The writer is CEO of Hermitage Capital
As Vladimir Putin’s murderous invasion enters its second year, it is time to take stock of what we can do now to help Ukraine win. The British government and Nato allies have come a long way from the early days of the war when they endlessly repeated: “No offensive weapons for Ukraine”. Certainly, more needs to be done in terms of quantity but we have now provided most of the categories of weapons Ukraine requested. A live debate is raging over whether to provide fighter jets.
However, we need to fight Russia with banks as well as tanks. In this area, we still have a lot of work to do. Western allies froze well over $300bn of Russian central bank reserves in the first week of the war. This money is currently sitting in the Bank of England, the US Federal Reserve, the European Central Bank and others.
Since then, the Russian invasion has caused at least $1tn of damage to Ukraine, and possibly much more. We have sent money to help the Ukrainians fight the invasion but not enough to help them win. Meanwhile, complaints are growing (notably among US Republicans) that the war is costing too much as the conflict drags on. People wonder why we should pay for a war in a faraway country when we have a cost of living crisis and strikes for higher wages to contend with at home. These sentiments will only get louder so we have to come up with a solution of how to pay for this war.
And that’s when we come back to the $300bn plus in central bank reserves. This money should not just be frozen. It should be seized for the defence and reconstruction of Ukraine. This seems entirely morally logical. It makes financial sense. It would be an easy response to those complaining about the costs of this war. And it makes political sense for every allied leader struggling with the long term consequences of the conflict.
So why isn’t this happening? Some are concerned that seizing this money would lead to further de-dollarisation of the global economy as other countries respond out of fear that similar action will be taken against them. This would be a risk if the US alone was raiding the central bank reserves. But if every country with a reserve currency were involved, then investors would have no alternative.
The UK Foreign, Commonwealth and Development Office, the US State Department and other foreign ministries in allied countries are also standing in the way. Their argument is that Russian Central Bank Reserves are protected by a legal concept known as sovereign immunity. But Putin continues to push our definitions of what constitutes an international crime, by invading a peaceful neighbour and redrawing the map of Europe. It seems entirely logical that we need to update the law in response.
My proposal is that allied countries that have frozen central bank reserves should all revise their laws on sovereign immunity in unison. Of course, sovereign immunity should apply in every scenario apart from the specific instance in which a country commits an act of aggression against its neighbouring country. The move to prosecute Russia for an act of aggression (defined by the Rome Charter of the International Criminal Court as “the use of armed force by a state against the sovereignty, territorial integrity or political independence of another state, or in any other manner inconsistent with the Charter of the United Nations”) is gathering momentum. Only by revising our laws so that sovereign immunity does not apply under these specific circumstances, can those assets be seized.
I believe the UK, the US, Canada, Japan, the EU and Australia all need to unify around this simple, viable proposal. That would go a long way to at least starting to repair the financial damage that Russia has wrought with this terrible invasion of Ukraine.