Daily Management Review

EU Plans To Seize Russian Assets Is Fraught With Risk, According To Western Banks


EU Plans To Seize Russian Assets Is Fraught With Risk, According To Western Banks
According to senior industry sources, some western banks are lobbying against EU measures to transfer billions of euros in interest generated on frozen Russian assets because they believe it could result in expensive legal action.
Leaders of the European Union decided on Thursday to proceed with developing a proposal to invest as much as 3 billion euros ($3.3 billion) annually to arm Ukraine in an effort to support Kyiv's conflict with Russia, which would retain ownership of the underlying frozen assets. The funds, according to EU leaders, might be put to use in a few months.
Nonetheless, several banks are concerned that the EU proposal may apply to assets in accounts they hold for sanctioned people and businesses, and that they may ultimately be held accountable by Russia if they are involved in any financial transfers to Ukraine.
So far, the EU has not brought up the idea of such an extension.
The plans, according to the sources, might cause a further decline in public confidence in the western financial system.
Due to the sensitivity of the subject, the sources, who wished to remain anonymous, said they were raising their concerns with policymakers in the UK and the EU and that they anticipated legal action should the anti-Russian sanctions eventually be loosened or abolished.
Russia claims that any attempt to seize its assets or interests is "banditry" and threatens to sue any parties involved for decades. Moscow has stated time and time again that it will strike back if its resources or earnings are taken away.
For the second straight day, Wall Street's three main stock indexes closed at all-time highs on Thursday, after the Federal Reserve's reassurance to investors over the likelihood of rate decreases this year.
Euroclear owns cash and securities from the Russian central bank valued at approximately 190 billion euros. Western banks also retain assets worth billions of dollars, pounds, and euros that belong to individuals and companies that are sanctioned.
According to Russian Finance Minister Anton Siluanov's statement from the previous year, over 3.5 million Russians have frozen assets overseas totaling over 1.5 trillion roubles ($16.32 billion).
The EU plan calls for paying Euroclear a charge; the organisation did not reply to a request for comment.
In order to protect itself from legal action, 10% of the earnings on stranded Russian assets will also be temporarily retained by the central securities depository, located in Belgium and owned by some of the biggest banks in the world.
90% of the money that was seized would, according to the EU plan, be used to purchase weapons for Ukraine through the European Peace Facility. The remainder will go towards healing and rebuilding.
Sanctions laws from the EU, the UK, and the US usually allow for the freezing of assets held by specified parties but not their confiscation. Under English law, assets may only be seized if it is determined that they are the profits of crime.
The owners may fight banks that permit the seizure and transfer of interest generated on those assets, the sources said.
The "weaponization of foreign-held reserves and assets" and the precedent this proposal would set, according to one source, were concerns.
In reaction to Western sanctions, Russia has taken control of assets, changed the management of Western businesses' subsidiaries, and pushed outgoing enterprises to sell at steep discounts.
Another noted that their bank was consulting with lawyers regarding indemnities that it could require in order to take part in the EU initiative.
"If these proposals move forward, the whole legal architecture would need to change," said Paul Feldberg, partner and head of Brown Rudnick's White Collar Defense, Investigations & Compliance practice in London.
"As far as banks go, I think they're right to be concerned because we have already seen huge amounts of civil litigation in relation to sanctions," said Feldberg, who is not currently directly involved in any lobbying.
According to Moscow, any seizure would violate property rights, undermine trust in Western bonds and currencies, and undermine confidence among central banks.
This week, Dmitry Peskov, a spokesman for the Kremlin, declared that the EU proposal would violate international law and foresaw unavoidable harm to Europe as well as decades of legal disputes.
"The Europeans are well aware of the damage such decisions can cause to their economy and to their image, their reputation as a reliable, so to speak, guarantor of the inviolability of property," Peskov stated to reporters.
According to Francis Bond, a senior associate at the legal firm Macfarlanes, assessing the possibility of protracted international legal conflicts requires an understanding of the specifics of the EU proposal.
"...this proposal is not going to represent the end of this story but more likely the latest salvo in a perennial debate about the nature of sanctions and their appropriate role in the global financial system," he said.
There were no comments from the European Commission. The UK Foreign, Commonwealth, and Development Office was contacted instead of the British Finance Ministry for a comment.
According to the FCDO, British Foreign Secretary David Cameron remarked, "The moral case is there — this money should be used for the benefit of the Ukrainian people," in a debate on March 5.
The number of EU members who will back the measures and the speed at which they could be put into effect are yet unknown.
Lawyers reviewing them in the interim stated that indemnities wouldn't always discourage possible lawsuits.
"There isn't an immediately obvious way for banks to insulate themselves comprehensively from future challenges and clawback actions," Oliver Browne, litigation and arbitration partner at Paul Hastings, said.
"Prudent financial institutions need to anticipate the likely future costs of the inevitable disputes that will come," said Browne, who is not lobbying directly but is talking with clients who might be impacted by changes to sanctions law.
According to a third industry source, bankers' concerns regarding their adherence to sanctions and managing any potential misalignment between the United States, the United Kingdom, and the European Union have intensified due to the possibility of confiscations.