Using Russia's own money to pay for western weapons deliveries to Ukraine seems like a clever idea. Or maybe too clever by half?

The Group of Seven industrial countries are planning to raid Russia's foreign currency reserves of around 280 billion dollars. Of those, 210 billion dollars are held at Euroclear, a financial depository based in Belgium.  

After Russia invaded Ukraine, the immediate response by the West was to freeze the money to deprive Russia of the financial means to fund the war. Now the western allies want to go a step further and seize the assets themselves.

There are many ways to do this. What the US is proposing is a hideously complex financial construction based on the idea to use the Russian assets as a collateral for a bond. When I read about it first, I was reminded of the subprime bonds in the US that caused the 2008 global financial crisis.

Two G7 countries resist the US proposals: Germany and Japan. What they have in common is that they both face war reparation claims themselves. The previous Polish government made a claim of 1.3 trillion euros against Germany because, unlike Russia, Poland never received compensation for German war crimes. Radoslaw Sikorski, the current Polish foreign minister, reiterated those claims as compensation for the deaths of more than 5.2 million Polish citizens. Japan is facing compensation claims from South Korea.

There are subtle legal linkages between these claims and those against Russia. If the West argues that Russia owes money to Ukraine for the war crimes it committed, it can surely be argued that Germany owes money to Poland or that Japan owes money to South Korea. 

Russia has several avenues to defend itself against a money heist on its reserve assets. They could sue. Some of the money is not held in Europe, but in places like Hong Kong. If Russia took legal action there and won, it could create a hole in the balance sheet of Euroclear, which would then need to be recapitalised by the EU. Russia may also succeed in European courts. There are a lot of legal opinions out there, but we are in uncharted legal territory. Never before has anybody tried to extract war crime reparation payments while the war was still raging.

Another plausible Russian response is retaliation. The West, too, has assets in Russia. The number of western companies in Russia is hard to ascertain. The Kyiv School of Economics Institute estimated last year that 1400 western companies were still conducting business in Russia. Only 300 had left. I have seen reports that after an initial wave of departures in 2022, only few German companies have left Russia since. The reported turnover of German companies alone was reported to have been 21.3 billion euros. Last weekend, Vladimir Putin decided to sequester two European household goods companies, Ariston of Italy and BSH Hausgeräte from Germany. We are not the only ones with the power to sequester.

For me, the biggest reason to be cautious is the eurozone's precarious position after the debt crisis. China, Saudi Arabia and Indonesia leaned on the EU not to tamper with Russian assets on the grounds that it would create a precedent. These countries, too, have large holdings in the EU. They will surely ask themselves the questions: Could it happen to us? Why take the risk?

I find there is a lot of complacency in the response to this question. I am hearing arguments like: Where else can they go? Or:  they have nothing to fear unless they want to invade their neighbours. If we set a precedent on Russian assets, would we not apply this precedent to China over Taiwan? Does China not know this? 

It is also not true that they have nowhere to go. Money is more mobile than factories.

Despite my scepticism about the merits of an asset seizure, I nevertheless believe it will happen. The reason is that this is the only way through which the West can fund its support for Ukraine without having to raise taxes or incur more debt. After the pandemic and the initial economic shock after Russia's invasion, Western countries supported their economies through large deficits. Now, everybody is consolidating their public finances. I always suspected that Europeans would get tired of funding Ukraine's defence against Russia if they had to pay for it with their own money. Russia's untapped reserve assets are simply too tempting. 

But an asset raid would come at a price. One of the most formidable assets of the West is the trust in our currencies and our financial systems. When we use the financial sector to force our political will on others through sanctions, we encourage them to create their own financial infrastructure. This is easier today than it used to be. The blockchain technology that stands behind crypto-currencies makes this at least feasible. 

But this takes us beyond the time horizons of G7 leaders. They are focused on the next move, not the grand strategy. This is why I believe that they will probably find a way to approve an asset raid at their summit in Italy in June, or least get the ball rolling. They have no other plan. 

One of the lessons of the financial crisis is that complex financial instruments always conceal risk. That is why they are opaque. Back then, the risk was a mass default of US home buyers. What we are now trying to conceal is our inability to put our money where our mouth is.