Could frozen Russian assets finance Ukraine's war effort? | DW News

Key Concepts

• Frozen Russian Assets: Funds belonging to Russia that are held by foreign entities and cannot be accessed or used by Russia.
• Loan Against Frozen Assets: A financial mechanism where a loan is provided to a country (Ukraine) using frozen assets as collateral or a basis for repayment.
• Sovereign Assets: Assets owned by a state, which are generally protected under international law from seizure.
• Sanctions Packages: Coordinated measures imposed by countries or blocs (like the EU and US) to restrict economic or political activities of another country (Russia) to achieve specific foreign policy goals.
• Liquefied Natural Gas (LNG): Natural gas that has been cooled down to a liquid state for easier transportation and storage.
• Shadow Fleet: A fleet of oil tankers that operate outside of international regulations and oversight, often used to circumvent sanctions.
• Dual-Use Items: Goods, software, and technology that can be used for both civilian and military purposes.
• Secondary Sanctions: Sanctions imposed on entities or individuals in third countries that engage in prohibited transactions with sanctioned entities.
• War Industrial Process Economy: An economy that is heavily geared towards military production and expenditure.

EU Leaders Debate Use of Frozen Russian Assets for Ukraine

EU leaders are currently deliberating a controversial plan to utilize frozen Russian assets to provide Ukraine with a loan of approximately 140 billion euros. This approach aims to support Ukraine financially without directly confiscating Russia's funds, a move complicated by international law which generally prohibits the seizure of sovereign assets. The Kremlin has issued warnings of a "painful response" should these assets be seized.

Belgian Concerns and Guarantees

The frozen assets are primarily held in Belgium. The Belgian government has requested assurances that it will not be held liable for any legal actions Russia might pursue. Belgian Prime Minister Bart De Va has outlined three key stipulations for his government's support:

1. Risk Sharing: Ensuring that the financial burden is distributed among all EU member states, rather than falling solely on Belgium.
2. Guarantees Against Repayment Obligations: Seeking assurance that other countries will share the responsibility if Russia demands the return of funds, particularly in the event of a ceasefire.
3. Inclusion of Other Frozen Assets: Advocating for the inclusion of Russian financial assets frozen in other EU member states, not just those held in Belgium.

Ukrainian President's Stance

Ukrainian President Volodymyr Zelenskyy has welcomed the proposed plan, stating, "If Russia brought war to our land and they have to pay for this war in any case, one of the ways to pressure on them... and of course, one of the ways has to use frozen assets." He expressed hope for a positive political decision from EU leaders to support Ukraine using these frozen assets.

Technical and Political Challenges

Correspondent Jack Parrick highlighted the delicate and complicated nature of using these funds. He noted that EU leaders are facing domestic political pressure and struggling to find sufficient funds from their own budgets to continue supporting Ukraine. The process requires finding a "fine line through making this legal." The extent to which EU leaders will reach a definitive decision at the current summit remains uncertain, with discussions expected to continue.

EU's 19th Sanctions Package Against Russia

In parallel to the asset debate, the EU has announced its 19th package of sanctions against Russia. This package includes significant measures such as:

• Banning Liquefied Natural Gas (LNG): Restrictions on Russian LNG imports.
• Targeting the Shadow Fleet: Measures aimed at disrupting the operations of Russian oil tankers operating outside regulatory frameworks.
• Cryptocurrency Restrictions: Limitations on the use of cryptocurrencies by Russia.

The overarching goal of these sanctions is to exert economic pressure on Russia, with the stated aim of compelling President Putin to negotiate a ceasefire. However, it is acknowledged that previous sanctions packages have not yet achieved this objective.

Overcoming Objections to Gas Sanctions

The inclusion of sanctions on Russian gas faced initial objections, particularly from Slovakia and Hungary, who expressed concerns about their domestic energy supply. These objections were reportedly overcome through "tweaking in the language" of the sanctions, though specific details remain undisclosed. There is speculation that Slovakia and Hungary may have softened their stance on sanctions in exchange for concessions on other EU climate regulations they oppose.

US Sanctions and Russian Response

President Putin has dismissed new US sanctions as unlikely to significantly impact the Russian economy. The US has imposed sanctions targeting Rosneft and Lukoil, Russia's largest oil producers, with the aim of pressuring Moscow to negotiate a ceasefire. Russia has stated these plans will fail and accused Europe of clinging to ineffective measures.

Expert Analysis on Sanctions Effectiveness

Olga Kakova, Deputy Director for European Energy Security at the Atlantic Council's Global Energy Center, believes the US sanctions on major oil producers will have a significant impact, providing a "huge lifeline for Russian war machine and for Russia's broader economy." She emphasizes that while Russia may find ways to circumvent sanctions, it is an expensive, lengthy, and risky process that businesses generally avoid. She cites the Arctic 2 LNG project as an example where sanctions, even if circumvented, delayed development and increased costs.

EU vs. US Sanctions Emphasis

Kakova notes that the EU and US sanctions are complementary, pressuring Russia from multiple angles on its key revenue sources: gas and oil. The EU's focus on piped gas and LNG, paired with US efforts to restrict Russian revenue reinvestment in its war efforts, creates a "layered multiplier impact."

Rationale for Incremental EU Sanctions

Regarding the EU's incremental approach to sanctions (19 packages), Kakova explains that this gradual implementation allows for:

• Maintaining Progress: Enabling continuous pressure on Russia.
• Member State Alignment: Facilitating consensus and preventing significant pushback from individual member states.
• Supply Security: Ensuring that EU member states can prepare for future steps and maintain energy security.
• Price Competitiveness: Ensuring future price stability for energy.

Anastasia Fedic, Assistant Professor of Finance at the Har School of Business and active in the NGO Economists for Ukraine, also discusses the impact of sanctions. She acknowledges that sanctions will negatively affect the Russian economy but questions the speed and extent of their impact on Russia's willingness to negotiate. She points out that restrictions on dual-use items and technology can have faster effects than those on long-term LNG contracts.

Loopholes and Enforcement

Fedic suggests that while sanctions are tightening, Russia has been skillful in finding "openings" to continue selling its energy. She notes ambiguity in US secondary sanctions and believes that the ultimate effectiveness of sanctions depends on their implementation and the "will to follow through."

Impact on Russian Consumers and Economy

Fedic describes the Russian economy as having transitioned to a "military economy," which masks underlying issues like high interest rates and inflation. She believes that a withdrawal from military aggression would expose these economic fissures. For Russian consumers, the impact is seen in the replacement of Western brands with lower-quality domestic alternatives. While innovation and new business creation have suffered, the Russian population's perception of "winning" the war may lead them to tolerate economic hardship. Fedic emphasizes that weapon aid remains more critical than sanctions aid, as progress on the front line is what will ultimately influence the Russian population's perception of the war's impact.