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It’s payback time

The West demands reparations for Ukraine. In turn, Kremlin threatens to seize hundreds of billions of dollars’ worth of foreign assets

Alexander Shirokov, exclusively for “Novaya Gazeta. Europe”

The UN General Assembly voting for the Ukrainian resolution on war reparations, 14 November 2022. Photo: Michael M. Santiago / Getty Images

On 14 November, the UN General Assembly voted for a resolution calling on Russia to compensate damages inflicted in the course of its war against Ukraine. Right at the start of the war, the states that backed the document froze reserves of the Russian Central Bank worth approximately $300 billion and blocked assets of several Russian oligarchs. 

Russia’s ex-president Dmitry Medvedev responded to the reparation demands by suggesting that private properties of foreign investors in Russia should be appropriated. Novaya Gazeta Europe takes a closer look at what foreign assets the Kremlin can seize and what it will lead to.

What does the UN want from Russia?

The resolution envisages the creation of a register to document all the damages inflicted on Ukraine and the establishment of a mechanism to pay out reparations. Even though the document does not instruct countries to immediately confiscate Russian properties, the EU is laying down a legal framework to seize the frozen Russian assets, says Ursula von der Leyen, President of the European Commission.

The UN resolution can propel the economic struggle between Russia and the West to a whole new level. “If the blocked assets of Russia, and primarily the Central Bank, are used as reparations to rebuild the Ukrainian economy before a peace treaty is signed, it will become a truly important international precedence,” professor of economics at the University of California Oleg Itskhoki told Novaya Gazeta Europe.

The resolution was backed by 94 countries, with the EU members, the UK, the US, Canada, Japan, and South Korea among them. These are the same states that froze the Russian Central Bank reserves worth around $300 billion.

Can we assess what reparations Ukraine can demand?

The Ukrainian authorities are yet to announce the amount that they will want to see paid as reparations. According to the estimates of Kyiv School of Economics (KSE), the Ukrainian infrastructure damage had reached $127 billion by September. The housing sector accounts for more than $50 billion out of this amount. According to KSE, around 3 million people have had their homes destroyed or damaged. Donbas cities suffered the most. For instance, 90% of residential buildings are damaged in Sievierodonetsk.

Mariupol had the largest industrial complexes that were destroyed. KSE puts the damages caused as a result of the Azovstal and Illich Steel and Iron Works at $3.5 billion. Hundreds of energy infrastructure facilities were devastated across the country, including 19 combined heat and power plants and thermal power stations (out of 36 in total), Ukrainian Communities Minister Oleksiy Chernyshov said on 21 October.

The total sum required to rebuild the Ukrainian economy stands at $349 billion, the same numbers were cited by the Ukrainian government, the European Commission and the World Bank.

The necessary social and industrial expenses are included in this amount apart from the infrastructure damage. At the same time, Russia launched large-scale missile strikes on Ukraine’s power network in October. On 1 November, President Volodymyr Zelensky said that 40% of the national energy infrastructure had been devastated. When the war comes to an end, whenever it may be, Ukraine might need up to $1 trillion to revive its economy, senior official Iryna Mudra noted in November.

What will the Kremlin do if the frozen assets are handed over to Ukraine?

Dmitry Medvedev, former president and currently deputy chair of the Russian Security Council, took to his Telegram channel to suggest that “enemy countries” can pass national acts to “steal” Russian assets on the basis of the UNGA resolution. “We will need to irreversibly seize money and properties of private investors from these countries, even though they are not responsible for the fools in their governments. Luckily, we have more than $300 billion worth of them (foreign loans, frozen account funds, and other valuables),” he wrote.

The UNGA resolution and the freezing of Russian Central Bank assets (on the one hand) and Medvedev’s suggestion (on the other hand) have one important difference, Ruben Enikopolov, professor of Russia’s New Economic School and Spain’s Pompeu Fabra University, told Novaya Gazeta Europe. The first case involves state assets, while the other deals with private investor estates, and they are not responsible for actions of their governments, as Medvedev himself pointed out.

