An article by: Riccardo Fallico

With the start of the Russian special operation (SMO) in Donbass, the USA, Great Britain, and the European Union, along with their closest allies, promised to impose “unprecedented” sanctions on Russia that could completely stop its military maneuvers. The real intention was to strangle the Russian economy, to deprive it of all resources, financial and otherwise, necessary for the stability of the country.

Global North freezes the assets of the Central Bank of Russia

Already on February 22, 2022, two days before the start of the SMO, the UK froze the assets of five Russian banks, and the US placed state banks VEB and Promsvyazbank, along with their subsidiaries, on the sanction list. In the days that followed, the European Union, NATO, and G7 countries froze Russian assets of individuals and companies in their territories and placed individuals, media, companies, and Russian banks, both private and state-owned, under sanctions. However, the efficiency of these sanctions is overrated, because even the statistics of the International Monetary Fund (IMF) characterize the Russian economy as good. Even in the summer of 2023, despite its status of the most sanctioned country in the world, Russia rebutted the late US Senator McCain who in 2014 defined it as “a gas station masquerading as a country”: Russia’s GDP, in terms of purchasing power, has turned the country into the fifth largest economy in the world and the largest economy in Europe, even surpassing Germany’s.

However, the most unexpected move by the countries of the so-called Global North was the freezing of the assets of the Central Bank of Russia (CBR) abroad. According to initial official estimates, the CBR’s reserves were frozen in the amount between 300 and 600 billion dollars. At the time of the freeze, the Central Bank’s assets totaled $67 billion in US currency and the equivalent of $207 billion in euros, $37 billion in pounds sterling, $36 billion in yen, $19 billion in Canadian dollars, $1.8 billion in Singapore dollars, and approximately $1 billion in Swiss francs. For its part, the CBR confirmed that these amounts consist mainly of bonds of foreign countries, bank deposits, and reserves on correspondent accounts. The countries to freeze the largest amount of assets of the CBR were France ($71 billion), Japan ($58 billion), and Germany ($55 billion). The United States has frozen $38 billion, and Britain has frozen $26 billion.

“How much?” Russia’s frozen assets in figures

Clarification should be made immediately. All amounts of assets that were frozen abroad are based on official statistics published by the CBR in January 2022 but were incorporated into its consolidated balance sheet as of June 2021. It is unclear whether and what transactions the CBR was able to conduct in the months prior to the SMO, and in support of all this, the case of France is illustrative. The $70 billion frozen would, in fact, be only “theoretical,” because, according to information disclosed by the French government itself, France has only frozen about $19 billion. This figure is also less than $25.6 billion announced in April 2022 by the French Ministry of Finance. In February 2023, there was still a great deal of uncertainty about these numbers, to the extent that, for example, European countries were considering requiring banks to declare all Russian assets on their balance sheets, because only $36 billion of the approximately $258 billion belonged to the CBR. In February 2024, it was revealed that the total reserves of the Russian Central Bank frozen abroad amount to about 280 billion dollars, of which two-thirds are in Europe, more specifically in Belgium, at Euroclear that specializes in securities custody and settlement. According to official estimates, Euroclear actually has 180 to 190 billion dollars of CBR’s assets on deposit.

Damages of the Russian-Ukrainian conflict: who should pay compensation?

For the past two years, even before a winner has been decided on the battlefield or the terms of a ceasefire agreed upon, the Global North has immediately insisted that Russia take responsibility for repairing the damage caused by the armed conflict. Time and again, the proposal for the final confiscation of Russian assets has been heard. Already in November 2022, Ursula von der Leyen stated that Russia would have to take on the damage caused to Ukraine by the armed conflict, which is estimated at 600 billion dollars. This statement by the president of the European Commission followed a petition by the English Parliament to facilitate the expropriation of Russian assets in the United Kingdom, but rejected due to the lack of support. In April 2023, the US Department of Justice submitted a request to Congress to expand sanctions relief to be able to implement the seizure of CBR assets frozen in the USA. Propaganda for the seizure of Russian assets abroad continued throughout 2023: in October of that year, Anthony Blinken said that the United States and the European Union needed to develop a legally meaningful framework for appropriating frozen assets in order to use them to help rebuild Ukraine.

Toward the end of 2023, the rhetoric began to shift slightly in light of, firstly, the increasingly persistent disagreement among countries in the Global North over what legal formulas to use to confiscate Russian assets, and secondly, the growing fear of those same countries of having to pay a high price, both political and economic, for the decision to take unprecedented action. In November 2023, Belgium itself stated that any expropriation action must be coordinated and approved by its government. Thus, the European Union has begun to turn its attention to the revenues generated by frozen assets.

Russian Foreign Ministry spokesperson, Maria Zakharova: "Russia has qualified the actions to seize Russian assets as theft, and will treat the participating countries as thieves."

