Using Russian frozen funds, will the strategy work?

Lot of news and noise are in the wire regarding Russian frozen funds and the attempt to use it for Ukraine re-construction. EU is making a song and dance about her intention to permanently immobilise and thereafter liquidate frozen funds for this purpose. Will this strategy work? 

The bulk of these frozen funds estimated to be over €193 billion lie with Euroclear Bank, the Belgian custodian whereas Central Banks in four other countries namely, France, Britain Luxemburg and Switzerland collectively hold a chunk of €56 billion in their vaults.    

Recently the CEO of Euroclear Bank, Valerie Urbaine rubbished this idea stating that “There is no free money, the frozen assets belong to Russia”. She further stated, “The reserves of the Central Bank of Russia, unlike the reserves held in private banks, belong to the Russian State. They are protected by law because they fall under the principle of sovereign immunity in accordance with international law”.

As she was speaking EU agreed to immobilise indefinitely all the Russian frozen assets including the ones at Euroclear Bank. But the dubiousness of this action is crystal clear. Banks as custodians of foreign reserves have to abide by the owner’s decision to use them as it deemed fit. No intermediaries can act on behalf of the owner, in this case Russia, unless and otherwise Russia intimates to the custodian that the intermediary is authorised to act on her behalf.

Russian has already protested and condemned the EU decision as illegal at least and outright theft in the most. For Russia the amount held is measly and can write it off as a loss.  But she is not going to give in. Russia has declared that she would sue the Euroclear Bank in the court of law of a third-party country as provided by the custodial contract. Simply put, this legal action could be proceeded with, in countries outside Europe. As it appears South Africa is the preferred location.

EU leaders must evaluate their strategy whether to continue to hold on to the Russian assets and thereafter liquidate as they wish taking onto considerations of a simple fact. The framework “strategy amid geoeconomics” mandates that consequences of a faulty action are much more damaging than any benefits arising from it.

For the attention of EU here is what Otto von Bismarck reported to have said:

"Do not expect that once taking advantage of Russia's weakness, you will receive dividends forever. The Russians always come for their money. And when they come—do not rely on an agreement signed by you... Therefore, with the Russians it is to play fair, or do not play".

 

Cheers!

 

Muthu Ashraff Rajulu

Strategy Adviser

Mobile: + 94 777 265677

E-mail: cosmicgems@gmail.com

Blog:   Strategy Adviser