Ukraine, war economy: confiscation of enemy property: Jun 2022

The Rada permits the seizure of Russian and Belarusian property

(for the EIU)

In the first half of May, the Verkhovna Rada, the Ukrainian parliament, approved a bill, proposed by the president, Volodymyr Zelenskyi, to permit the confiscation of Russian and Belarusian property.

The bill applies to the assets of individuals or organisations found to have contributed to threats to Ukraine’s security, sovereignty or territorial integrity. The legislation is wide-ranging, applying to assets both inside and outside Ukraine, albeit at present only for duration of martial law, introduced following the Russian invasion of late February. Property so taken is to be transferred to a new National Investment Fund, with the proceeds from any sales to be used to strengthen national defence and to restore war damage.

The new law paved the way for the immediate seizure of the assets in Ukraine of Sberbank and Prominvestbank—the first, the largest Russian bank, majority-owned by the Russian state; the second, a subsidiary of Vnesheconombank (VEB), Russia’s state development bank. In mid-May, according to Ekonomichna Pravda, an online business news site, a Ukrainian court took possession of more than 400 railway carriages belonging to Russian firms, with the proceeds from their sale (estimated at US$300m) earmarked for the Ukrainian army. Amid reports of Russian forces appropriating economic quantities of grain and steel in the parts of south-east Ukraine they newly control, the Rada’s new law can be seen as part of a larger economic war that is running alongside, and is integral to, the military campaign.

At the same time, the new law is part of a wider, ongoing effort by Ukraine and its Western allies to lay the legal groundwork, at an international level, both to increase the effectiveness of economic sanctions on Russia and to access the Russian assets frozen by Western financial institutions in response to the Russian invasion—not least, with a view to helping Ukraine to pay for reconstruction, once the war ends. The sums of money potentially involved are substantial, and could reach up to US$600bn, if the assets of some state-linked Russia firms are included. This is roughly the same size as Ukraine’s national wealth before the invasion, as well as Ukrainian estimates of the total economic cost of the invasion so far, including physical damage and lost earnings.

Charles Michel, the president of the European Council, had earlier raised the possibility the use of frozen Russian financial assets to aid Ukraine's reconstruction, but suggested this was likely to be harder legally in the case of individuals oligarchs’ assets than for those of the Russian Central Bank (RCB).

In this light, in late May the European Commission proposed a bill to strengthen the legal basis for EU states to confiscate the property of those involved in crime, including the violation of EU sanctions on Russia. In particular, this would allow assets to be confiscated at the investigation stage, rather than on conviction, and could apply when assets have been transferred to a family member—as some Russian oligarchs have done.

Moreover, in late May, President Zelenskyi launched a project, advised by international experts, to investigate whether the establishment of a new international claims commission through inter-state treaty might be an effective mechanism to facilitate the legal access to frozen Russian funds by way of compensation claims for war damage.

These last two initiatives are in their early stages and may not bear fruit. Alongside the Ukraine’s own confiscation bill, however, they illustrate an important legal-financial dimension through which the conflict with Russia is being conducted.