Western Seizure of Russian Central Bank Assets Risks Sparking Global Pushback

Photo by Фотобанк Moscow-Live licensed under CC BY-NC-SA 2.0

As fighting between Russia and Ukraine continues to drag on, Kiev’s backers are taking steps to confiscate Russian central bank assets frozen in the West. Whether it is legislators advocating for such a move, governments exploring potential mechanisms or authorizing leaders to seize assets belonging to the Russian Federation, momentum is building. Doing so may be popular domestically and would help finance Ukraine’s expensive military efforts and reconstruction at a time when Western support is waning. Nonetheless it risks undermining trust in international financial norms that support the global economy. In a bid to stave off the weaponization of financial instruments that are fundamental to the world’s economic system, some countries are not only pushing against the confiscation of Russian assets, but also preparing for a potential post-seizure economic landscape.

Global Opposition to Seizure of Russian Central Bank Assets

Western apparent willingness to confiscate Russian central bank assets has spooked some non-Western governments, in part because they fear that such measures may one day be directed against them. Countries such as Indonesia have, for example, actively lobbied the European Union against taking such steps. Others have signaled that they might retaliate. According to reporting by Bloomberg, Saudi officials hinted to their G7 counterparts that should the latter confiscate Russian central bank assets, Riyadh may sell some of their European debt holdings. The EU may have seen this as a threat, which the Saudi government has denied. But in either case, the concern and opposition is clear. During his participation in the Swiss-hosted Ukraine summit Kenya’s President William Ruto voiced his opposition, arguing that “just as Russia’s invasion of Ukraine was unlawful and unacceptable, the unilateral appropriation of Russian assets is equally unlawful, unacceptable, and a derogation from the UN Charter, especially for those of us who believe in freedom, justice, democracy.” More indirectly, the majority of Global South countries abstained or voted against a UN General Assembly resolution on Russian reparations for Ukraine, which has been envisioned by some in the West as being accomplished through the use of central bank assets.

Reasons for the opposition are varied and complex. Some level of affinity and alignment with Moscow may explain part of it. Saudi Arabia has used the rupture in Western-Russian relations as an opportunity to enhance its own position by working with Russia in the context of OPEC+ and by facilitating Russian-Ukrainian prisoner exchanges. Concurrently, the country signaled to its traditional Western partners, many of which have become increasingly critical of the kingdom, that Riyadh had other strategic options. Although Western governments have argued that a Russian defeat in Ukraine is crucial for global security, this is not a widely held sentiment. As the Singaporean former diplomat and a distinguished fellow at the Asia Research Institute Kishore Mahbubani writes, a Russian defeat “would not be in the interests of the Global South” since many non-Western countries “prefer a multipolar world, with Russia as an independent pole to give them geostrategic options” due to concerns that “the West will once again become arrogant and insufferable if it defeats Russia completely.”

Beyond immediate economic and foreign policy considerations, steps towards seizure—i.e. the transfer of ownership as opposed to merely freezing assets—have raised concerns about the reliability and trustworthiness of Western financial institutions. The weaponization of financial instruments, most notably through various kinds of sanctions intended to limit a country or a subset of the population’s ability to engage in commerce with the hope of influencing the target’s behavior, has grown significantly in recent decades. It was once a drastic measure but is becoming the go-to action for many Western governments. According to a 2024 Washington Post analysis, “more than 60 percent of all low-income countries [are] now under some form of [US] financial penalty.” Traditional sanctions, principally through freezing assets or punishing trade, generally targeted weaker or more isolated countries, such as North Korea and Iran today or Saddam Hussein’s Iraq and the Federal Republic of Yugoslavia during the 1990s. The threat of ramping up measures in the form confiscations of central bank assets belonging to a large economy like Russia—a G20 economy (now the fourth biggest in the world measured by PPP) and a permanent member of the Security Council—has shown governments around the world that no non-Western state is immune. The seizing of central bank assets owned by a significant power represents a major intensification in the use of economic warfare. By escalating from freezing to confiscating, as well as honing in on central bank assets, the potential effects could be far more consequential in informing how states navigate unchartered waters.

Afghanistan and Venezuela Distinguished

The threat to confiscate Russian assets is unprecedented for an additional reason: it involves assets of Russia’s central bank. To be sure, central bank assets have been the target of sanctions in past, but those directed at Moscow are—unlike past sanctions—not even arguably related to the recognition of a government. The United States froze Afghanistan’s central bank assets following the fall of Kabul because it did not recognize the Taliban as the legitimate government of Afghanistan and sought to deprive the Taliban of access the Afghan central bank assets. Across the Atlantic, the Bank of England controversially froze Venezuela’s gold reserves on the basis that Nicolás Maduro was not its legitimate ruler. London recognized opposition figure Juan Guaidó as the president of Venezuela and thus the BoE transferred Caracas’s assets to the Latin American country’s self-declared leader. Even following Guaidó’s ousting by the opposition, the gold remains frozen.

