12 May Invoicing Russia for Ukraine’s Recovery: The Complexities of Repurposing Frozen Russian Assets
[Dr. Paul R. Williams is the Founder of the Public International Law & Policy Group (PILPG), the Rebecca I. Grazier Professor in Law and International Relations at American University, and a world-renowned peace negotiation lawyer who has assisted over two dozen parties in major international peace negotiations.]
[Alexandra Koch is Co-Chair of the Policy Planning Initiative at the Public International Law & Policy Group (PILPG) and previously worked at the International Criminal Court in The Hague. She graduated Stanford University Phi Beta Kappa with a B.A. in International Relations and Human Rights.]
Russia’s war in Ukraine has caused significant damage to Ukraine’s economy and infrastructure. The estimated cost of rebuilding Ukraine is in the hundreds of billions of dollars, making it a massive undertaking. In response to this aggression, more than twenty countries and the European Union have imposed economic sanctions on Russia, including freezing a significant amount of assets (~$500 billion) belonging to the Russian State, as well as over $58 billion of assets belonging to individuals and private companies.
Ukraine has called for these frozen assets to be repurposed to fund its recovery efforts and this proposal has gained notable traction and support internationally. Such traction has led to various efforts to repurpose frozen Russian assets, including using the assets to induce Russia into agreeing to reparations, and repurposing revenue from the investment of Russian State-owned assets. Yet, implementation of these and other proposals, especially those that call for a direct transfer of State-owned assets to Ukraine, require a comprehensive understanding of the underlying legal mechanisms that govern the freezing and seizure of these foreign assets.
Whether or not such foreign assets may be seized at all will depend first on the type of asset. Repurposing the assets of individuals and private companies may be possible through establishing a link to criminal activity. However, State-owned assets, such as central bank reserves, are afforded heightened protection under international and domestic law. Typically, any attempt to repurpose State-owned assets must be done without infringing on Russia’s legal immunities as a sovereign State.
This blog post outlines some of the next steps that will be needed from advocates and policymakers alike to move forward on efforts to repurpose frozen Russian assets under domestic and international law frameworks. In brief, repurposing frozen Russian assets will likely require policymakers to: (i) develop clear mechanisms for States to change and transfer ownership of assets under existing or new legal frameworks; and (ii) identify and understand the impact of certain legal immunities Russia has as a sovereign State and consider developing mechanisms to use frozen Russian assets that are owned by the State in a temporary and reversible manner. In taking these next steps, policymakers may more effectively harness the momentum of existing moral and legal arguments in support of repurposing frozen Russian assets.
Repurposing of Russian Assets for Ukraine’s Reconstruction
Existing sanctions regimes are designed to ‘freeze’ assets, not seize and transfer assets. Freezing an asset prevents the owner of that asset from using that asset freely, without changing the actual ownership of that asset. Transferring an asset away from its original owner will thus typically require a change in ownership. For this reason, using frozen Russian assets to fund Ukraine’s recovery is likely to necessitate clear legal mechanisms that either allow for a change in ownership of the asset or somehow circumvent the ownership requirement.
While there are a few proposals that try to circumvent the ownership requirement (most prominently, the European Commission’s proposal to invest frozen Russian State assets, which is already being implemented by some of the EU Member States), the majority of attention has been directed to laws that allow for the change in ownership. Many States already have domestic legislation that allows for the seizure and permanent change of ownership of an asset in certain instances, typically where the assets are linked to a crime or criminal activity (e.g., civil or criminal forfeiture in the United States). While these laws have limited applicability to the assets of the Russian State, States such as the United States, Canada, and France, are already using such laws to repurpose assets of sanctioned Russian nationals and private companies that can be linked to criminal activity.
Helpfully, as a response to sanctioned Russian nationals attempting to hide their assets and evade sanctions prohibitions, many countries have taken steps to make sanctions evasion a crime in of itself. Germany has amended its Sanctions Enforcement Act to allow for the prosecution of any sanctioned person who fails to declare their assets in Germany to the German authorities. United Kingdom lawmakers introduced the Economic Crime Act which would provide the government with the authority to levy civil penalties against sanctions violators on a strict liability basis. The European Union has also proposed that all of its Member States take a uniform approach to criminalizing the evasion of sanctions, and has created a dedicated Working Group that looks at using frozen Russian assets for reconstruction of Ukraine. This Working Group will carry out a legal, financial, economic and political analysis of the possibilities of using frozen Russian assets.
