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How the West can make Putin pay for what he's done to Ukraine

·9-min read
ukraine - SERGEY KOZLOV/EPA-EFE/Shutterstock
ukraine - SERGEY KOZLOV/EPA-EFE/Shutterstock

Sergey Lavrov, Vladimir Putin’s foreign minister, seemed outraged as he accused the EU of “theft”. The bloc’s officials were discussing the possibility of using frozen Russian state assets to fund the reconstruction of Ukraine.

Yet the cash in question is not inconsiderable, particularly when taking the devastation of entire cities into account.

At the onset of the war in Ukraine, the West froze about half of Putin’s $640bn (£524bn) war chest of foreign assets, cutting the Kremlin off from $300bn held in overseas accounts.

Seventy-three European Parliament members have now called for the assets to be liquidated and sent to Kyiv, writing in a letter to foreign policy head Joseph Borrell: “it is equally fair that Russia’s state assets are also dedicated to support the victims of Putin aggression”.

As signs of normal life return to Ukraine with some construction works beginning again and businesses reopening, there are questions over how it will fund its post-conflict rebuild. The country’s economy is set to plunge by almost a third this year, yet rebuilding costs are expected to come at a price of more than half a trillion dollars - and Putin’s attack is only dragging on.

Charles Michel, president of the European Council, has endorsed allowing confiscation and deploying the proceeds for the rebuilding of Ukraine, but this could involve years of gruelling legal battles.

Putin’s cronies are also in line to lose out: the US and EU are targeting oligarch’s assets, which may face confiscation. Last month, Brussels said it had frozen €30bn of assets linked to Russian and Belrusians on its blacklist.

Neither move would be unique. Taking state assets would mirror a move made by the United States over Afghani funds following the Taliban’s takeover.

Meanwhile, Italy could provide a model for tackling oligarchs: the country has a long history battling the mafia, seizing illicit assets to combat organised criminals, according to Michal Baranowski, the director of the German Marshall Fund office in Poland.

He adds: “It will require political will to do it. The Italians have a working model for their mafia, which is just a different kind of mafia in this case, Russian instead of Italian.

“They created legal instruments that lead to seizures, which has happened with Russian yachts. But I have not seen any of them being sold and put into a fund. That is what would have to happen.”

Nothing can compensate for the loss of life in Ukraine, but punishing the Kremlin financially while fixing damaged property and infrastructure might help to ease the considerable burden on the victim state and its allies.

Analysts at the Kyiv School of Economics estimate the value of direct damage so far to infrastructure alone at $94bn.

Almost one-third of that is housing, concentrated in cities such as Mariupol and Kharkiv.

Roads are next, with 23,800km of routes damaged at a cost just shy of $30bn.

Factories, airports, bridges - key infrastructure across the nation - has been trashed and there are 562 kindergartens on the list. Some 102 religious buildings are in ruins and almost 90,000 cars have been destroyed.

It is likely to be an underestimate: parts of the country remain behind Russian lines. When taking into account wider costs such as the loss of GDP, the flight of millions of refugees and emergency spending on defence, the cost is in the region of $600bn.

It leaves Ukraine with a significant financial hole, both on a day-to-day basis as the state must finance the war, other public services and repair work, and in the longer-term as it needs to rebuild.

Hlib Vyshlinsky, director of Kyiv’s Centre for Economic Strategy, has been visiting Lviv, close to the Polish border.

“It is totally peaceful now, there were no air defence warnings today or yesterday, which is quite unusual,” he says, hoping it is a sign Russia is running low on missiles.

When it comes to reconstruction, the priority is safety then rebuilding roads, he adds: “The sequence is the following: first they need to clean and de-mine the areas [that were occupied by Russian forces], then they repair the roads if needed.

“In terms of financial resources, the biggest issue is bridges which were blown.”

But this does not come cheap, and the “financial aid Ukraine receives is not enough to cover its basic budget deficit,” says Vyshlinsky.

He says the National Bank bought $1.7bn-worth of government debt last month, effectively printing money to fund the gap.

Western nations have discussed sending more cash - the EU, for instance, is considering issuing debt jointly across its members, potentially offering €15bn (£12.8bn) in cheap emergency loans.

Longer-term, a scheme akin to the post-Second World War Marshall Plan has been mentioned, though that took several years to appear and the authorities in Kyiv will be keen for a quicker solution.

