Russia’s friends beg EU to leave frozen assets alone

BRUSSELS — Countries sympathetic to Russia are demanding the EU drop any notion it might have about a wholesale confiscation of Moscow's state assets.

Representatives of China, Saudi Arabia and Indonesia are privately pushing the EU to continue resisting pressure from the U.S. and U.K. to seize more than €200 billion of Russian state assets it immobilized after February 2022's invasion of Ukraine to help Kyiv's reconstruction efforts, four officials with knowledge of the proceedings told POLITICO.

“These countries are very skeptical about the idea,” said one of the officials, granted anonymity because the talks are so sensitive. The concern is, “this would create a precedent” ― in other words, these countries would fear they could be next to lose out.

For the time being, any plan to seize Europe's frozen Russian assets and use the money to help Ukraine is on the back burner. Western EU countries in particular are fierce in their opposition for fear of legal ramifications and the potential destabilization of the eurozone.

But with Washington and London keen ― as much as anything because tight budgets and messy domestic politics mean a different way of funding Ukraine's flagging war effort and reconstruction is an attractive option ― and the matter up for discussion at next month's meeting of G7 finance ministers, the countries that don't consider Vladimir Putin an enemy aren't complacent.

They have already seen the EU put forward a more limited proposal to skim off the profits accrued by investing the assets, worth about €2.5-3 billion per year, with 90 percent of the proceeds going to buy weapons for Ukraine.

And this might feed into the countries' lobbying motivation, too. As much as fearing a precedent, they could be acting on Putin's behalf and not wanting the EU to help Ukraine on the battlefield.

“I would admit that the Russians could have asked their friends to create this fuss,” said a senior diplomat from a non-EU country.

Acting as the middlemen

If so, these countries' lobbying would follow a similar playbook to the one seen since the start of the Ukraine conflict where governments which didn't necessarily come out in support for Russia did do some of Moscow's bidding nonetheless.

For example, Turkey, China and the UAE enabled Russia to avoid some Western sanctions imposed after the start of its full-scale invasion, giving its economy a boost and allowing it to finance its war machine.

And throughout the conflict, Gulf states have acted as middlemen, facilitating prisoner swaps between Russia and Ukraine and brokering a deal to allow grain exports out of the war-torn country. The argument given by these countries is that seizing Russian assets might prolong the war and force them to pick sides against their wishes.

An escalation of the war and the possibility of a Russian defeat go against the interests of Gulf states, said Theodore Karasik, senior advisor at the Gulf State Analytics consultancy.

“Gulf states do not want to see Russia fall apart,” he said, pointing to their investment in the country.

He added that using Russian assets to rebuild Ukraine might undermine their ambition of playing a leading role in the country's post-war reconstruction.

Lawsuits around the world

Confiscation could also spell legal trouble for these countries. Russian entities have already filed over 100 lawsuits in domestic courts demanding the release of Western assets currently frozen in Russia, according to officials with knowledge of the proceedings.

There are fears that these litigations might expand beyond Russia.

Moscow might push friendly jurisdictions such as China and Saudi Arabia to target target Western assets in their own countries, potentially tarnishing their reputation in the eyes of international investors.

Experts suggest that fears from these countries, that their assets in Europe might be next in line for confiscation if they fall out of favor with the West, are overblown.

“The only countries that should be concerned are those planning an illegal and unprovoked invasion of their neighbor,” said Tom Keatinge, a financial crime expert at the RUSI think tank. “And I don’t think any of those countries [China, Indonesia, and Saudi Arabia] are planning this.”

Nonetheless, arguments focusing on financial risks resonate in some European capitals. The German government and the European Central Bank argued that confiscation might undermine investors’ confidence in the EU’s financial system.

Any potential but unlikely market turmoil caused by a full-scale confiscation might harm countries like the Gulf states which own huge stocks of foreign currency, Keatinge added.

If the G7 group of industrialized countries decides to seize Russia’s frozen assets, officials expect Russian courts to successfully challenge the decision. A court ruling in Russia could potentially leave a black hole in the balance books of the financial institutions holding the assets.

These bodies would have to tap into their cash reserves to make up the loss. This could involve using, as a last resort, other sovereign funds that are deposited in their accounts.