The debate over using frozen Russian assets to fund Ukraine’s reconstruction is coming to a head. The arguments in favor are compelling. The objections are weak. But there could also be unintended consequences.
Canada has passed legislation allowing Russian assets to be redeployed on behalf of Ukraine. In the US, four members of Congress have introduced legislation to repurpose sovereign Russian assets for Ukraine. And EU leaders considered the issue at their recent summit, though Olaf Scholz and others expressed concern that any such action might violate international law.
The arguments in favour of seizing frozen Russian assets have been conveniently assembled in one place by Lawrence Summers, Philip Zelikow and Robert Zoellick. Russia possesses the means to finance reconstruction. A vigorous economy will be postwar Ukraine’s best defence. Truth and justice are on Ukraine’s side. Other strongmen tempted to emulate Vladimir Putin’s imperialism will be deterred.
Then there is the pragmatic case. G7 governments are heavily indebted and are confronted with the need to devote additional resources to national defence, to the green transition and to ageing populations. Already, there are signs of Ukrainian aid fatigue, and critics ask why western countries should bear the costs of a war they didn’t start.
These complaints are heard despite the fact that financial transfers from the US and the EU, amounting to about $3bn (£2.3bn) a month, pale in comparison with the costs of reconstructing Ukraine. In March, the World Bank put those costs at $411bn. The bill continues to mount with each additional day of fighting.
G7 governments will not provide funding on this scale. To be sure, other countries and the multilateral financial institutions will contribute and foreign direct investment will flow in, though it is unlikely to be sufficient even if provided with war insurance. In these circumstances, $230bn of frozen Russian central bank assets, plus interest, would go a long way toward filling the gap.
Some objections are easily dismissed. One worry is that if central-bank currency reserves are garnished, central banks will stop holding reserves and the international monetary system will become illiquid and unstable. But only central banks whose governments commit the most egregious violations of international norms would be subject to such measures; the risk will not be general.
Others worry that the dollar’s international role will be diminished if the US and its allies garnish Russia’s reserves. But this argument neglects the fact that there is no practical alternative to the greenback. China’s yuan, though much vaunted,