Though both the Afghan and Venezuelan cases are legally contested and are at least partially motivated by foreign policy objectives as opposed to being purely based on law, they nonetheless relied in part on disputes over who was the lawful owner of the central bank assets. The case of the Russian Federation is markedly different. The ongoing push to confiscate Russian central bank assets is not rooted in questions of governmental legitimacy or a claim that those assets are not in fact Russian. To be clear, the point is not to argue that the Afghan and Venezuelan measures were legal and that the proposed steps against Russia are not, topics that have generated extensive debates. The point is instead that, aside from legality of such measures, their global impact is important, especially as it relates to foreign, economic, and security policy. As such, the possibility of internationally recognized governments being stripped of their legal assets by third parties due to geopolitical contestation has worried governments across the world. The Russian case signals to the non-Western world that central bank assets are not as safe as they thought and that Western financial institutions are not as trustworthy as they believed, thereby spurring them to prepare for similar actions directed at them.

Precautionary Measures

The anxiety induced by the growing willingness of Western countries to sanction and seize central bank assets—such as the U.S. Congress authorizing the President to confiscate Russian state assets—has revived talks of alternative mechanisms that governments might use to protect their own foreign currency reserves and other assets. Governments have, for example, begun to repatriate gold reserves. In 2020 only 50% of gold reserves were held domestically, a figure that grew to 68% by 2023 and is expected to rise further to 74% by 2028. According to asset manager Invesco’s head of official institutions Rod Ringrow, “Up until this year [2023], central banks were willing to buy or sell gold through ETFs and gold swaps” but that “this year it’s been much more physical gold and the desire to hold gold in country rather than overseas with other central banks . . . it’s part of the reaction to the freezing of the Bank of Russia’s reserves.”

Consequently, governments have also increased their purchases of gold. As the Financial Times reported, Invesco’s survey of 57 central banks and 85 sovereign wealth funds found that a greater shift towards gold was driven by the fact that many “sovereign investors were ‘concerned’ by the precedent set by the confiscation of Russian assets, with 96 per cent saying further investment in gold was driven by its status as a safe haven.” To be sure, there are multiple reasons for this trend. High inflation (as in Turkey) and a weakening currency relative to the U.S. dollar (as in India) have also contributed to many countries’ decisions to buy more gold. Even the desire to diversify risk from sanctions is not purely a post-2022 phenomenon. Iran, Venezuela, and China—under considerable pressure from the United States even before February 2022—looked to gold in order to insulate themselves from Washington’s long reach since it is an “unfreezable asset” that can be physically transported without tracking or limitations imposed by third parties. The appeal of gold has nonetheless markedly grown since 2022. In 2021 central banks purchased a net amount of 450 tonnes of gold while in 2022 and 2023 this had risen to more than 1,081 and 1,037, respectively.

Actions targeting Russia are particularly concerning for China because the United States, the European Union, and NATO all variously describe the People’s Republic as either a strategic competitor, systemic rival, or a threat. Beijing has systematically developed its “shadow reserves,” whereby some of its dollar reserves are shifted away from the People’s Bank of China (its central bank) to other state-owned commercial banks. The dollars in the latter remain deeply integrated into the global economy. Christopher Vassallo notes:

While every dollar is de jure subject to Washington’s jurisdiction, some dollars are more vulnerable than others. In 2022, in a move Moscow anticipated, Washington and its allies froze Russia’s central bank reserves; at that time, they did not freeze the dollar balances of Russia’s largest energy giant, Gazprom, or its largest bank, Sberbank. China can expect its shadow reserves to afford a similar measure of security, if confronted with Russia-style financial sanctions.

Other options also remain possible. These range from currency swaps to establishing a BRICS Bridge system (as an alternative to the SWIFT payment system) to even relying on bartering. Nonetheless, barriers do exist. The limited convertibility of some currencies, such as the renminbi and the rupee, generally make them less desirable than other more easily convertible currencies. Mongolia, for example, is completely surrounded by sanctions-wary Russia and China yet relies primarily on the dollar for its foreign trade.

