As the Russia-Ukraine war enters the tenth month, the footage of blown–up buildings and devastated cities leave behind some questions: what will be the cost of rebuilding Ukraine and who will foot the bill?
Unnerving estimates have projected Ukraine’s economy to contract by 45 per cent this year. Amid the gloom comes yet another challenge. Waiting in the wings of a withering economy could be Ukraine’s collapsing governance, which might perpetuate the disruption of its societal fabric. Given the scale of destruction, this scenario could only be a few months away.
Intuitively, the situation sounds counterproductive to the humongous financial and military assistance being sent by the West. The aid must mean something beyond fighting the war.
Is there a plan of action? What are the options? And what roadblocks are likely to emerge along the way?
Although it is difficult to precisely estimate how expensive it will be to rebuild Ukraine, the cost is touted at over $1 trillion. And the most baffling part is that this expenditure is only slated to rise.
Assessing the current aid packages
Ukraine has been receiving staggering amounts of macro financial, military, and humanitarian aid from the West and other countries ever since the war started. The US has sent a total of $68 billion-aid, and the Joe Biden administration has recently asked Congress for another $37.7 billion in the proposed budget for 2024. The US, UK, and Poland have emerged as the major providers of military support to Ukraine. Much of the financial aid is coming from the European Union and Canada.
Yet, taken together, it is just about enough to keep Ukraine’s government afloat.
Grandiose posturing aside, these proposals do not furnish the resources required to either counter the drain of the war on Ukraine’s economy or save it from the impending societal disintegration.
Ukraine’s economic requirements
President Volodymyr Zelenskyy recently proclaimed that Kyiv needs an estimated $5-7 billion monthly support to continue fighting for its survival. Far more substantial aid and sustained support will be required to stave off a defeat. Getting the economy back on track and the eventual rebuilding of the country’s destroyed civilian and critical infrastructure will be astoundingly expensive. The rebuilding load will have to be shared among the western allies, but the West is also keen on making Russia foot the bill for its destruction of Ukraine.
This brings us to the question of “war reparations,” a politically and emotionally loaded term. Hypothetically, the classic reparation mechanism kicks in after a country is clearly defeated in war. By contrast, clear victory has been elusive to either side in the Russia-Ukraine context. We also don’t know how long the war will go on. It would be brazen oversight to ascribe defeat to any side just as the war enters its winter phase.
The United Nations General Assembly (UNGA), voted by a large majority, recently passed a resolution to set up a mechanism for reparations by Russia. However, the UN mechanism is not going to be effective beyond its symbolic value because of the veto impasse at the Security Council. How, then, to work around the reparation pathway?
Will Russia pay for the reparations?
There is an emerging consensus among the EU 27 on this matter, which was recently voiced by EU Commission president Ursula von der Leyen. The Union wants to hold Russia accountable for the estimated €600 billion in damage it has caused in Ukraine.
Finding ways and means to make Russia pay the reparations has been around since a couple of months after the war started. More specifically, as the SWIFT sanctions entered into force, analysis has centred around the long term feasibility of the freeze.
There are two kinds of frozen assets that may be confiscated. The public assets, that is the foreign reserves, alone make up to almost $340 billion. The private assets of the Russian oligarchs might add another $30 billion to the pool.
But finding a modus operandi is easier said than done. Without necessary legislative reform, it will be daunting to actually liquidate the value of the sanctioned assets.
On its part, Canada has already done this through the C-19 bill and is now working with G7 allies to craft new legislation that would allow for not just the freezing of sanctioned Russian assets but their seizure on behalf of Ukrainian war victims.
But what about the big players – the US, EU and the UK?
The UK is mired in economic challenges, and despite welcoming the idea of coordinated confiscation of Russia’s assets, there is hardly any progress on the ground.
There have been calls in the US legislature to move from freezing to seizing those assets to fund the eventual reconstruction of Ukraine.
Janet Yellen, Governor of the US Federal Reserve, has warned of the probable seismic impact of confiscating Russia’s vast dollar holdings. Her logic draws on the bankability of the US dollar as the international reserve currency. It would discourage countries like China from future reliance on dollars (and euros) as reserve currencies for fear of confiscation, lest a situation of this magnitude arises. That would be a blow to Pax Americana.
Optimists, however, have argued that political coordination will be key. Disjunction in policy-decisions for dollars and euros might render the coordinated arrangements nugatory and trigger speculation and wariness among asset investors. If allies could ensure that swap lines would remain functional, banks would not have a problem going about business as usual, and assets would remain safe. The clear signal for the West is to stay united.
The biggest legal hurdle, however, is that state assets enjoy immunity from execution under international law. Therefore, current international legal law makes it impossible to advance on this course. Without a precedent, there is currently no clear answer to how to break the impasse of international law.
Those in favour of confiscating Russian assets argue on the premise of state countermeasures for wrongful state action. In simple terms, it will have to be shown that the property’s monetary worth is linked with criminal activity. A precedent exists in the internationally imposed decisions after the 1990 Iraqi invasion of Kuwait. These precedents must be adapted to the circumstances in Ukraine.
Does that mean declaring Russia a terrorist state will help? Partially true in terms of making it pay for war reparations, but it will simultaneously open Pandora’s box in terms of how to negotiate with a terrorist state on cooperation in outer space and the New START Treaty, among other things. Fathomably, while the EU, owing to its largely economic relations with Russia, is up for it, the US, realising that the costs will outweigh the benefits, is not.
Therefore, to prove Russia’s wrongdoings without declaring it a terrorist state would require a novel legislature with many Gordian knots.
The European Union
The European Union is also proposing to confiscate the frozen Russian assets and use them to finance the costly reconstruction of Ukraine.The plan, which includes reinvesting the foreign reserves of the Russian Central Bank, is challenging for lack of precedent. At present, EU countries cannot confiscate private assets just because those assets have been targeted under EU sanctions. Just like in the case of the US, EU nations can use a criminal conviction or a criminal association involving the owner in order to expropriate the property. That explains the EU’s readiness to declare Russia a terrorist state.
Road to negotiation
Confiscating and liquidating Russian assets may be more arduous than the optimists claim. Nonetheless, in the West’s calculus, it will also be about creating pressure on Russia to bring them to the negotiating table in due course.
Russian President Vladimir Putin has tried to project a nonchalant attitude pegged on capital controls and surging energy prices, implying that the sanctions regime will have little impact on the Russian economy
But the recent decision by the Duma to yet again raise taxes on oil and gas companies tells a different story. Russia needs the money to keep its war in Ukraine going. The pressure on President Putin is palpable. The revenue Russia earns from energy sales is not sanctioned yet, but the tide might turn since the payments are deposited in Western banks.
Let’s assume a scenario where the revenues are not sanctioned directly, but freight and cargo companies are. The indirect sanctions would hurt Moscow significantly. How risk-averse can Russia afford to be?
Does this mean that the complicated mazes of confiscating frozen Russian assets, or their likely unfreezing, could lead to the long-awaited peace treaty? If transpired, it will help sort the tangled deliberations on Russia’s role in war reparations. When and if that happens, credible players like India from the world stage will have a role to play.
The writer is an Associate Fellow, Europe and Eurasia Center, at the Manohar Parrikar Institute for Defence Studies and Analyses. She tweets @swasrao. Views are personal.
(Edited by Tarannum Khan)