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The writer is a former president of the World Bank
As Ukraine struggles to survive Russia’s relentless onslaught, the G7 countries are still debating the transfer of frozen Russian reserves to Ukraine. Some hesitate because of supposed risks to financial stability. Others assert legal worries even though prominent international lawyers have endorsed the transfer. The doubters far overstate these fears and fail to weigh the strategic benefits in the balance.
Take the fears first. Countries hold reserves for protection against macroeconomic risks, not so that they can overrun their neighbours. If the G7, including the EU, act together, other countries will not find good alternatives for investing their reserves. Some may hold gold, but it is not liquid. Even as China has encouraged the use of renminbi for its trade, countries have not been relying on China’s currency for their reserves with good reason.
China and other economies do not hold dollars or euros because they are friends with Europe and the US. Rather, they run trade surpluses that earn foreign currencies. If Beijing dumped its dollars or euros for renminbi, it would have to figure out where to invest the proceeds at the same time that it undermined its exporters’ exchange rate, thus hurting its trade.
Moreover, governments and markets have already offered a test. The G7 nations and others have frozen Russian reserves for two years without creating a disruptive, chilling effect. If countries believe that they cannot conquer and annex their neighbours without losing access to their global reserves, that is a good thing.
Rogue states have always been free to nationalise foreign investments without compensation or legal basis. Most do not do so because they would cut off international investment. And G7 countries are not likely to hold their reserves in Russian roubles, Venezuelan pesos or even Chinese renminbi.
With little risk, consider the diplomatic, economic, and legal gains from transferring frozen Russian reserves to an escrow for Ukraine and possibly other claimants. Russia is waging a war of attrition against Ukraine. Ukraine’s friends need to send a signal that Moscow cannot outlast Kyiv; it is elegant justice to do so with Russia’s own assets. Ukraine would also benefit psychologically from a large, enduring show of financial support during its winter of discontent.
If one approves of sending weapons to fight Russian soldiers, it seems odd to shrink from transferring Russia’s assets to Ukrainian victims. It is not likely that governments and their publics will send the billions they have frozen back to Russia. And we should consider how the reserves can be used constructively.
The promise of financial support for survival, recovery and reconstruction may ease Kyiv’s eventual acceptance of a settlement. If Russia agrees to a true peace settlement, however unlikely, the G7 could return some funds.
Well respected-international lawyers — from the UK, Belgium, the Netherlands, Japan, and the United States — have endorsed the use of the countermeasures principle to transfer frozen Russian reserves to an escrow for Ukraine. We should applaud the use of international law to meet modern challenges and support future deterrence, instead of relegating it to an ineffectual statement of protest.
Moreover, the experience of a claims process for Iraq’s reserves after the reversal of its 1990 invasion of Kuwait opens the possibility of setting aside some of the Russian reserves to assist developing countries that have been demonstrably hurt by higher food and energy prices. In addition, some amount could be allocated for claims by companies that suffered Russian retaliation.
Some critics of the proposed transfer use a mistaken analogy to reparations after the first world war. But Weimar Germany was a fragile democracy that had accepted defeat and a peace treaty. Putin’s autocratic Russia has done neither — and so Kyiv’s fragile democracy seems closer to Weimar Germany.
Finally, a transfer of Russian reserves should complement the continuation of military and financial support from the EU, the US and other friends of Ukraine. Indeed, US supporters of Congressional action maintain that transferring Russian reserves will help win votes. Citizens might reasonably complain about politicians using their tax dollars for Ukraine while hesitating to use Russian funds. The sponsors of bipartisan bills in the House and Senate, which would affirm US President Joe Biden’s existing authority to transfer Russian assets, want to use all tools to back Ukrainian self-defence.
Policymakers rarely find opportunities based on sound policy, good politics, and compelling ethical values. Putin continues to pulverise Ukraine mercilessly. The G7 and other friends should quit dithering and instead use an obvious economic tool to help the nation resist.
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