Risks for Confiscators

Advocates for seizures tend to minimize the potential fallout of their proposals, but their ideas come with considerable practical risks. Confiscation and transfer of central bank assets, as opposed to sanctions, come with an element of irreversibility. Although Western governments could theoretically reverse seizures by reimbursing the Russian Federation, the likelihood is low given how hostile Russia-West relations are likely to remain (even in the case of a peace settlement between Moscow and Kiev) and the potentially high domestic political cost that would be incurred by Western politicians perceived as paying money to the Kremlin. Even steps short of outright seizure that use central bank assets as collateral are perilous because they could affect the perception of whether foreign currency reserves are inviolable. The G7 and the EU are currently set to use profits from frozen Russian assets to repay a $50 billion loan taken out to fund Ukraine, which has elicited pushback even from the European Central Bank’s (ECB) head Christine Lagarde. The primary worry is that the move will weaken trust in the euro as a currency, which in the long term may harm the EU more than the expected benefits from using profits generated by frozen Russian assets. This is a larger risk for the euro than it is for the dollar because the dollar is a far more common reserve currency. According to the ECB roughly 20% of international transactions in 2023 were in euros. However, most of these took place within the eurozone, suggesting that the true figure is considerably smaller. The Atlantic Council’s Hung Tran suggests that the real number of truly international euro transactions is closer to 9.4% as of March 2024, compared to the dollar’s 47.37%.

Even the dollar’s situation is not rosy. The greenback has experienced two decades of gradual decline, having constituted approximately 70% of global foreign exchange reserves in the early 2000s down to 59% by the end of 2021 (even lower when adjusted for exchange and interest rates). The International Monetary Fund observed in a 2022 report that the dollar’s shrinking share was not mainly replaced by other major currencies, such as the British pound or the Japanese yen, but instead by a variety of “nontraditional reserve currencies” and that by the end of 2020 there were 46 “active diversifiers.” Should Russian central bank assets be confiscated, there is a very real risk that this trend could accelerate. Creon Butler, who leads Chatham House’s Global Economy and Finance Programme, cautions that “if action to confiscate Russian state assets combines with retaliation by the Russian authorities against Western-controlled private or multilateral assets still in Russia,” there would be a real risk of global capital flows being constrained. Given that President Vladimir Putin has already signed a decree authorizing retaliatory confiscations of U.S. assets (both publicly and privately owned) in case of the seizure of Russian state assets, Butler’s hypothetical scenario is not far-fetched.

Despite widespread political support on both sides of the Atlantic—the United States’ REPO for Ukrainians Act was passed with bipartisan support while asset seizure has been advocated for by both left and right-leaning politicians in Europe—the potential downsides are increasingly being acknowledged. Conservative member of parliament Harriet Baldwin warned that the United Kingdom cannot “go out and seize people’s assets randomly” because “that would make us a kleptocratic regime.” Bankers in the City of London have also cautioned against any such move on the basis that it will harm trust in the British financial system.

Switzerland has taken a cautious approach to sanctions but has gradually moved closer to the broader Western position of implementing unilateral sanctions (i.e. sanctions not mandated by the United Nations Security Council). The Swiss parliament has so far not confiscated Russian central bank assets but has voted, albeit narrowly, to advance the establishment of a reparations mechanism under international law that could draw from frozen assets. Bern has shown greater restraint than other Western states, but it is nonetheless suffering reputational damage. While 2021 witnessed wealthy clients bringing 131 billion Swiss francs into the country’s banks, this shrank to 45 billion the following year with total assets falling by 11% year-on-year. Traditionally, Swiss financial institutions have benefited from global instability because they are seen as reliable safe havens. Declining inflows, however, were in large part attributable to growing global skepticism of how the Swiss government might respond to new geopolitical developments. Boston Consulting Group predicts that Hong Kong will overtake Switzerland as a booking center by 2027 with Singapore and the United Arab Emirates also catching up.

Willingness by Western actors to fiddle with the inviolability of central bank assets can also serve to improve the relative reputations of non-Western states. Ryan Martínez Mitchell  argues that “Beijing is likely to reap diplomatic dividends from perceptions that Western financial warfare has become too extreme” and that the “contrast with a G7 maneuvering around the UN at every turn makes a potent impression in the Global South.” As a result, confiscation runs the risk of damaging Western states both economically and geopolitically.

Conclusion

Western policymakers have focused too narrowly on the Russo-Ukrainian conflict, using it as the lens through which they see much of international affairs. The desire to pursue policies of dubious legality runs the risk of destabilizing the global economic system and can contribute to its fragmentation. While it may help Ukraine and alleviate short-term budgetary pressures on Western support for Kiev, it can also spark a global backlash as countries around the world begin questioning the trustworthiness of Western financial institutions, thereby causing self-inflicted reputational damage for Western governments.