The economic arguments around using immobilized Central Bank of the Russian Federation (CBR) assets for Ukraine can be reasoned from the perspectives of costs and investment in Europe’s future, while the excuses of Russian retaliation and European reserve currency devaluation fall flat.
The cost argument
* European taxpayers cannot/should not be expected to pay the full bill for defending Ukraine and funding reconstruction – it is morally and politically untenable.
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Three and a half years into the war, we know the cost of sustaining Ukraine in the war, and its defense of Europe – it’s about $100 billion a year to stay in the war, and likely $150 billion a year to put Ukraine in a position to win.
Europe has been covering two-thirds of the cost, but with the US under Trump pulling back, the full cost will now fall on Europe. Reconstruction costs are likely now close to $1 trillion.
How is it morally right that European taxpayers cover the full cost of funding Ukraine when we have $330 billion of Russian taxpayers’ (the perpetrators) money sitting in Western juridications?
Failing to fund Ukraine to win means the war goes on longer, the cost to European taxpayers is larger, and the risk is that European populations resist by supporting populist, far-right, pro-Russian parties
* Bang for buck, supporting Ukraine is a slam dunk from a cost-benefit analysis. Europe can spend $150 billion for two years to ensure Ukraine wins, or can spend an extra 2-3% of GDP ($600-900 billion) per annum for the next decade plus on defense spending to counter the Russian security threat.
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That is a multiple (20-30:1) payback for supporting Ukraine now – and CBR assets could even be used to “moonshot” Ukrainian and European defense spending to bring it up to speed in 1-2 years.
The investment argument
* Concerns over confiscation and the legal basis for confiscation can be overcome by more flexibility in managing immobilized CBR assets. The EU has ruled that the interest on immobilized CBR assets is not the property of Russia, so invest the assets to generate higher returns.
Move the assets to a sovereign wealth fund structure (AURA – Agency for Ukraine’s Reconstruction and Accession to the EU), co-managed by the G7 and Ukraine, and invest them in a portfolio of EM debt – which could realistically generate returns of 8-10%.
That would be over $30 billion per year, covering most of Ukraine’s annual budget financing needs. The underlying assets would remain untouched, and still the property of Russia. Ukraine could even issue bonds to be purchased by AURA using immobilized CBR assets – giving Ukraine access to the full underlying $330 billion in assets for defense/reconstruction. Whereas CBR assets are now held in Bunds, USTs, or Gilts, they would then be held in Ukrainian Eurobonds, or Brazilian Eurobonds, Turkish Eurobonds, etc.
The retaliation excuse
The fear is that Russia will respond to the seizing of CBR assets by seizing Western assets in Russia. But….
* Russia is already doing this.
* Western companies invested in Russia made bad investment decisions, against the best advice of their governments, and should not now be bailed out by Western taxpayers, who are being made to pay because Western governments are protecting Russian tax payer assets in their juridication – they are putting the interests of Russian taxpayers and greedy Western companies ahead of their taxpayers.
The reserve currency excuse
Seizing CBR assets will have zero impact on markets, bond prices, or G7 reserve currency status
* The move to immobilize CBR assets in 2022 saw little movement of other assets out of G7 jurisdictions, or impact on asset prices, and there is little difference in perception from investors between immobilization and seizing, as the FX reserves have been put beyond the reach of Russia.
* There was no movement out of G7 reserve assets, as there are few liquid alternatives to G7 currency and bonds for the $7 trillion in FX reserves of states such as China, India, and the Gulf states.
* Any move by Saudi, China et al to move from G7 reserve currencies/bonds would be self defeating – it would crash bond prices, and the value of their portfolios (they would suffer immediate huge mark to market losses), global interest rates would rise, expectations of global growth would drop resulting in lower oil and commodity prices (hurting Saudi Arabia, et al and risking their dollar pegs).
Actually, they would then encourage a flight back to quality, back to the dollar, Euro, Sterling, bunds, et al, and would therefore increase the reserve currency status of G7 assets, so would prove counterproductive. It is not going to happen as Saudi Arabia, China, et al value global market stability above all else.
Not seizing CBR assets will hurt the reserve currency status of the Euro, and increase borrowing costs for Europe because:
* Ukraine will remain underfunded, the war will extend for many years yet, risking a defeat for Ukraine, and huge (tens of millions) population outflows out of Ukraine to Europe, destabilizing Europe socio-economically and politically
* A long Ukraine war, or Ukrainian defeat, would increase European defence spending by 2-3% pa (€600-900 billion), increasing budget deficits by similar amounts, and most of this will be funded through increased borrowing – more supply means higher yields.
* Higher bond yields in Europe will mean lower growth, lower budget revenues and higher budget deficits, and a vicious cycle of more borrowing, higher borrowing costs and lower growth.
* Higher defense spending will divert funds from social spending, which, with lower real GDP growth, will reduce social cohesion, increasing support for populist, far-right parties.
* Europe’s failure to be able to fund Ukraine to win quickly will be a huge humiliation for Europe, and the lower growth, higher deficits and borrowing needs, and higher debts resulting will be a confidence blow to the whole of Europe, and a critical blow to the very credibility of the Euro, and whole European project.
Reprinted from the author’s @tashecon blog. See the original here.
The views expressed in this opinion article are the author’s and not necessarily those of Kyiv Post.
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