Controversial procedures

The European Council has instructed all European depositaries with frozen CBR assets exceeding €1 million to credit the proceeds of frozen Russian assets to separate accounts, starting February 2024. These revenues represent nothing but coupons on bonds held by depositories, which at maturity should have been transferred to the CBR, but which, in the absence of a special directive, flowed into the current liquidity item of the depositories themselves. Depositories, unable to maintain excessive liquidity given the capital and risk management requirements they must meet, reinvested the accumulated coupons in other bonds or Eurobonds, which in turn generated additional profits, related to the payment of their coupons. Euroclear reported net interest income of nearly $6 billion in 2023, of which $4.8 billion came from securities held on behalf of the CBR. According to the European Union, revenues from the frozen assets of the CBR could range from 16 to 21.5 billion dollars between 2024 and 2027. It is unclear how much money will be allocated for Ukraine’s reconstruction, as Borrell’s statements in March 2024 made it clear that 90% of the roughly $3 to $5 billion in annual revenues will go to the European Peace Fund (EPF), with the remaining 10% going to improving Ukraine’s weapons industry. This is a non-trivial detail, as the purpose and ultimate destination of the proceeds must be clearly stated to provide a legal basis for expropriation.

Tools and operation

From a legal standpoint, the European Union has two instruments to appropriate these financial resources. The first solution would be a one-time tax (windfall profits tax), which, although could be challenged and contested, has greater legal strength because states have maximum freedom over taxes and their application. There are no international treaties or laws that could restrict national tax laws. No investor can expect or require a country’s investment tax laws not to be changed or not to be able to change. The second option, however, involves partial or full confiscation of the proceeds received, which, however, will be more difficult to defend in court. In addition, this case raises the issue of financial responsibility for paying legal fees and managing frozen assets, which in this case is borne by the depositary. To take the example of Euroclear, the Belgian depositary’s costs for managing frozen Russian assets increased in 2023 and reached 62 million dollars. Regardless of the tool used, other problems remain. The wording of the one-time tax, in order to be applicable, must comply with the most general investment protection rules, otherwise the investors themselves, having discovered the risk associated with the gain, may require amendments to the investment treaties. In addition, expropriation of profits derived from frozen assets could create the same problems as expropriation of the frozen assets themselves. There are also certain technical barriers to “redirecting” assets or the financial flows they generate. Firstly, the ownership of frozen assets and the income from them are legally indistinguishable. Secondly, since the terms of the management agreement between the CBR and the depositary are unknown, it is impossible to determine whether the income received may be subject to a nonrecurring tax or should instead be treated as expected profits from each other investor/depository client. Thirdly, the application of a one-off tax will not be immediate, as there is no single European tax regime, and it is unclear what rate should be applied. If a rate tied to the tax code of the country where the frozen assets are located were applied, would the liability fall only on the country concerned or would it be shared by other European countries? Finally, we should not forget the status of a country’s reserves: they are not comparable with other public facilities and, given their role in fulfilling the functions of state/national sovereignty, are generally considered exempt from restrictive measures by other states, as are the revenues derived from them.

The correct word is expropriation

Judicial and legal difficulties do not at all exclude the possibility of expropriation, but give it a somewhat dubious validity. Both the United States and Great Britain continue to seek confiscation of frozen assets, although they have yet to find a compelling legal justification. Moreover, according to the politicians themselves, such a maneuver would have implications for the national legislation of individual countries. In 2023, Janet Yellen essentially stated that while the US was convinced that confiscating Russian assets was the only alternative to financing Ukraine, this maneuver had to include “adjustments” and related changes in the Americans’ own laws. Nevertheless, in January 2024, the Foreign Relations Committee of the US Congress once again put forward a bill to confiscate the CBR assets in the United States for approximately 6 billion dollars. At the end of 2023, the Anglo-Saxon investment minister was forced to state that the confiscation of Russian assets should not have left legal loopholes that could then be used in national or international courts to challenge the expropriation decision. Russia’s response to all these actions will be the mirror confiscation of Western assets on its territory.

However, beyond political slogans, divisions among the countries of the Global North are strong. The finance ministers themselves, as it turned out after the G20 meeting in Brazil, still hold detached positions on what to do with the frozen assets of the Central Bank of Russia. In March 2024, Belgium, backed by the USA but rejected by France and Germany, proposed financing Ukraine by issuing bonds, the coupons on which could be guaranteed and paid from the proceeds of frozen Russian assets. Any decision to divert frozen Russian financial resources to Ukraine contradicts an irrefutable fact: even if a legal framework were developed to confiscate Russian assets abroad, a legal precedent would be set that would cause an earthquake in the global economic and financial system. The declarations of international banks, which in February 2024 expressed a negative opinion on maneuvers on frozen Russian assets, are indicative: financial institutions, in fact, fear liability to Russia for their involvement in asset transactions. Moreover, if sanctions against Russia are eased or even lifted in the future, the banks themselves see the risk of facing very lengthy court battles, given the lack of a legal basis for their governments’ actions. However, the biggest risk is the erosion of customer and investor confidence in the Western financial system. International law will lose any relevance, and investor confidence, completely undermined, will provoke capital flight due to the lack of a legal framework for protecting their investments. Some countries have already sent their complaints to the European Union, emphasizing what could be the consequences of the illegal use of frozen Russian assets.

We must not forget, however, that the first step has already been taken: with the tightening of sanctions policies, first by the USA and then by the Global North as a whole, competition and international rules in trade and investment have been rigged. The use of sanctions has become indiscriminate, and the occasion for their use can also be justified only by the fear of succumbing to competition.


Riccardo Fallico