Europe Announces Plan to Use Frozen Russian Assets for Ukraine

Happy Friday! An enterprising car thief in Colorado was ready to get back to the grind after being released from jail on—you guessed it—a car theft charge when she saw a pickup that struck her fancy. Too bad she couldn’t drive a manual. 

Quick Hits: Today’s Top Stories

• Israeli Prime Minister Benjamin Netanyahu seemed to respond to President Joe Biden’s announcement Wednesday that the U.S. government would halt some weapons shipments to Israel as it moved toward an invasion of the southern Gazan city of Rafah. “If we have to stand alone, we will stand alone,” Netanyahu said Thursday. Responding to accusations that the decision to curtail weapons to Israel amounted to Washington’s abandonment of its ally, White House national security spokesman John Kirby on Thursday rejected that characterization and argued that a large-scale Israeli operation in Rafah would strengthen Hamas’ leverage in ongoing talks. Negotiations over the ceasefire-for-hostages agreement have reportedly paused amid the fighting in Rafah, though they have apparently not broken down completely.
• The Somali government asked the United Nations Security Council on Tuesday to end a political assistance mission to the country that has advised on peace-building, security, and democracy. The 360-person mission has been active in some form in Somalia for three decades, but the Somali government asked the group to leave when its mandate expires in October. Minister of Foreign Affairs Aimed Moa Fiji didn’t specify a reason for the request, saying only “it is now appropriate to transition to the next phase of our partnership.”
• Adult film star Stormy Daniels took the stand again on Thursday in Manhattan District Attorney Alvin Bragg’s criminal case against former President Donald Trump. The former president’s defense lawyer cross-examined Daniels, a witness for the prosecution, for three hours about the details of a 2006 sexual encounter with Trump, ultimately suggesting Daniels had not actually had an affair with the former president and that she shared the story for profit. Madeleine Westerhout, Trump’s former executive assistant, also testified to the fact that leaders at the Republican National Committee were “shaken” by the leak of the October 2016 Access Hollywood tape of Trump bragging about grabbing women, which the prosecution has argued was part of what propelled Trump to pay Daniels the hush money through an intermediary. Judge Juan Merchan also rejected the second request from Trump’s attorneys for a mistrial, criticizing the defense’s strategy in the process. “I don’t know why you went into it ad nauseam on cross-examination,” Merchan said when Trump’s lawyers complained about the level of supposedly unrelated detail Daniels got into on the stand. “You drummed it over and over again into the jury’s ears. I don’t understand the reason for that.”
• A federal appeals court on Thursday declined to dismiss federal gun charges against Hunter Biden, President Joe Biden’s son, as a different federal judge threw out an appeal that would have had the charges tossed on Second Amendment grounds. The two rulings pave the way for a trial to begin early next month on the charges brought by special counsel David Weiss against the younger Biden last year. 
• The Senate voted 88-4 on Thursday evening to pass a bill that reauthorizes the Federal Aviation Administration for an additional five years. The legislation—which now goes to the House approval—includes $105 billion for the Federal Aviation Administration and $738 million for the National Transportation Safety Board. Democratic Sens. Mark Warner and Tim Kaine of Virginia and Sens. Ben Cardin and Chris Van Hollen of Maryland opposed the bill over provisions that would add long-haul flights to Reagan National Airport in Washington, D.C., which they argued the airport is not equipped to handle. The Senate also unanimously approved a short-term extension on the current authorization to give the House time to vote before it lapses. 
• The Biden administration proposed a narrowly tailored immigration rule on Thursday that would accelerate the removal of people who crossed the border and were deemed ineligible for asylum—for posing a national security or public safety risk—earlier in the process than is currently possible. There will now be a 30-day public comment period on the rule before it can be finalized.

Rubles Between the Couch Cushions

Russia celebrated Victory Day on Thursday, the anniversary of the Soviet Union’s triumph over Nazi Germany in World War II. But this year’s celebration was a little more muted than in years past: After festivities in 2021 included a parade of 10 WWII-era T-34 tanks and more than a dozen modern ones, this year the military could only scrounge up a single T-34 tank for the display—almost assuredly due to the heavy losses Russia has suffered at the hands of Ukraine since Russian President Vladimir Putin’s 2022 invasion of the country.

But the battlefield isn’t the only place Ukraine and its allies are trying to put the screws on the Kremlin. In the weeks and months following Putin’s invasion of Ukraine, the U.S. and Europe imposed an array of sanctions and restrictions designed to degrade Russia’s ability to prosecute its war. Those measures included freezing some $300 billion in Russian sovereign assets held outside of the country—Central Bank of Russia assets, not oligarchs’ yachts.

