Welcome to in the City.
I'm David Merritt and I'm Francine Lakwa, and this week, Dave, we talk about Russia.
Of course, last week saw the second anniversary of the invasion of Ukraine by Russia, and with Western governments all trying to figure out how to continue to shore up support, there's this debate that's emerging around possibly seizing some of the Russian assets that were frozen around the world to channel that money into Ukraine, and it's causing something of a row between governments and banks around the world.
As you say, David, it's been twenty four months that this war has been ongoing, and it's very clear that Ukraine is also becoming more desperate for funding, especially as aid from the US is not being unlocked for now.
Yes, and we all know about the relative failure of the Ukrainian counter offensive last year, So governments are really agonizing about what can be done to give Ukraine the support it needs. And Richie Sunak I saw wrote an off ed in the Sundays it's saying that Western nations need to be more aggressive in actually seizing those frozen Russian assets and then channeling that money back to Ukraine.
The problem is that if you're a bank, or if you're in financial services, you wonder where this ends. So a lot of them are pushing back, and they're warning the UK government that if there's not the right law, it's very difficult to just press the button and sees billions of pounds worth of Russian assets.
That's right. They're worried about getting snarled in legal disputes. They're worried about the reputation for London as a center if governments can just seize assets like this, And Richie Sunak says in his column that there needs to be a lawful way of doing this. Is there, in fact a lawful way to seize tens or hundreds of billions of dollars of another country's money. That's what we need to dive into in this episode.
So with us for this is Stephanie Baker, senior reporter on Bloomberg's investigations team. And Stephanie, you've also been calling all of your little Black book all the contacts because you're writing a book on this.
Yeah, I've spent the past six months deep into sanctions against Russia. My book is coming out later this year. It's called punishing Putin inside the economic war against Russia. So I've been talking to everyone from oligarchs to US officials, people in Brussels, London devising these policies to try to slow down Russia's advance in Ukraine.
So Stephanie, you are the expert in trying to understand oligarchs, especially all of this Russian money that for a long time was in London that we thought maybe has left, But where are we? Did the sanctions work as we thought they would.
There are two buckets of Russian money that have been frozen as a result of sanctions. There's the oligarch sanctions, which are the mansions and the yachts and the private jets, And for any oligarch with assets in London or EU or the US with those sort of assets, those are grounded. Those are for Then there's a second pot of money,
which is the Russian Central Bank reserves. And that's a pot of about three hundred billion dollars that was frozen within days of Russia's invasion in a very unprecedented move. And when Rishie Sunak is talking about seizing Russian assets, that is the pot of money he's talking about. He's
not talking about the Oligarch assets. You would need to prove that there has been a crime of either sanctions of vasion or money laundering, and therefore you could seize those assets as the proceeds of a crime, and that is happening in the US with some Olivegarch assets. This Russian Central bank funds is a much bigger pot of money, so much more consequential, and it is not subject to court.
The people who are pushing this idea are saying it would be allowed under the international law called countermeasures, which is a state on state action. It would not challenge the whole concept of sovereign immunity. Countermeasures is a part of international law. It's different from sanctions. It's all about compensating victims, and there's precedent for that, but certainly not precedent in terms of the scale of the money we're talking about right now.
So, Stephanie, I remember when the central banks there was
this coordinated announcement. Wasn't there about freezing those assets the three hundred billion that you just mentioned right after in just in the days after the invasion of Ukraine, And I remember talking to a senior official at the Bank of England, and they said it was like they were actually trying to engineer a crash in the Russian economy, And of course the ruble fell sharply at the time, but of course has since recovered and the Russian economy
seems to be doing just fine despite that action. So could you explain a little bit about the thinking behind that originally freezing those assets and why they don't seem to have really changed the game in terms of Russia's actions and the fate of Russia's economy.
Well, the real reason is because Russia is an energy superpower. It exports so much oil and gas. Now, Russia's gas exports have fallen precipitously as a result of Europe weaning itself off of Russian gas, but it is still a major It is this world's second largest oil exporter, so it was able to earn an enormous amount of money in twenty twenty two as a result of high oil prices in parts sparked by his own invasion. So that's why it didn't have as much of an effect as
some thought it would. But I would stress that I think it is a huge deal that they did this, and it is a huge pot of money, and it was not something that Putin was counting on. It was a surprise, and if you look at what happened with the Russian Central Bank funds, he was preparing for this day for many years. He had shifted the Russian Central bank assets out of dollars into euros, thinking that you're rope would be too divided and wouldn't be able to move.
And I think he was taken by surprise on this. And I think although the Russian economy has rebounded, the Western coalition has moved to try to cap his oil revenues with mixed results. But I think that this pot of money is incredibly important and they want it back.
