedural issues, Ekaterina Arapova writes. Despite the intensification of confiscation rhetoric, the Western authorities cannot fail to understand that the cascading of such practices from the United States both causes serious damage to the reputation of a reliable financial hub of their jurisdictions, and provokes retaliatory measures from Russia.
In April 2024, the United States approved H. R. 8038, the 21st Century Peace through Strength Act, which provides for the possibility of confiscating Russia’s sovereign assets. It represents a serious precedent that entails a number of questions. What does the decision mean for the global economy and the current financial system? What are the prospects for replicating such solutions within the collective West? How symmetrical is the Russian response, embodied in Presidential Decree No. 442, establishing a special procedure for compensation for damage caused to Russia by the United States?
The adopted decision contradicts not only the norms of international law, which is designed to guarantee the immunity of the sovereign property of states (and the official reserves of the country and the property of the Central Bank are precisely that), but also America’s own laws, particularly the US Foreign Immunity Act of 1976.
For almost a decade, China has been steadily reducing investments in American government debt, and over the last three years this process has been accelerated (ownership of American debt has decreased from $1.1 trillion at the beginning of 2021 to $800 billion by mid-2024). Over the past year, Saudi Arabia has reduced investments in American government debt by 17% — from 135 to 113 billion dollars, and Mexico has reduced such investments by 27% — from 93 to 68 billion dollars. In the group of countries outside the top 20 American debt holders, the reduction was 8% (from 1.46 to 1.33 trillion dollars), and it was provided mainly by the exit of developing countries from American assets. Of course, the factor of anti-Russian sanctions is not the only one contributing to the consolidation of this trend. The trade war between the United States and China, internal imbalances in the American economy, and political turbulence in the United States have played a significant role, but the crisis of confidence provoked by Western policies, the violation of private property rights and the introduction of secondary sanctions have played a decisive role in this process. The legalisation of the practice of confiscating Russia’s sovereign assets without a court decision will further push non-Western countries to withdraw their own reserves from large US banks, and, inertly, the EU.
The actions of the United States can definitely find a response among the other states of the Western coalition, which act with an eye on their American partner. However, when assessing the possible consequences, it is important to separate the legislative design of a particular initiative from law enforcement practice. In this case, the adopted bill gives the US President the “right” to make decisions on the confiscation of Russia’s sovereign assets, but does not entail the automatic implementation of these measures. As practice shows (mainly with regards to Canada, which legalised the confiscation of assets of sanctioned persons back in June 2022, but has not yet implemented a single precedent), the implementation of legislatively formalised decisions can be difficult due to the lack of procedural issues.
Within the boundaries of the collective West, two possible scenarios for the development of events can be formulated. The first is the preservation of dualism in the statements of Western politicians regarding the confiscation of Russian assets: some make loud statements, echoing American regulators, while others block relevant initiatives in the parliaments of their countries.
Politicians in American partner countries are obviously concerned that a new wave of crisis of investor confidence, provoked by the United States, will spread to their jurisdictions.
Former British prime minister Rishi Sunak has repeatedly called for countries “to be bolder” in the confiscation of Russian assets; however, the confiscation bill introduced in Parliament was rejected, and representatives of the House of Lords, the Bank of England and many British experts have expressed concern about the potential decrease in the attractiveness of the British financial hub for investors in the event of legislative registration or even the systematic discussion of such initiatives. A similar situation has transpired in Canada: discussion in the Senate of a bill to lift immunity from sovereign foreign assets in the spring of 2024 has not resumed. It is likely that the Canadian authorities this time decided not to act as the flagship of the process and took a pause, awaiting similar decisions from their American partners. The issue of complete confiscation of Russian assets is no longer on the G7 agenda.
It is no coincidence that over the past few months, both the Prime Minister and the Minister of Defence of Australia have made statements about the impossibility of introducing the practice of confiscation in their country due to the provisions of the Constitution and national legislation, which guarantees the return of funds to persons after the lifting of sanctions.
Despite the intensification of confiscation rhetoric, the Western authorities cannot fail to understand that the cascading of such practices from the United States, first, causes serious damage to the reputation of a reliable financial hub of their jurisdictions, and second, provokes retaliatory measures from Russia, which could be very painful for their business sector. Third, they could completely cut off the path to establishing a dialogue with Russia in the future, since they make the process of asset seizure irreversible.