Additionally, a number of major Russian State-owned enterprises began to open their branches in Crimea after the beginning of Russia’s full scale invasion of Ukraine in February 2022. Such companies include Sberbank and VTB, two of the largest Russian banks, which held significant amounts of their assets in the United Kingdom, the European Union, and the United States prior the beginning of the full scale invasion of Ukraine. These banks have previously avoided working in Crimea or other Russian occupied parts of Ukraine in order to escape international sanctions, but have begun to do this after President Putin’s call for Russian companies to enter the Crimean market in March 2022. There are suggestions that such actions by these Russian State-owned enterprises would pave the way for major Russian private and State-owned telecommunications, retail and oil companies to enter the Crimean market as well.
It could be argued that the opening of Crimean branches would make these companies complicit to the ongoing Russian occupation of Ukrainian territories, directly linking them to criminal activities of the Russian State, including violation of the existing restrictions on working in Crimea and other Russian occupied parts of Ukraine. This could potentially assist the seizure and repurposing of the frozen assets of such companies using the aforementioned domestic civil and criminal forfeiture legislation of many States, including Members of the European Union, the United States, and Canada, which allows that State to change the ownership of an asset linked to a crime or criminal activity by requiring the original owner to forfeit their ownership of that asset. Any effort to move such a process forward will require careful consideration. While operation in Crimea breaches international law, it does not necessarily constitute a crime under the national law of these States given the act does not happen on their territory and is not committed by the companies that are incorporated in these States.
Even where Russian assets are successfully seized, policymakers may face domestic law limits on the use of seized assets. Such challenges may be addressed by following the United States’ or Canada’s approach in designing legislation to expressly allow for the transfer of such assets to Ukraine. In December 2022, the United States amended its domestic legislation to allow for the transfer of assets seized from Russian oligarchs to Ukraine. This was used by U.S. Attorney General Merrick Garland in February 2023, to authorize the transfer of assets owned by Russian oligarch Konstantin Malofeyev. In May 2022, Canada amended a number of laws (including its Special Economic Measures Act, Magnitsky Act, and Seized Property Management Act) to allow seized Russian assets to be transferred to Ukraine to fund its recovery.
Nevertheless, the approach to repurposing frozen Russian assets will vary depending on the asset type. Specifically, the repurposing of any State-owned asset is likely to require an understanding of Russia’s legal immunities as a sovereign State. Although States like Canada and the United States have adopted laws to allow for the transfer of seized assets to Ukraine, more work needs to be done to expand the scope of these laws to include State-owned assets.
Russia’s Sovereign Immunity Protection
Any steps to permanently deprive Russia of its State-owned assets will require an understanding of Russia’s immunity as a sovereign State under international law. Many have argued Russia’s violations of international law have arguably justified the use of ‘countermeasures’ by other States. Countermeasures are acts an injured State may take against a State that is responsible for an internationally wrongful act, in order to induce that State to cease the internationally wrongful act or to make reparation for the internationally wrongful act. In essence, such countermeasures are intended to persuade a wrongful State to comply with its obligations. For this reason, and as noted by the International Law Commission in its Articles on the Responsibility of States for Internationally Wrongful Acts, countermeasures must be proportional, temporary, and reversible. Due to the scale of Russia’s illegal acts, the proportionality requirement is likely to be easily met. However, policymakers will need to carefully justify how any proposed seizure of State-owned assets is temporary and reversible. One approach that may circumvent this concern is Professor Paul Stephan’s proposal to hold the frozen assets until Russia agrees to pay reparations, directly linking the unfreezing of these assets to Russia’s fulfillment of its obligations under such agreement.
Identifying a legal justification to permanently and effectively deprive Russia of its frozen assets will require careful consideration of Russia’s sovereign immunity under international law. Sovereign immunity plays an important role in international law and international relations, as it protects States and their officials both from being subject to the jurisdiction of another State’s courts (jurisdictional immunity) and the enforcement measures of another State (enforcement immunity). There are limited exceptions to sovereign immunity that exist under international and domestic law. Prominently, both Canada and the United States provide an exception to sovereign immunity where a State is designated a “State sponsor of terrorism.”