And we've just seen, obviously after the death of Alexei Navalni, another wave of sanctions, both from a Europe and for the United States, a whole new raft of measures. Are any of these going to have any impact now? Or is it just more of the same.
It was a very long list some of the entities that were targeted. I read and I thought, why did it take you two years to do this? You know, defense manufacturers, you know certain individuals they should have sanctioned.
I thought there was nothing left to sanction exactly.
I was surprised there was, you know, entities I'd never really heard of. But they should have sanctioned the entire Russian military industrial complex, and they didn't. And I've asked questions to officials on this, why didn't you? And I think the answer I get is that some of these Russian factories are producing other things that are important to
the world economy. But I think they realize that they really need to be much more aggressive and really shut down Russia's ability to produce weaponry that is ending up on the battlefield in Ukraine.
So, Stephanie, why is it so controversial now what Rishisunak is actually proposing. Is it the seizing and giving to Ukraine? And is that a legal problem or are there two school of thoughts on how dangerous this could be.
So there's a few misconceptions about this. Under the international Law of countermeasures, which is what everyone says, there is a legal precedent for doing this. It is not for providing military aid. It is only for reconstruction. So you could use the money to help war veterans rebuild hospitals, bridges and all those things are important in terms of Ukraine's ability to withstand Russi assault. But I think that
there are two schools of thought on this. One is that we passed the rubicon when we froze the reserves in the first place, and that if there are concerns about the stability of the dollar or the euro or the yen, then when the Western coalition froze that pot of money, that's when the real concern would be. And you didn't see anyone moving away from those currencies. There's another school of thought that says the freezing is okay,
it's the real dangers when you actually seize those assets. Now, what Rishie Sunek was proposing was using the interest on those assets. It's very similar to what the EU has been trying to do with their windfall tax. They looked at using the interest, they decided that was not legal, that the only way to do it was to tax
that interest, so they weren't actually seizing the money. There is a school of thought of like you tax it, you sees the interest, it's all violating the principle, and so want not just seize the whole pot.
But the article that Richie's seen that wrote I thought there is this contradiction in the middle of it, isn't it because he talks about the need for Russia to lose this in order this war, in order to preserve a rules based what they call the rules based international order. But that's exactly the problem with this maneuver, isn't it on these assets that there isn't a precedent? It isn't according to the rules, and many people deem it to
be illegal. So how do you think the West are going to be able to reconcile those that contradiction.
I've interviewed three very prominent people involved in pushing for this proposal, Larry Summer's former Treasury secretary, Phil Zelikoe and Bob Zolik to veteran Republican officials, and they I think put it the most succinctly when they wrote a Foreign Affairs story about this, and their phrase was bank robbers should not expect banks to honor their safe deposit boxes. And I think that gets to the heart of the matter that Putin can't expect the rules based order or
to be followed. If he's not following the rules based order himself, he has violated that principle and there is a precedent for this. The one that most people point to is Iraq. Nineteen ninety one, the UN Security Council set up a fund freezing Iraqi assets to compensate victims of the Iraq invasion of Kuwait, and they paid out
more than fifty billion over many years. The problem we have now is that there is no consensus on the UN Security Council because of Russia and China, and folks like Bob Zohlik will say, well, that you can't just say you can't use the international legal system because Russia and China won't agree. That there has to be another mechanism for doing that, and that there is a possibility of setting up some sort of international institution, whether it's
through the World Bank or something else where. There is a process and it's not just handing over three hundred billion to Ukraine immediately. It is putting it in a fund, allowing claims to be made with a transparent process, and there is an international kind of overseeing of the whole the way the assets are handed out.
But Stephanie politically, so if this gets seized, and I remember at the time when the sanctions were put in place, sixty percent of the people that we spoke to were one hundred percent in favor, and then the ones that maybe worked in more difficult countries said, Liz, you know, what does it mean if I'm a big company in China and what if something happens politically in China? Does
it mean that my assets are frozen? So does the UK government need to think about the I guess unintended consequences of them doing trade with countries that may not share our values at all time.
Yeah, that's a big one. I think that the opposition to the seizing of Russian assets often the argument is that what happens to the Western companies that are still in Russia? And I would argue they should not be expecting to get those assets back, and I think it's unrealistic for them to think that they will. I think that eventually, regardless of what the West does, putin will move against those assets. I think it's a naive to
think that they can get any of that back. And you know, yeah, there is a broader I guess argument about what this does with China in terms of Western companies in China. But the fact of the matter is China needs the US dollar, and any country that has a trade surplus needs access to fully convertible currency with deep capital markets, and that is the United States and Europe and the hero.