Baranowski suggests linking much of the aid to EU membership, with Ukraine wanting to become a formal candidate later this year. That process can be tied to cash handouts, issuing funds in return for progress on physical construction and institutional reform, such as the battle against corruption.

With the money it has, and is yet to receive, the nation needs to decide its priorities.

It is not only the physical cleanup which is key: so too is the preservation and restoration of economic activity.

Yulia Svyrydenko, Ukraine’s minister of economic development and trade, says that with the Black Sea effectively closed off by Russian ships, the country must build more links west.

“Our major task now is to upgrade and increase the throughput capacity of our railways, roads, highways,” she told a recent conference on reconstruction in Warsaw.

The country’s government has signed new deals with Poland to expand railway crossings on the border to get this started.

Igor Burakovsky, director of the Institute for Economic Research and Policy Consulting in Kyiv, says Ukraine’s government is similarly helping businesses adapt with a relocation programme to move staff and equipment from hazardous eastern regions to the country’s centre and west.

“The government is trying to help people to ship the necessary equipment and materials to new locations,” he says.

That includes finding new suppliers, new routes to market, and even the workforce, whether that is finding accommodation for staff moving across the country, or new recruits when required: “they cannot relocate everybody - some of the people have gone to war.”

Official figures indicate more than 400 companies have been relocated, just over half of which are operational once more.

Self-sufficiency in energy is on the agenda - Svyrydenko says it can be done “within three to five years” - while the country also wants access to western military technology so it can arm itself in future.

Long-term, it will be crucial to try to encourage investment in eastern Ukraine, where businesses may fear to tread lest the Kremlin invade again in future.

Kyiv’s Centre for Economic Strategy’s Vyshlinsky suggests offering extra guarantees or insurance to investors putting their money into the region, to avoid abandoning swathes of the country to permanent economic depression.

Perhaps most important will be encouraging refugees to return.

The International Labour Organisation estimates that of the 5.2m refugees who have left Ukraine, 1.2m were of working age.

Burakovsky says as many as one-in-five of those who have gone to Poland may already have found work, potentially reducing the chance of them coming back home even once it is safe to do so.

If reconstruction does not begin rapidly, providing homes for refugees to return to them jobs for them to do when they arrive, he fears refugees’ families - typically husbands and fathers, as those leaving are mainly women and children, while men are largely barred from crossing the border during the war - will follow in the years to come.

Funding the restoration of Ukrainian homes and jobs and the reunification of separated families may not be such an outrageous use of Russia’s money.

Which other war-torn countries have used seized assets to rebuild?

By Louis Ashworth

If the West seizes frozen Russia’s assets to fund Ukraine’s post-war reconstruction, it will be far from unprecedented.

Joseph Borrell, the EU’s top foreign policy representative, pointed to similar actions in the past, including against the central bank of Afghanistan.

“We have the money in our pockets, and someone has to explain to me why it is good for the Afghan money and not good for the Russian money,” he told the Financial Times.

In February, United States President Joe Biden swooped on $7bn (£5.7bn) of assets owned by the Afghan central bank and held in American institutions. Severing the Taliban’s access to the US financial system, he announced $3.5bn of the pile would go towards humanitarian aid, and the rest to the families of 9/11 victims.

The White House said the step would “provide a path for the funds to reach the people of Afghanistan, while keeping them out of the hands of the Taliban and malicious actors”.

Such seizures – of which a Russian one would be by far the largest – have occurred before, but rarely.

In 2003, the Bush Administration seized $1.4bn of Iraqi assets, some of which had initially been frozen during the Gulf War a decade earlier. Treasury Secretary John Snow said the funds would be used to help rebuild America after the war.

The country also seized Cuban assets in 1996, with the money later used to compensate the families of three American pilots who were killed by the Cuban military.

With Russia, the potential seizure would be far bigger. The Kremlin had built up $640bn of foreign currencies and gold in the lead-up to its invasion of Ukraine. At the outset of the conflict, the West moved to limit Vladimir Putin’s access to this warchest – freezing roughly half of the pile.

Even if the West does not plough ahead with a full seizure, even deciding when to unfreeze the assets could prove to be a difficult decision.

More than $1bn of Iranian government assets held in the US were frozen by President Jimmy Carter in 1979, ten days after 52 US citizens were taken hostage at the US Embassy in Tehran.

That action, Executive Order 12170, sparked decades of demands from Tehran, which eventually took its complaints to the Hague. Some of the money has been returned to Iran since – including $400m flown over in 2016 in exchange for the release of five American hostages.

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