In today’s Finshots, we tell you how Russia could end up involuntarily paying for invading Ukraine.

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The Story

In February 2022, Russia launched a full-fledged invasion of Ukraine. And almost immediately, the United Nations General Assembly (UNGA) called for an emergency special session. It was only the eleventh time the UN arm held such a session since 1950. And one of the points in contention was — how to make Russia pay for damages it was inflicting on its neighbour.

Extraordinary times call for extraordinary measures, eh?

And we get it. World Bank's estimates say that Ukraine needs at least $400 billion to rebuild itself.

But you obviously won’t expect Russia to roll over and agree to the demands. They couldn't care less about it.

So, how will the UN and its member nations force Russia to cough up the money, you ask?

Well, there are a few ideas being bandied about today.

For starters, when the war broke out, most Western countries slapped sanctions on Russia. They didn’t accept a bunch of goods from Russia. They denied non-essential exports to the country. And they did this to cripple the economy. But the sucker punch came when they froze the assets that Russians held in Western bank accounts — whether it was the money of Russian businesses or its government.

This was a huge deal because the Russian government had parked its emergency savings — worth $300 billion — with these Western countries.

And now, the US seems quite inclined to not just freeze it but to actually take this money away from Russia and send it to Ukraine. They’re tweaking laws to ensure that it is possible. And there’s precedent for such a measure too — when Iraq invaded Kuwait in 1990, the US seized Iraqi assets and transferred them to the UN Compensation Commission.

But not everyone’s a fan of this action. The EU is quite worried about the legal repercussions because they hold more Russian assets than the US. And Russia has already said that it will drag these governments to court if that happens. So as Luxembourg’s Foreign Minister pointed out,

Imagine if we decide politically to give billions to Ukraine. And in six months we have a judicial decision saying we are not allowed to give it to them. Who will pay then?

That would be quite a pickle.

Also, the EU is worried because Euroclear, a crucial European financial services company that helps settle transactions, has a few billion dollars worth of assets in Russia today. And if Russia retaliates and confiscates that money, it could create mayhem in the European markets. Investors could panic and try to withdraw their investments in the region. And it could even hurt the value of the Euro.

So, what tactic does the EU prefer instead?

Well, what we didn’t mention is that while the Russian assets in the West are frozen, they’re actually not idle. The money is generating interest. For instance, Euroclear made close to $5 billion in interest last year from the frozen Russian assets.

Now the EU’s rules do state that if sanctions are lifted, they have to pay Russia the full value of its assets plus interest. But the EU is tweaking those rules this month. They want to start sending at least whatever interest accrues from here on out to Ukraine.

But that's not all. There’s also another idea in the works.

The Western countries seem to be considering banding together to create a special entity. This entity could then issue long-term bonds on behalf of Ukraine. For example, bonds worth $100 could be issued for 5 years. And the money raised will be sent to Ukraine.

But the special feature of these bonds will be that they won’t carry regular interest payments. Rather, at the end of 5 years, a lump sum of $125 will be paid back to the investors.

But who pays investors this $125?

Well, the trick here is to use the frozen Russian assets as collateral. So when the special entity eventually defaults (a likely scenario in this case), it can simply liquidate the Russian assets and make the repayment.

Quite ingenious, eh?

So yeah, there are a whole host of tactics the Western countries are trying to deploy to turn the screws on Russia. And we’ll have to wait and see which idea prevails and the consequences that come with it too.

Until then…

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