However, the possibility of other actors replicating American practice should not be completely ruled out. If the crisis escalates, the second scenario may be realised, and the UK and Canada may be next on the path to legitimise the practice of confiscation of sovereign assets. In this case, it is unlikely that these legislative initiatives will be implemented this year. Moreover, even in the case of legal registration, the issue of law enforcement practice of confiscation measures remains open; accordingly, the risks of Russia losing its assets (or part of them) are postponed indefinitely, but the blow to the reputation of Western jurisdictions will manifest itself immediately.
The Russian response to the unfriendly actions of the United States was not long in coming. In May 2024, Presidential Decree No. 442 “On a Special Procedure for Compensation for Damage Caused to the Russian Federation and the Central Bank of the Russian Federation in Connection with the Unfriendly Actions of the United States” was adopted. The symmetry of the Russian response, discussed in expert circles, is determined by two factors: (1) the content of the provisions of legislative acts and the category of assets falling under the measures provided, and (2) the comparability of the volumes of relevant assets located in the jurisdictions of the warring countries.
H. R. 8038 does not apply the forfeiture provisions to the frozen assets of individuals, which is further emphasized in section 104(e) of the relevant Act. At the same time, Russia’s retaliatory measures apply to the property of the United States, foreign persons associated with the United States, as well as persons under the control of US persons and associated foreign persons, including movable and immovable property on the territory of the Russian Federation, securities and shares (stakes) in authorized capital Russian legal entities, as well as property rights. Even rough estimates of the value of mutually blocked assets suggest that the response is more than comparable to the potential damage to the Russian economy. It will also be comparable if the second scenario is implemented — the practice is replicated by Canada and the UK and mirror measures are taken by the Russian side. The value of Russian sovereign assets in the USA is estimated (in accordance with the same Law) at 4-5 billion dollars, in Canada the volume is insignificant, while in the UK it is significantly higher: according to various estimates, from 14 to 22.7 billion pounds (from 18 to 29 billion US dollars). At the same time, the accumulated investments of the United States in the Russian economy (even after the departure of a number of companies) amount to more than $9 billion, Canada — $2.5-2.9 billion, the UK — $16-19 billion. Cumulatively, investments from the G7 countries are worth more than $80 billion. 60% of Russian securities traded on the stock exchange are owned by foreign institutional investors, and the share of Western investors is extremely high: about 45% of this volume comes from the USA, 25% from the UK, approximately 25% from continental Europe. So it turns out that in relation to these three jurisdictions, the Russian authorities have all the levers for a mirror response.
At the same time, creating conditions for a mirror response is only one of the components of the strategy to ensure the sustainability of the Russian economy amid the current realities. At the same time, it is important to actively move away not only from using the currencies of unfriendly countries in foreign trade payments, but also from determining the value of foreign trade contracts in these currencies (including through the gold rate). It is better to use barter and compensation schemes where it is profitable and appropriate. The expansion of transactions in national currencies should be accompanied by the further development of reliable channels for the extraction and full use of export proceeds received in the relatively less liquid currencies of countries that maintain restrictions on the withdrawal of funds: through cryptocurrency mechanisms or through investing in the economies of importing countries (where appropriate and confirmed by commercial expediency). From a system of bilateral currency swap agreements, it is important to move towards multilateral systems (mainly based on the BRICS and SCO platforms), which allow the use of partner countries’ currencies (for example, dirhams or yuan in trade with India). This will help remove imbalances in bilateral trade and will help increase the liquidity of the Russian ruble and friendly currencies. Diversification of the structure of international reserves should also be extremely pragmatic: to stock the currencies of friendly countries in the amount necessary to ensure import transactions. It must be admitted that in the current conditions, the possibilities for the reliable placement of accumulated funds are very limited, and the profitability of relatively more reliable instruments is limited and unstable (especially considering the steadily declining exchange rates of the yuan and rupee in recent years). The most reliable instrument for investing reserves is still gold.
However, an even more reliable channel for investing is in your own economy. It is important to move away from the usual paradigm of expanding reserves while underinvesting in one’s own economic system: review the “budget rule” and the policy of surplus budgets, expand investment emissions that do not lead to an increase in the money supply in circulation, and work to reduce interest rates to restore industry’s access to credit resources. The development of the Islamic banking system is strategically important. This will not only open access to more than 500 Islamic banking and financial institutions in more than 100 countries, but will also enhance the investment image of our country in the eyes of investors in Asia and the Middle East.
