Deeks, Gulati and Stephan are on the law faculty of the University of Virginia. Their work lies at the intersection of foreign relations, international debt, and international law.
There have been many many , many proposals to use Russia’s frozen assets to help Ukraine. Russia’s invasion violated international law; reparations are owed. Can’t Ukraine use Russian assets held by its allies to defend itself?
As Daleep Singh, US deputy national security adviser for international economics, said in Kyiv on Wednesday on another recent proposal:
We’re at a point in which we should explore every possible avenue to maximise the value of the immobilised reserves for Ukraine . . . We can’t wait forever, we know that.
But the answer isn’t easy. It’s clear that the US government may freeze Russian assets. But US law presents obstacles to transferring those assets to Ukraine. And even if those legal obstacles are surmountable , there are policy reasons for the US government to be wary.
As a matter of law, the legal gap between freezing and seizing assets is big enough to have stopped the Biden administration and the other G7 nations that hold frozen Russian assets from making that transfer. And in that legal logjam we have been stuck for the past two years.
But a month ago, Lee Buchheit, Hugo Dixon, and Daleep Singh proposed a way out (as Martin Sandbu and Felix Salmon have commented). It’s intriguing, but there are some wrinkles that should be considered.
First, here’s a quick explainer of the BDS proposal. Ukraine has a right to claim reparations against Russia. If Ukraine held frozen Russian assets and obtained a legal determination that Russia owed it reparations for the invasion, it could set off its claim against the Russian assets that it held. But the frozen Russian assets are not with Ukraine; they are mostly with Eurocloear in Belgium, with the US and other G7 nations holding the balance.
The answer, BDS argue, lies in finding a technique that merges the right of set-off with Ukraine’s legal claim against Russia. The BDS proposal is that the G7 nations make a joint loan to Ukraine for, say, $300bn — roughly the value of the frozen assets. Ukraine backs the borrowing by using its right to reparations from Russia as collateral.
When Ukraine obtains a judgment against Russia, perhaps by a tribunal set up by the G7 and Ukraine, Russia won’t pay (and will question the validity of the tribunal). A properly structured loan could relieve Ukraine from its debt by allowing it to assign its reparation right to its creditors. At that point, the creditors, including the US, will possess both frozen Russian assets and a claim against Russia. Voila, set off.
The plan is a thing of beauty. But the devil is in the details. We’re US lawyers, so we’ll analyse the US context only.
The Foreign Sovereign Immunities Act sets out the rules for protecting foreign states’ property from judicial process. Foreign central bank deposits in US bank accounts enjoy protection: A court cannot touch that money as long as it belongs to the central bank and is used for normal banking purposes.
There are, however, ways of moving money out of a bank account without going through the courts. Set-off allows a bank automatically to collect money that an account owner owes it. At least one US court has allowed a domestic bank to collect a debt owed to it by a foreign state by setting it off against money it held on behalf of that state’s central bank.
It explained that federal law:
. . . provides for immunity from attachment and execution, not immunity from set-off. Attachment and execution are fundamentally different from set-off. The former are legal remedies to legal wrongs, whereas the latter is a remedy that rests in equity.
Although some argue that international law mandates central bank immunity, we think the stronger position is that immunity is a domestic creature put in place by countries like the US to attract deposits from foreign central banks.
The real question then is whether the fear of reduced central bank deposits in the future will deter the US from making this novel move. Unlikely, we suspect, if the G7 is acting together in this endeavour.
You could argue that the Treasury and the US as a sovereign are different entities — so that the US itself is not eligible for set-off. But we think a US court would regard them as the same legal person. Similarly, a court might regard the Russian state and the Central Bank as sufficiently alike to treat their legal duties as interchangeable.
A recent International Court of J ustice decision regarding Iran’s central bank points in the opposite direction, but that case rested on a treaty to which Russia is not a party.
The Extraordinary Receipts Act requires that any money received by a US agency be turned over to the Treasury. Does this mean the money acquired from the Russia accounts must go to the Treasury, rather than satisfy any claims against Russia that the US might acquire?
The logic used to avoid the FSIA may apply here as well. The statute applies to a receipt of “money”, and in set-off there is no money and no receipt. As far as we can tell, the Office of Management and Budget, which arbitrates these issues within the Executive Branch, has said nothing to the contrary.
To make a loan, the administration needs Congressional approval. Given Congress’s divisions over Ukrainian assistance, there is little chance of direct approval. But the approval may not need legislation directly authorising a loan.
Congress usually enacts more general authorisations, which the administration then uses for specific purposes. We don’t know which existing authorisation could be used, but knowledgeable people must be looking.
In foreign relations, what’s good for the goose is good for the gander. If the US adopts BDS’s approach, it must be prepared for unfriendly states to undertake similar measures in the future. Perhaps weak states will start placing their legal claims with other states that hold the assets of rich and powerful states.
Maybe the US and others in the G7 are confident that they have not placed assets in a country that would consider offsetting claims by an adversarial state. But it would not be the first time that a ticket seemingly written for one trip only turns out to become an enduring precedent for frequent flyers. Moreover, losing $300bn in negotiating leverage with Russia may not be worth the candle if it means that the fighting drags on for much longer.
BDS’s proposal is morally appealing and legally intriguing. There are legal nuances and practical challenges, but none are insurmountable. More than anything, a dose of courage will be required.