I mean, but this is one of the things that people are raising an objection to. This, isn't it saying that an action like this, a unilateral action, or the West acting without the agreements of the entire global community, would undermine the dollar and the dollar status, because if you can't be sure that your dollars are safe in other central banks around the world, then why should you keep those assets. You mentioned at the beginning that Putin
had moved a lot of the assets into euros. But do you think this war has got any credibility that somehow seizing these assets would shake the foundations of the dominance of the dollar.
Well, that is why there's been such a push to have the G seven, the Group of Seven, move in unison, so that it's not any one country sticking their neck out. That you would have the world's major reserve currencies the dollar, the euro, the yen, the pound, and therefore it wouldn't be seen as a unilateral action. David Cameron has come out very strongly on this. He's been one of the most prominent figures to come out early on and argue for it forcefully. But the UK doesn't have that much.
The vast majority of the assets are in Europe. They happen to be at Euroclear. So Europe is absolutely essential to this.
And the fact I mean are the European is going to get on board with that? Then? Is that where the sticking point for this is going to be Because the European Union has struggled, of course, with the difference of opinions, say between Hungary and France on this issue. But we see the G seven members.
Of Europe agree on this, So you're absolutely right, Europe is essential and there is division. France, Germany Italy are more suspicious of this. The ECB Christine Legard has been also very against it because of concerns about what it would do to the euro But there are others within the EU that are very supportive of it and think that it makes absolutely no sense for the West to
be sitting on this pot of money. No one thinks anyone is going to give this three hundred billion back to Putin and frankly it's hard to see in any immediate term when Russia will agree to pay war reparations. There are a lot of interesting ideas being floated now about how you could use these assets as collateral still being debated, and maybe that is the ultimate solution, is there's some financial engineering that can get around some of
the legalities that are holding back European countries. I think it's going to take some time, but I think as the war drags on, I think, given the fact that the amount of money Ukraine requires is so enormous, it'll be very hard to ignore this pot of Russian money and use Western taxpayers funds instead.
But Stephanie could argue that sanctions so far have not really deterred Putin and his resolve of getting Ukraine. So would this make a material difference on the Ukrainian side of winning the war.
I've talked to the Ukrainians on this. I mean, the latest World Bank estimate is that it will cost four hundred and eighty six billion to rebuild Ukraine. And the task that they are facing is enormous. It is hundreds of bridges, thousands of kilometers of roads, water supply from the Nova Kokovka dam collapse last year, There's just an
enormous amount electricity substations, what have you. And the argument is that, Okay, this money can't be used by weapons, but just being able to rebuild homes and allow people to return is going to increased Ukraine's resilience to resist the Russian attacks. So I think it is important, and I think it doesn't make sense for Western taxpayers to be paying for Ukraine's reconstruction when there's this Russian money on the table.
Stephanie, did you think that actually, by imposing sanctions on oligarchs that was supposedly to touch Putin's money, almost his direct money, because we can't find a bank account, right, did you think at the time that would have made more of a difference.
I was always suspicious of the oligarch sanctions. There are kind of two oligarchs, two sets of oligarchs. There that the oligarchs that got rich off of Putin directly either running state owned companies or getting state contracts, and they were very beholden to him. And then there were the sort of first wave oligarchs who got rich in the nineteen nineties and had a slightly more precarious position visa
VI Putin. And I've interviewed some of these guys, and I think the way Putin exercises power is such that it's very hard for them all to band together to try to sort of overthrow him or change who sits in the Kremlin. So I think they could have been a little bit more sophisticated about the way they targeted these guys to try to encourage splits at the top. But they've been rolling out all these sanctions, it's very hard for them to know who's who.
Stephanie, with all of the way you've been tracking this, do you see and the drum beat on this seizure question seems to be getting louder with Richie's we've got the British Prime Minister coming out strongly for what we've had. Biden mentioned it. Do you see this now as sort of inevitable? And maybe it's dressed up in some of these ways you've talked about, whether it's the interest only at first, or financial engineering somehow to make it seem
palatable or legal and given a legal stamp. But what does the next few months look like? Is this something that's going to happen imminently?
In your opinion, I think we're going to be talking about it a lot for the next few months, and I think it will happen. I can't tell you when or how long it will take, and I think a lot of that will depend on getting agreement in Europe because that's where most of the assets are. But I think eventually it will happen in one way or another.
Stephanie Baker, thank you so much.
Thank you.
Thanks for listening to this week's in the City. We'll be back next week, but in the meantime, if you like our show, please head on over to Apple Podcasts or wherever you listen to podcasts and rate, review and subscribe. This episode was hosted by me Francine Laqua with David Merritt. It was produced by Sammersati, additional editing by Rishi bou Jay Cole, and special thanks to Stephanie Baker.