Russia’s behaviour represents the most flagrant breaking of international law in a generation – if not longer. It has provoked justified anger at the wanton and unprovoked destruction that Russia has inflicted on Ukraine. There will be a pressing need for reconstruction in Ukraine once the war is over. And there is something neat about saying: ‘we have some $300bn of Russian reserves in western instruments, let’s use that’. There is also a sense of fairness to this.
But neatness and fairness are not enough, especially as what we might consider ‘fair’ will be seen differently by others (and not just Russia). It smacks too much of victor’s justice, verging on vengeance. And if it is not agreed with Russia as part of the comprehensive treaty to end hostilities it will not only be seen by Moscow as theft, it will be theft.
It is not enough to say, as some commentators do, ‘Russia has broken the law, and should forfeit the right to be protected by the law’ – we moved on from treating criminals as outlaws (literally, ‘those outside the protection of the law’) in medieval times. Sentiments like ‘it makes little sense to protect Russian property when Russia itself is flagrantly destroying Ukraine’ merely brings the West down to Russia’s level of banditry.
Reparations are not a new concept. The most famous example of reparations are those imposed on Germany in 1919 (note: a defeated Germany, and as part of the Peace Treaty – we are not at that stage with Russia and may never be). The main result of the reparations imposed at Versailles was a bitterness in Germany, a hatred of the ‘unfair treaty’ and fertile ground for the rise of Adolf Hitler.
Hostage to fortune
The consequences in the global South of seeing the US appropriate an enemy’s assets could be more serious than some allow. Many countries will be concerned that their reserves have suddenly become contingent on good behaviour, a hostage to fortune if you like, and even if they are not currently planning actions that the US may disapprove of, they will write the value of those assets down accordingly.
China alone could wreak havoc in the bond market if it decided to dump its treasuries. It may be unlikely to do that as the cost to itself would also be huge. But if the US establishes the principle that it will just steal other countries’ assets if it disapproves of their actions, then China may consider that the value of those treasuries has pretty much been written down to zero anyway. It may prefer to carry out a fire sale and get some value in ‘real money’, rather than see treasuries seized and therefore become worth nothing to Beijing. If the consequences for the dollar and the Treasury market are adverse, so be it.
Russia’s actions in Ukraine are those of a thug and quite clearly break international law. But I do not think the right response is to descend to their level of breaking the law. Moreover, all stick and no carrot is not going to turn Russia, under Vladimir Putin or anyone else, into a law-abiding, peace-loving neighbour. A unilateral seizure of Russia’s reserves would merely guarantee that whatever else the eventual cessation of hostilities brings, it will bring an even more bitter and estranged Russia, driven even more into China’s embrace, and the breeding ground for the next conflict.
In 1945, and especially as the horrors of the holocaust started to emerge, the crimes of the Nazi regime were unforgiveable and the task of reintegrating Germany into the family of civilised nations looked impossible. Somehow that generation found the way to do it, avoiding the kneejerk ‘aggressor must pay’ reaction. I do not know how we reintegrate Russia into society, but we need to do so and seizing its assets is not the way to start.
John Nugée is a Senior Adviser to OMFIF and former Chief Manager of Reserves at the Bank of England.
