Russia Frozen Assets, Ukraine Reconstruction and G7-BRICS
Bottom Line: A number of proposals to seize or use Russia frozen assets for Ukraine reconstruction are not getting overwhelming support within the G7 and a decision could be delayed until the G7 summit in Italy June 13-15. Concerns over the legal standing and reputational risk (China has been shifting from U.S. Treasuries to Gold post Russia asset seizure) of the proposals are the key constraints.
Figure 1: China Gold Holdings Lags G7 (Tonnes)
Source: World Gold Council
Figure 2: China Pct in Gold Still Low (Pct of Foreign Reserves)
Source: World Gold Council
The UK has been pushing for Russia frozen assets to be used for reconstruction, with support from the White House. What are the options and what will be the progress? The three main options are as follows:
1. Seize Russian assets. Though some in the G7 have been vocal in supporting this option, the vast bulk of the assets are held in the Eurozone via Euroclear. Germany, Italy and the European Central Bank (ECB) are nervous about the legal foundations of such action and also fear the reputational risk to the Eurozone financial system. China has been gradually reducing it’s exposure to U.S. treasuries and part of this has been invested in Gold (Figure 1). Other big EM countries would also likely oppose the principle of G7 countries seizing assets of a country at war and before war reparations have been determined. This could split the G7 and G20 still further.
2. Russia assets as collateral for G7 debt. An alternative proposal is that the G7 use Russia assets to issue debt that then pays for Ukraine reconstruction on the assumption that Russia would have to pay war reparations at a future date. However, opposition exists within Europe, with Euroclear worried that it amounts to indirect seizure. The U.S. congress position on this is also unclear, given the infighting over the USD60bln package to finance Ukraine war efforts and the Republicans attitude on debt matter.
3. Interest on Russian assets. Some in the G7 see this option, as less of a legal and reputational risk. The EU is pushing this option. However, it could raise only USD4-5bln per annum compared to the World Bank, the EU and UN currently estimate of USD486bln for reconstruction and recovery in Ukraine (here).
The inability of the G7 leaders call this month to put serious momentum behind any of the options suggest that progress could slow in the coming months. A renewed push is likely into the G7 summit in Italy June 13-15. However, it is not clear that even the option of using the interest on Russian assets will be agreed, given internal G7 differences, legal concerns and G7-BRICS tensions. None of this solves Ukraine pressing need for finance for the war and economy in 2024, which without extra U.S. finance could see Ukraine forced to finance domestic debt via money print, which would ignite inflation, and perhaps getting some extra funds from the EU.