Last week, rumors surfaced that the Russian government was preparing an "asset swap" proposal. The idea of exchanging Russian assets frozen in foreign jurisdictions for property of foreign companies and individuals immobilized in Russia came as a surprise to the West, but not to Moscow.
Although the details of the initiative are scarce, its existence means that the Russian government, which is under pressure from the devaluation of the ruble, military spending, and falling oil and gas revenues, is now in a "bargaining" phase that could escalate into unilateral action.
For example, in early August, Putin signed a law on blocking the funds and property of foreign legal entities against which Russia has imposed sanctions. In fact, it introduced a more aggressive mechanism for blocking the assets of international businesses in Russia and their subsequent seizure.
This means that the issue of the fate of frozen Russian assets abroad and assets of foreign companies in Russia may become more acute in the near future.
The Russian Federation has been off to a slow start since 2014
The occupation of Crimea, Donetsk and Luhansk regions resulted in the transfer of property and assets located in these territories to the Russian Federation without proper compensation to their owners.
In the first months of the full-scale aggression, the Russian authorities, on the one hand, publicly opposed the West with its policy of ever more complete asset freezes. "Unlike Western countries, we will respect property rights," Putin said on March 18, 2022.
However, against the backdrop of sanctions pressure, Moscow has begun to take retaliatory steps against the property of "unfriendly countries." In particular, a ban was imposed on the payment of dividends abroad, which effectively blocked the funds of foreign investors in Russia.
Back in April last year, Moscow was considering the fate of foreign property under Russian jurisdiction. The State Duma was considering a number of bills that would allow Russia to seize property of foreign companies and individuals "unfriendly to the regime" without compensation or to manage foreign assets without the consent of their owners.
Since October 2022, AerCap, the world's largest aircraft leasing company, has been engaged in a complex legal battle as more than 100 of the company's aircraft, which were located in Russia, were expropriated by Russian operators after Russia's invasion of Ukraine. Due to a presidential decree allowing the seizure of aircraft belonging to foreign countries, 1,140 aircraft were re-registered in the country under Russian documents.
And on April 25, 2023, Putin signed a decree that allowed for the introduction of external management of Russian assets (property and corporate rights, movable and immovable property) owned by owners from "unfriendly countries." At the same time, foreign investors were prohibited from selling Russian assets without special permission.
The first victims of this mechanism were two energy companies: Finnish Fortum Oyj and German Uniper SE. The Russian assets of these companies were transferred to state control exactly on the anniversary of the decree, in April 2023. In July, the assets of Danone (France) and Carlsberg (Denmark) were confiscated.
Although the assets have been transferred to the temporary management of the Federal Agency for State Property Management, they have actually become a gratuitous benefit for groups of influence loyal to the Kremlin.
In particular, a relative of Ramzan Kadyrov was appointed head of Danone in Russia, and the Baltika beer company, which belonged to Carlsberg, was headed by a protege of the Kovalchuks.
But the carrot was not long in coming. On August 23, the Financial Times (FT), citing sources in Moscow and Western governments,reported on the initiative of the Russian government, which was called "asset swap." The publication notes that there are no details yet, but the initiative itself is quite characteristic.
It provides that Western companies can withdraw their investments and working capital from Russia by buying out Russian assets abroad.
At the same time, the assets are not so much industrial enterprises or real estate, but securities owned by the Russian Federation and Russian companies and frozen abroad.
According to forecasts by Russian Finance Minister Anton Siluanov, this will supposedly unlock $1.1 billion belonging to retail investors. This is a rather small amount and a seemingly modest goal.
However, if a precedent is set, the "asset swap" could work on a much larger scale.
The FT also cites the example of British Petroleum (BP), which has frozen dividends for previous years in the amount of $1.4 billion. Although BP has publicly distanced itself from these funds, this is probably not the only case, and stakeholders may be more determined.
There are still many international businesses in Russia, and with the increasing pressure from the Putin regime, this option may become attractive to them. Given that external management of foreign companies in Russia can be introduced by presidential decree, which, after the adoption of amendments to the Constitution in 2020, will have superior legal force and may contradict international law, no one can guarantee the protection of foreign property located in Russia.
Confiscation of Russian assets as a form of financial responsibility for aggression
At first glance, the proposal under discussion seems unrealistic. After all, our allies constantly emphasize that Russian assets will remain frozen until Ukraine is fully compensated for the losses caused by Russia's aggression.
This scenario was confirmed, in particular, in the Group of Seven communiqué following the Vilnius Summit.
Although such a scenario currently seems to be a worse option for Ukraine than confiscation of these assets, it creates minimal guarantees for the entire recovery process.
With this initiative, even if it was only in the form of a media leak, Russia is trying to intercept the initiative. The democratic camp should not allow this to happen. For many companies in the EU and the US, the opportunity to get their assets back from Russia in the midst of an economic recession may sound attractive. Given that many Western companies continue to operate in Russia, we understand that business may exert some pressure on politicians to achieve such compromises, at least with regard to private Russian assets.
To prevent this, the Ukrainian government should take several political and diplomatic steps. It will have to work on several fronts simultaneously.
First of all, it is necessary to audit frozen Russian assets and create an International Register of Sanctioned Assets. These assets should become the main source of filling the Compensation Fund, which should become one of the elements of the future international compensation mechanism. This step will allow to obtain realistic estimates of frozen assets of the Russian Federation and prevent the "loss" of certain assets through these and other schemes.
Secondly, it is necessary to add the issue of compensation for losses to foreign and international businesses affected by the actions of the Russian Federation to the agenda of work on compensation for losses from aggression. Western companies should be given the opportunity to apply for appropriate compensation within the international Register of Damages.
The confiscation of Russian assets and full compensation for damages to Ukraine, Western companies and victims will encourage Russia to stop its aggression, since it is being carried out at Ukraine's expense.
It is equally important, especially for Ukraine, to emphasize that compensation for damages should be made at the expense of Russian assets, as this will help to implement the principle of inevitable responsibility of the aggressor for illegal actions. Russian property should be one of the measures of punishment for those involved in the war, not a bargaining chip for sanctions relief and barter deals.
It is important to coordinate the efforts of individual actors and create a single foothold for working on compensation for the consequences of the Russian war. This will allow to unite Ukrainian and international efforts and offer a certain direction of movement, instead of chaotic individual initiatives.
Confiscating Russian assets is not an easy task. However, the goal of establishing justice and providing adequate compensation to the victims of the Kremlin's unprovoked aggression should be sufficient grounds for Ukraine's allies to justify the expediency of seizing Russian property. The perpetrator of deaths, injuries, and destruction must be held not only criminally liable but also financially responsible for their actions. In this respect, compromises are unacceptable.
The study was conducted within the framework of the ANTS project "Russian Assets as a Source for the Recovery of the Ukrainian Economy", which is implemented in cooperation with the National Democratic Institute (NDI) funded by the National Endowment for Democracy (NED).