Though the U.S. passed its own effort last month addressing Russian state holdings here, the bulk of the funds are in Europe. After years of deliberation, including with U.S. officials, the European Union (EU) decided on Wednesday to take the punishment a step further, agreeing to seize the windfall profits from the assets and use them to fund military aid to Ukraine. But it remains to be seen what will happen to the assets themselves.

“There could be no stronger symbol and no greater use for that money than to make Ukraine and all of Europe a safer place to live,” European Commission President Ursula von der Leyen, said on Wednesday. The agreement would allow the EU to seize some profits without touching the principal. As we explained last summer: 

One approach that may prove tenable is the so-called ‘windfall’ option: reallocating the European Central Bank’s interest accrued on Russian central bank assets held by European firms. While potentially less lucrative than actively managing the Russian investments and transferring the capital gains, this plan seems preferable to European bureaucrats wary of the legal jeopardy that could come with controlling the assets and the financial risk of losing money on those investments.

In the plan agreed upon this week, approximately $3 billion in profits on the assets—mostly located in a Belgian financial clearinghouse—will be sent to Ukraine each year, 90 percent of which can be spent on military equipment and weapons. The remaining 10 percent will be spent on humanitarian aid and rebuilding the war-torn country. The latter portion was included as part of a deal to provide the handful of neutral European nations, like Austria, with a way to avoid supporting lethal aid.

The debate over the last year has evolved from hesitancy to touch the assets at all, to a discussion of using the money to help rebuild Ukraine, to this week’s agreement to use the profits for military support. When we last wrote to you on this topic, officials were worried about the potential ramifications of messing around with Russian sovereign cash: 

Von der Leyen set up a working group to look into the [windfall] proposal, but the European Central Bank has expressed concern about the plan, arguing it could lead countries with large holdings in Euros to move away from the currency. If the EU levied a windfall tax on Russian assets, what’s to say other countries’ money couldn’t meet the same fate if they run afoul of the bloc’s sanctions?

Using the profits on the assets instead of the assets themselves won out as the less aggressive, consensus plan amid fears of upsetting international financial norms. European Central Bank President Christine Lagarde has remained cautious, warning last month that “moving from freezing the assets to confiscating the assets, disposing of them, is something that needs to be looked at very carefully” and that confiscation would “start breaking the international legal order that you want to protect, that you would want Russia and all countries around the world to respect.”

Last May, the Group of 7 (G7) advanced democracies announced they’d keep the reserves frozen until Russia pays Ukraine reparations for the damage caused by the war. But, as U.S. aid to Ukraine faltered in recent months, the discussion shifted from a focus on using the money to rebuild Ukraine after the war and toward using it to actively fund the war effort. “Of course, I would love to invest in reconstruction, but it is a bit pointless to invest in reconstruction if we risk losing the country,” Belgian Prime Minister Alexander De Croo said in March. Repairing the damage done to Ukraine since the beginning of the war through December would cost at least $486 billion, according to the World Bank, although that number grows higher with each day the war continues.

But the EU’s consensus approach still has some world leaders nervous. During a recent G20 ministerial meeting in Brazil, for example, the finance ministers of Saudi Arabia and Indonesia expressed alarm at the prospect of using the assets over concerns about the fate of their own sovereign assets in the West if the seal is broken on this kind of confiscation. 

For their part, Russian officials have also said they have readied a law of their own to target European assets held in Russia if the West moves forward with confiscation. “We have a draft law, which we are ready to consider immediately, on retaliatory measures,” Valentina Matviyenko, a Russian lawmaker who sits on the country’s Security Council, said last month. “The Europeans will lose more than we do.”

But the significance of European and American sovereign holdings in Russia is unclear. Dmitry Medvedev—a senior Russian security official and former president and prime minister of the country—admitted in April that Russia has little asset leverage over the U.S. “We do not have a significant amount of American state property, including money, rights, and other U.S. assets,” he wrote on Telegram—though he suggested the Kremlin could seize private holdings by U.S. citizens if necessary.

Some advocates of using the original $300 billion in assets counter that any potential damage to the international financial system was already done by freezing the assets in the first place, particularly since the G7 has made clear the assets will be used as collateral against Russia paying reparations to Ukraine. “We can’t stop here,” Estonian Prime Minister Kaja Kallas said on Wednesday. “We must find a way to use Russia’s frozen assets entirely.”

The U.S. has seemed content to let Europe take the lead on this issue, since the amount of Russian assets held in America is comparatively smaller—estimated to be only around $5 billion. The resumption of U.S. aid to Ukraine has also taken the pressure off immediately confiscating the assets, although the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act (REPO) was among the provisions passed last month in the aid package. The REPO law codifies the G7 pledge to keep the assets frozen until Russia repays Ukraine for the war damage, but it also empowers the president to confiscate Russian assets “for the purposes of transferring” them to Ukraine if he chooses to do so.