However, the West also freezes assets and properties of Russian oligarchs. The total amount of assets reached €14 billion, Didier Reynders, European Commissioner for Justice, said in June. Calls are made to hand this money over to rebuild Ukraine. The issue once again is complicated due to the lack of a legal framework. “Putin and his entourage are responsible for this madness; therefore, he and his cronies should pay up. It is not easy legally speaking, but it will be absolutely fair,” co-leader of Germany’s Alliance 90/The Greens, one of the ruling parties in the country, Ricarda Lang wrote on Twitter.

Medvedev counted $300 billion in foreign assets that can be seized. Is it possible?

It is very difficult to calculate the value of all properties in Russia belonging to foreign investors from “unfriendly” countries. These assets can be split into 3 main categories:

  • state and company debts borrowed from foreign creditors;
  • Russian company shares bought at stock exchanges;
  • real sector investments (retail chains, plants, etc.).

In total, these assets are worth hundreds of billions of dollars (it’s impossible to give an accurate estimate). The Russian Central Bank reported after the war broke out that Moscow had imposed limitations on transferring approximately $300 billion which could potentially be moved to unfriendly countries.

In particular, bans on capital movement and selling of securities by foreign investors were introduced. Corporate and national debt payments to representatives of the countries that slapped sanctions on Russia needed to be greenlit by the government.

Later, these measures were relaxed. The Central Bank increased overseas transaction limits, while Russian companies were allowed to pay off their foreign debts ahead of schedule.

Can Russia refuse to repay its foreign debt?

Medvedev’s post shows that Russia could decline to pay off its foreign debts. As of 1 October, the external debt of the country stood at $56 billion, which is far off from Medvedev’s dream of $300 billion.

If Russian companies were banned from paying their foreign debts, it would be possible to reach that amount. The corporate external debt, according to the latest estimates, is around $380 billion. But it also includes debts between companies that are linked to each other, therefore, the actual foreign debt of Russian companies is lower. Russia’s ACRA rating agency puts it at $223 billion in the second quarter of 2022.

It is not disclosed what part of the Russian debts belong to “unfriendly” country holders. “These debts were loaned in peace time, therefore, the share of Western investors there was very significant there. I am not sure that they could exit it easily, therefore, the debts are stuck now,” Enikolopov says.

Investors can repeatedly resell debt securities, so Russia is unlikely to have any technical abilities to track who the state or Russian companies owe money.

This creates a risk that an investor from a “friendly” country will be left without their money.

“Russia does not control clearing centres. It is not guaranteed that Russia can track debt owners and debt security sales on the secondary market. Whether debts of Western owners were sold to Chinese buyers, for instance. If they are not able to track them, the payment ban will be pointless because Western investors will immediately sell them to someone else,” Enikolopov explains.

If the state or companies refuse to pay their debts, any foreign properties at least will be at risk of confiscation, the expert adds. For instance, energy giants like Gazprom and Rosneft can lose vessels that they use to transport energy resources. “It is absolutely the same as private bankruptcies. I don’t think the authorities will actually resort to it,” Enikolopov says.

And what if they strip foreigners of Russian shares?

The shares of Russian companies that were bought by investors from “unfriendly” countries at the Russian stock exchange are already frozen but yet to be seized. These buyers have 74% of the shares in free circulation, head of the Moscow Stock Exchange supervisory board Sergey Shvetsov siad in September. In February, they were banned from selling shares. However, a promise came in August that they would be allowed to trade with limitations at some point in the future.

As of 17 November, the total cost of all Russian shares at the Moscow Stock Exchange amounted to 38 trillion rubles or $630 billion. So, Russia could try to arrogate shares worth around $460 billion held by foreigners. However, the authorities are met here with a problem that is similar to the debt one. In particular, there are Russians amongst “unfriendly” non-residents who “invested in Russian assets, and not necessarily from Russia”, Shvetsov acknowledged.

The shares in any case cannot be described as a full-fledged substitute for the Central Bank reserves that can be seized as war reparations. As of now, the foreign accounts of the Central Bank have frozen stable currencies, while shares, especially those of Russian companies, are fluctuating in price a lot. To illustrate, these shares currently cost a half of what they did a year ago. The biggest companies refuse to pay dividends, while in summer their total profitability turned out four times lower than expected — 1 trillion rubles ($16.5 billion).

But there are also factories, retail chains and other properties that can be seized?

