The Bell, 7/26/24

The Kremlin wants to make it easier to seize Western assets

Russia is currently discussing a legal mechanism to seize funds from frozen accounts belonging to foreigners. Officials calculate that even the existence of such a mechanism should reduce the possibility of Russian assets being confiscated in the West. In a worst case scenario, it will allow Russia to fight a new battle of the “confiscation war” in which Russia and the West seek to inflict tit-for-tat economic harm on one another.

• A source told Interfax about the government’s plans earlier this month. And two sources confirmed to The Bell that the authorities are, indeed, drawing up a document that permits the seizure of foreign-owned funds in frozen accounts. It would be used in response to any attempt to seize Central Bank assets abroad.
• The accounts officials have in mind are so-called Type C accounts. These are escrow accounts that appeared in 2022 on the orders of Russian President Vladimir Putinin in response to the blocking of Russian assets abroad at the start of the full-scale invasion of Ukraine. Back then, assets of Russian investors held in accounts at Russia’s National Settlement Depository (NSD) in Europe, and Central Bank assets in Western countries, were frozen. In response, Russia stopped foreign investors from withdrawing funds with the introduction of these Type C accounts. 
• These accounts are credited with interest and dividends paid out by Russian securities. But this money cannot be transferred out of Russia without the express permission of a government commission. In the meantime, it can only be used to purchase Russian government bonds, or pay taxes.
• Type C accounts are an important part of the system of capital controls created in 2022 in response to Western sanctions and the seizure of Central Bank assets. Put simply, it was foreign investors who paid the price for the freezing of Russian assets. The Kremlin clearly hopes – at some point – to be able to exchange the funds held in Type C accounts for frozen Russian assets in the West.
• Last year, Vladimir Chistyukhin, deputy chairman of Russia’s Central Bank, referred to Type C accounts as an “exchange fund,” and called for Russia to accumulate more of them. The term “exchange fund” is normally applied to prisoners or detained spies, who can be traded for Russians held in Western jails.
• Amid discussions in the West about the possible seizure of frozen Russian assets, Putin signed decree № 442 in May. This established a special compensation process for losses sustained by Russia, or the Russian Central Bank, as a result of U.S. actions. The decree enables Russian courts to mandate compensation via U.S.-owned securities in Russia, property rights and shares in Russian companies.
• However, the document currently under discussion will simplify the process of seizing foreign-held assets. Likely, the process would resemble assets forfeiture. Claims will be filed by the Central Bank, or the Federal Property, and the government’s Commission on Monitoring Foreign Investments would be tasked with determining the assets for an immediate  seizure.
• In total, there are about 1 trillion rubles ($12 billion) frozen in Type C accounts. This is far less than the equivalent amount of Russian funds frozen in the west (about $300 billion), but twice as much as the Russian money frozen in the U.S. ($5 billion).
• Washington is the most prominent advocate of seizing Russian assets and transferring them to Ukraine, insisting that such a course of action would be legal. But, so far, Europe has refused to do this. Instead, the U.S. has organized its own scheme: Russian assets are not confiscated, but interest earned from them is transferred to Ukraine via debt. Russia, unsurprisingly, claims this is illegal. However, it is unclear whether the Kremlin regards it as de facto confiscation.

Why the world should care

Even if the mechanism currently under discussion is never used, officials hope its existence might reduce the likelihood of Russian assets being seized in the West (perhaps by encouraging Western companies with assets stuck in Russia to lobby against any such confiscations). If it is used, however, it would be an escalatory step. It would not so much damage Russia’s investment image (which can’t get much worse) as reduce the chances of Russian owners of frozen assets in the West ever getting their money back.