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Confiscation of Russian frozen assets: EU should not bend to Moscow’s blackmail

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If the West fears that their companies in Russia would suffer reciprocal measures in case of confiscation of Russian assets, it should be advised that the total absence of rule of law in this country makes them vulnerable to expropriation anyway, write Valeriia Radchenko, Olena Halushka and Andrii Mikheiev.

Olena Halushka is the co-founder of the International Center for Ukrainian Victory (ICUV) and a board member at the Anti-Corruption Action Center. Andrii Mikheiev is an international lawyer at the Anti-Corruption Action Center. Valeriia Radchenko is Head of Communications at ICUV.

In December 2023, the dynamics of the debate within G7 countries about the possible confiscation of Russian assets changed profoundly. Existing challenges in mobilising domestic aid for Ukraine amid the protracted war forced foreign partners to seek alternative solutions, including possible repurposing of the immobilised Russian Central Bank (RCB) assets.

The Kremlin swiftly responded with stern threats to take “symmetric measures”, including confiscating assets of Western companies. Such an aggressive reaction indicates that they consider confiscation to be plausible, fearing that it can undermine their core strategy to conquer Ukraine by betting on the West’s fatigue from this war.

Though G7 sovereign funds aren’t stored in Russian banks, numerous private assets remain there. Despite Ukraine’s repeated pleas and calls to Western businesses to exit the aggressor state promptly and stop supporting its war machine with taxes, 1,454 companies originating from the states that hold the majority of RCB assets still operate there on different levels.

Foreign companies indeed have been facing jeopardy since the start of the full-scale war. Yet, these risks were never related to the potential confiscation in the West; instead, they stem from the continuous rise of Kremlin authoritarianism and kleptocracy.

The tightening of screws against Western businesses in Russia began immediately but gradually after the start of the full-scale aggression with restrictions on dividend payments from securities in March 2022.

Through further limiting transactions between companies “affiliated with unfriendly states” in autumn 2022 and limiting the sales of shares by foreign shareholders in December 2022, the Kremlin went all the way down to de-facto expropriation of foreign businesses under cover of “temporary management” in April 2023.

By now, Russian authorities have actually confiscated the assets of some companies while restricting transactions and business operations for others, depriving all owners of actual and full control over their property.

Worth reminding separately that at the same time between February 2022 and December 2023 there were no serious debates about full confiscation of the Russian Central Bank assets in G7 whatsoever. Thus no direct and obvious connection between confiscation of Russian assets and Russian policy actions against Western companies can be made.

Thus, the sale of assets in Russia of the US electronic company Honeywell or British-Austrian paper company Mondi took place on highly extortionate conditions of more than 50% discount under the control of the Kremlin Commission as reported by NYT.

Others like Finnish Fortum, German Uniper, French Danone, Danish Carlsberg were even less lucky since Russians de facto have fully taken their assets over by placing them into the so-called “temporary management” mode. Cynically, in December former president Dmitry Medvedev specifically highlighted that “a strong budget means help for the front”, adding that expropriated assets of Carlsberg would contribute to modernising Russian weapons.

According to the detailed NYT study, damages inflicted on Western businesses have already exceeded USD 103 billion as of December 2023, while that analysis does not even include another headline case of Russia stealing 400 civil airplanes and spare parts belonging to the Western companies.

By taking all these measures the Kremlin has already gravely violated nearly all internationally accepted standards of investment protection, incorporated in bilateral investment treaties binding for Russia including fair and equitable treatment of investors, protection from unlawful expropriation (direct and gradual), freedom of transfer of capital, national treatment standard, and most-favoured-nation standard.

Furthermore, the existing status quo means that all Western companies that continue remaining in Russia can be actually kept hostage by the Kremlin. If such blackmail were to succeed once and the West postpones the decision to confiscate Russian assets now, it could establish permanent leverage against any Western decisions in future.

The actual absence of the rule of law in Russia and the wartime economy that burns out enormous resources lead to the situation that all foreign companies there are exposed to the danger of expropriation when the political or economic momentum comes. Hence, the sole viable option for the West is not to fall for this blackmail and for companies to withdraw from the Russian market and stop financing the Russian war machine.

In the event of losing assets there, the most effective recourse could lie in challenging the illegal expropriation through investment tribunals based on violation of the bilateral investment treaties concluded by Russia with states of such companies’ origin. To ease the burden, businesses could form consortiums for international arbitration proceedings and effectively win and enforce arbitration awards against Russia.

Other ways might include special programs offered by national governments of states of such companies’ origin or by applying to the international Compensation Mechanism which has been effectively established on the basis of the Council of Europe.

The companies can also take part in the post-war reconstruction of Ukraine which will contain great earning possibilities.

Repurposing the assets of the Russian Central Bank for Ukraine is crucial to rectify the imbalance between the significantly larger economy of the aggressor state and smaller, war-torn economy of Ukraine. The latter is consistently targeted by missile and drone attacks with large agricultural fields being occupied, contaminated with mines or shelled non-stop.

If the West doesn’t promptly furnish Ukraine with ample resources for self-defence and macroeconomic stability, there is a risk that Ukraine may lose. That would have a detrimental immediate effect on Euroatlantic peace, stability and security, but also on Western economies since Ukraine’s defeat would force millions of new refugees to flee from genocide, putting an additional cosmic burden primarily on the EU budget.

In the 2022 NATO strategic concept, Russia was named the most significant and direct threat to Allies’ security. Emboldened by a possible triumph in Ukraine, there is no doubt that the aggressor would continue the war, converting expropriated assets of Western companies into bullets and shells to be fired directly at NATO forces.

It is crucial for the G7 and EU to prioritise ensuring Ukraine has all necessary resources to withstand and prevail in this war, including by finally making Russia pay despite the Kremlin’s continuous blackmail.

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