Between the 1990s and early 2021, 75 biggest foreign investors (real sector mostly) funnelled $197 billion into the Russian economy, EY’s Russian office (left the international network in 2022) calculated. EY’s 2020 data also shows that most investments came into Russia from Germany, China and the US.

According to the Central Bank data, Russia received $479 billion in direct investments from “unfriendly” countries in the past 15 years, or 84% of all such investments into the country. But not all of these $479 billion actually came from overseas. Before 2014-2016, when sanctions were imposed and a de-offshorisation campaign was launched, 60-80% of direct investments were transferred from offshore accounts, and that money was moved there from Russia beforehand, economist of the Russian Academy of Sciences Boris Kheyfets noted.

It is practically impossible to determine the current value of these investments because the real value of assets is often determined after talks between buyers and sellers. On top of that, a government commission lets foreign companies sell their business with a discount of no less than 50% of the last estimated value, Finance Minister Anton Siluanov said in summer.

“Most foreign companies working in Russia, particularly foreign banks, treat their assets in the country as extra risky and expect a high probability of their expropriation or a necessity to sell these assets for a small portion of their value,” economist Oleg Itskhoki told Novaya Gazeta Europe.

It is pointless to seize factories and plants because they won’t work as they should, Enikolopov notes. “As soon as they are expropriated, their value plummets even faster,” he says.

The car industry serves as a good example of what happens after an exodus of Western investors. From January to September, car production dropped by 65.9% compared to last year. Over this time, Volkswagen, Mercedes, BMW, Renault, Toyota, Peugeot-Citroen and others shut down their factories in Russia. Russia’s Avtovaz, which was bought by the state from Renault for 1 ruble ($0.017), also suffered a lot. Avtovaz was forced to close its Izhevsk factory and halted production of its most advanced models: Vesta and X-Ray. The sales also halved compared to the beginning of 2022.

The situation in retail is not this straightforward. For instance, Russian business fairly quickly rebranded the McDonald’s chain, while it did not quite happen with IKEA. Stores of the Swedish company had a lot of imported products.

By trying to confiscate assets of Western companies, Russia can also inflict harm on investors from the countries that the country continues to actively cooperate with. “It is hard to separate assets of the “friendly” and “unfriendly” states. When you have mixed equity capital, and owners from different countries, how can you separate it?” Enikolopov says.

What would happen if Russia actually confiscated assets?

Seizing properties of foreign investors is a bad idea that is fraught with even bigger issues than losing frozen assets, experts say. It’s not just that Russia won’t be able to fully use these assets, the move will also likely harm investors from “friendly” countries and Russia itself.

After the war began, partial expropriation of foreign assets in a certain form was inevitable, Itskhoki says. He cites the example of Russian airlines refusing to return leased planes to foreign owners after sanctions were imposed. “We took somebody else’s property,” Transport Minister Vitaly Savelyev acknowledged.

However, Russia in its responses was recently mostly focused on preventing a capital flight rather than seizing assets. For instance, the demand for a 50% discount when selling businesses was enacted by the government to prevent an investor exodus, while the share freeze on the Moscow Stock Exchange was meant to avoid a stock market collapse, Enikolopov notes.

And in case assets are confiscated, any investor will stay away from Russia for a while. “If you seize and arrogate money from all private investors in Russia, it can come back as a boomerang, bringing in far greater problems than the ones the country is facing now.

Even the Soviet Union did not indulge in this escalation,” Enikolopov says. According to him, no one will believe Russia if it says that the country will only confiscate properties of some countries and not others.

“Everyone understands that they will be affected next time. It is a point of no return. It just undermines chances of any cooperation between Russia and foreign partners for many years to come,” the economist says.

We do not know whether these ideas are actually being discussed at the top of Russia’s leadership or it all stays in Medvedev’s Telegram channel, as the former president has often been drawing attention to himself with aggressive hawkish rhetoric. Earlier, the politician wrote that Russia’s aim is to “stop the supreme lord of hell, whatever name he uses: Satan, Lucifer or Iblis”.

At the same time, ideas are floated to “seize properties of Russian nationals”. On 17 November, senator Andrey Kutepov suggested freezing assets of major businessmen and corporation heads who fled the country after the war broke out. Earlier, lower house Speaker Vyacheslav Volodin also proposed confiscating cars of Russians who escape the country to avoid being drafted. However, this idea has not been implemented. For now.

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