Efforts to designate Russia as a State sponsor of terrorism have gained considerable support, including from the European Parliament, which has urged its Member States to create a similar exception within their domestic laws. While these efforts would allow for lawsuits by individuals and entities harmed by Russia’s actions, policymakers attempting to direct funds to Ukraine should consider that such exceptions need to be carefully designed to direct funds to Ukraine. In both the United States and Canada, using this exception provides the potential for their own citizens and companies to sue Russia for damages. This may mean that Russian funds are directed to the United States and Canada, rather than Ukraine.
Another possible exception to Russia’s jurisdictional immunity is the non-commercial tort exception. It allows parties to initiate court proceedings to seize State-owned assets for repurposing where such parties suffer personal injuries, death, damage to property, or loss of property that are attributable to the foreign State. While such responsibility cannot arise from damage caused by a State’s armed forces, it could arguably arise from damage caused by private military companies. Beyond the now ill-famed Wagner Group, which is responsible for countless military crimes in Eastern Ukraine (including executions of the prisoners of war), there are approximately 30 Russian private military companies, many of which are participating in fighting in Ukraine. While such companies do not have any clear legal status under Russian national law (which, in fact, prohibits mercenary activities) and their factual relationship with the Russian State remains obscure, it may be possible to argue that their conduct is attributable to Russia because the Russian State exercises effective control over them. Recent investigations by Politico and other U.S. and international media have uncovered unprecedented amounts of information about activities of these private military companies. This could link the Russian State to the crimes and violations of international law committed by these companies, and at least partially waive Russia’s jurisdictional immunity, allowing Ukraine to initiate court proceedings in relation to Russian State-owned property.
Existing Moral and Legal Arguments to Repurpose
Russia’s war in Ukraine has violated clear international laws and norms. The growing international consensus in support of Ukraine offers an unprecedented opportunity to overcome the legal challenges in repurposing the frozen Russian assets. The United Nations General Assembly has denounced Russia’s war in Ukraine as illegal. The International Criminal Court has issued an arrest warrant against President Putin and Russia’s Commissioner for Children’s Rights Ms. Lvova-Belova for the forced deportation and transfer of Ukrainian children. The international community is also uniting to establish a special tribunal to prosecute Russia for the crime of aggression against Ukraine. As actors around the world denounce Russia’s actions as illegal, it seems clear that these illegal actions should have legal consequences.
Russia’s violations of international law may in of itself justify the development of rules and doctrines of customary international law that allow for the repurposing of the full range of frozen Russian assets, including those owned by the State. Such moments, often called ‘Grotian moments,’ have existed throughout the history of international law. These Grotian moments led to the development of international law on individual criminal responsibility post-World War II and later again, following moral outrage regarding crimes committed during conflicts in Rwanda and Yugoslavia. Similarly to the rules developed after these former conflicts, new rules that arise from Russia’s war in Ukraine may pave the way for resolution of future wars and conflicts.
Ultimately, it will be up to States to work together both internationally as well as internally to construct effective strategies to develop the law to make repurposing of frozen Russian assets possible. Such efforts will require navigation of the realpolitik, as certain States may be concerned that seizing Russian State-owned assets may result in backlash that include Russia and other foreign States withdrawing funds from their economies and Central Banks. The need for thoughtful new domestic or international legislation should not be seen as an insurmountable obstacle, but as an intellectual challenge that requires further concerted support. This post has outlined some of the practical steps that legally repurposing frozen Russian assets will require, including the establishment of a clear legal path to transfer ownership of frozen assets, as well as the development of a solution that considers Russia’s sovereign immunity.
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Public International Law & Policy Group (PILPG), a global pro-bono law firm, convened our Ukrainian friends and colleagues and legal and subject matter experts over the past six months to assess the legal challenges to repurposing frozen Russian assets under domestic and international law in an effort to better identify and action viable solutions, resulting in the production of a policy planning white paper on this topic.