U.S. officials have not yet indicated whether or when the Russian assets held in America will be confiscated, with their attention seemingly focused on lobbying the EU and the G7 to take greater action. Treasury Secretary Janet Yellen said in April, before the EU decided on this windfall plan, that confiscation of the principal is an option that’s still being discussed, but that EU and G7 “leaders have asked us to give them a range of options.” One such option is a creative strategy to significantly increase funding to Ukraine from the assets without actually confiscating them: The Biden administration is reportedly quietly pitching the idea of providing Ukraine with $50 billion as a loan or bond insured against profits on the assets, effectively bringing forward the money from future profits instead of paying them out at a slower pace as they accrue each year.

The idea mirrors a proposal floated in a research paper co-authored by Daleep Singh, the White House deputy national security adviser for international economics. “We are developing the option that seems to have the greatest likelihood of delivering the most impact in the shortest period of time,” Singh told the Financial Times last week. The U.S. is reportedly trying to get support for the plan heading into the G7 leaders summit in June. When asked on Wednesday about the EU’s decision to use the profits on the assets, State Department spokesperson Matthew Miller told reporters at a briefing that he had no announcement of U.S. action but that “we continue to work with our European partners.”

It’s unclear if the U.S. can persuade allied leaders to go beyond seizing profits. Aside from the financial risk involved, a key area of concern is what role the frozen assets might have in some sort of negotiated end to the war. In that case, the assets could be a key bargaining chip. “Some people are saying, ‘give [the assets] to Ukraine now,’” Richard Haass—the former director of policy planning at the State Department and president of the Council on Foreign Relations—told Ezra Klein of the New York Times in March. “I want to save it as leverage down the road.”

But for now, the administration seems intent on shaking free every loose ruble. “Russia must pay for the damage it has caused in Ukraine,” Singh said last month in a speech in Kyiv. “It is not for Russia to decide if or when that happens.”

Worth Your Time

• Western leaders are getting deterrence wrong, Jakub Grygiel argued in Foreign Policy. “Restraint has become the West’s guiding strategic principle, seemingly preserving a modicum of international stability by keeping wars from escalating out of control,” he wrote. “Even if Israel and Ukraine don’t heed them, such requests to practice restraint are dangerous. They incentivize the attacker to be more aggressive, not less. By conveying to Russia or Iran—and by extension, China—that Western partners will be pressed to absorb the attack and fight a strictly defensive war on their own territory, Western policymakers achieve the opposite of what their risk aversion intends: They elevate the risk of a widening war. They are making aggression relatively cost-free for imperial powers, to be fought only on the attacked country’s land or thwarted by expensive defensive means. Paradoxically, restraining allies that have been attacked is destabilizing; the Western attempt to control escalation ultimately makes it more likely.”
• What is college for? No one seems to know, Derek Thompson reported for The Atlantic. “Goal ambiguity might be a natural by-product of modern institutions trying to be everything to everyone,” he explained, pointing to the growth of administrative staff who pull institutions in too many directions. “But eventually, they’ll pay the price. Any institution that finds itself promoting a thousand priorities at once may find it difficult to promote any one of them effectively. In a crisis, goal ambiguity may look like fecklessness or hypocrisy. … Confronted with the Gaza-war protests, colleges are again struggling to balance competing priorities: free speech, the safety of students and staff, and basic school functions, such as the ability to walk to a lecture hall. That would be hard enough if they hadn’t sent the message to students that protesting was an integral part of the university experience. … The ultimate problem isn’t just that too many administrators can make college expensive. It’s that too many administrative functions can make college institutionally incoherent.” 

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In the Zeitgeist 

Paging David French: There’s a new Lord of the Rings movie in the works from LOTR vets Peter Jackson and Andy Serkis that will focus on “the hunt for Gollum.” Just don’t confuse it with this independent fan film from 2009 that got to the name first.

Toeing the Company Line

• In the newsletters: Sarah and Mike unpacked the latest in Trump’s New York criminal trial and Judge Aileen Cannon’s delays in the classified documents case, Nick tried to make sense of Biden’s retreat from Israel’s war in Gaza, and Will dove deep on potential AI regulations in California.
• On the podcasts: Kevin joined Jonah on The Remnant to chat about fatherhood, populism, and U.S.-Israel relations. Plus, Megan McArdle joins Sarah and Jonah on today’s episode of The Dispatch Podcast to discuss the ongoing Trump trial, the demise of the Tea Party, and the veepstakes.
• On the site: Kevin examines the diminished state of libertarianism and what the pandemic might have to do with it, while Mark Stobbe explains what might happen if Trump were to go to jail.

Let Us Know

Should Europe confiscate all $300 billion in frozen Russian assets, or is the EU right to stick with the windfall profits? Does either step present too great a risk to global trust in the Western financial system?