Hot War and Cold Freezes
Targeting Russian Central Bank Assets
In light of mounting pressure to take effective action against Putin, the European Commission and six states (UK, USA, Canada, Germany, France, Italy) agreed last Saturday on yet another bundle of sanctions against Russia. Some of them had been expected, like the exclusion of Russian banks from SWIFT. Others like the freezing of central bank assets came as a bit of a surprise, allegedly even for Vladimir Putin. He should have watched the news more carefully. The United States did the exact same thing to Afghan central bank assets after the Taliban takeover last year. (Meanwhile, they went even further and distributed the funds to various victim groups.)
The purpose of this note is to explore the practical and legal implications of this freeze. I need to add the caveat that the sanction has yet to be cast into law. I expect the EU to amend once more Regulation (EU) 269/2014, the act that initially imposed sanctions on Russia after the invasion of Crimea, based on Article 215 TFEU.
Let me begin with the economic significance of this sanction. The sanction, according to Joseph Borrell’s statement on Sunday, will impose a freeze on the assets (“resources”) of the Central Bank of Russia (CBR). Obviously, such a freeze may only have a practical impact on assets located abroad. All central banks of the world hold foreign assets, whether in the form of foreign currency or foreign currency-denominated securities, deposited preferably in the vaults of foreign commercial banks, other central banks, and at the Bank for International Settlements. These assets serve two purposes. First, they allow a central bank to intervene in the currency market to stabilize their currency by buying it in exchange for other currency. Second, central banks may use their foreign assets for transactions, whether for their own or their citizens’ account, especially in case other payment mechanisms no longer work.
The asset freeze therefore complements Russia’s expulsion from SWIFT. SWIFT is essentially a messaging system for banks. Expulsion from it does not prevent international transactions, but makes them a lot more cumbersome and risky. Banks have to resort to fax machines, securitized email systems, or good old letters to communicate with their subsidiaries and correspondence banks abroad. It is therefore tempting to use central bank reserves held abroad for payment transactions, and the sanctions are to prevent precisely that. As an aside, the impact on payments would be even more effective if the sanctions also included correspondence banking. That would prohibit banks in Western countries to carry out transactions for Russian banks. I should add that there is even a workaround for the prohibition of correspondence banking. One way would be to carry out transactions with Russia via the intermediation of banks in third states (I see Swiss bankers rubbing their hands), another one would be to resort to payments in kind (e.g. fossile fuels, agricultural products). Companies with business in Argentina have accumulated plentiful experience in this regard. As the case of Iran shows, to be truly effective, sanctions have to include trade relations. Otherwise, sophisticated actors will find ways of skirting them, while ordinary people wishing to send remittances to their relatives will be hit hardest by the interruption of payment systems.
How effective will the asset freeze be? This depends crucially on the CBR’s foreign asset holdings. For the CBR, they currently total at 300bn USD. Where are these funds, who could freeze them? It is common for central banks to have lots of gold in storage at the Federal Reserve’s New York branch. Not so for Russia. Its ample gold reserves are stored under the streets of Moscow and Saint Petersburg. Instead, the CBR used to own lots of dollar reserves, mostly in the form of treasury bonds. However, it diminished these holdings considerably in reaction to the sanctions imposed on Russia for the 2014 invasion of Crimea. Rumour has it that the effective dollar holdings exceed the reported ones, but without precise knowledge it might be difficult to freeze them. It is unclear what the CBR did with the proceeds from the US treasury bond sales, but it seems that a lot of these assets is now held by the Eurosystem, specifically in accounts at Bundesbank. This may be derived from statistical comparisons between the monthly changes of (1) non-resident holdings of the Eurosystem and (2) the CBR’s reported foreign reserves. According to estimates, these assets are in the range of 50bn. Overall, the EU, the US, and their allies may therefore freeze a significant part of the CBR’s foreign assets, particularly those that may be used for transactions with their economies.
Under customary international law, central bank asset of foreign states enjoy immunity from execution. International practice is, however, all but uniform concerning the exact limits of these immunities and only weakly reflected by Article 19 of the UN Convention on Sovereign Immunities, a convention which has not yet entered into force. Many states exempt commercial transactions from sovereign immunities, and due to the hybrid character of central bank operations, it is often difficult to tell if assets are held and transactions are made for official purposes or for commercial ones. Some states like Germany look at the mandate of the central bank, considering acts within its mandate as “iure imperii”, which amounts to near-total immunity from execution. In the United States there is a rebuttable presumption that central bank assets serve official purposes, but plaintiffs may show with specificity that certain assets or transactions serve commercial purposes.
It therefore stands to reason that states need to justify the infringement of immunity when freezing central bank assets. There are two principal lines of argument that come to mind. While in case of Afghan central bank assets, each of these lines is fraught with a host of problems, in case of Ukraine, they both allow an infringement of the immunities enjoyed by CBR assets.
First, states may invoke the right of collective self-defense as stipulated in Article 51 of the United Nations Charter. Ukraine has been the victim of an “armed attack” – an attack that can neither be justified by an alleged, but non-existing genocide against Russians in Ukraine, nor by neo-imperial talk about spheres of influence or “security interests”. Ukraine has also called upon the international community to support its self-defense, and it has also specifically requested the imposition of sanctions. Measures taken in self-defence may not exceed what is proportionate to achieve their purpose, i.e. to end the war. It is difficult to imagine that central bank freezes would exceed this threshold. Notably, by invoking self-defense, the sanctioning states do not get into an armed conflict with Russia, as their acts remain below the threshold of “armed attack” that would allow Russia to strike back with armed force.
The second avenue would consist in playing Musketeers and invoking the “erga omnes” character of the prohibition of the use of force (Article 2(4) 4 UN Charter). Established by the International Court of Justice in the Barcelona Traction case, it implies that a violation of one state’s right counts as a violation of any state’s right under the respective treaty. This principle is reflected in Article 42(b)(ii) of the Articles on State Responsibility. Accordingly, a state may claim to be an insured state and take countermeasures in case the obligation in question (i.e. the prohibition of the use of force) is owed to the international community as a whole, and the breach would “radically change the position of all other states to which the obligation is owed with respect to the further performance of the obligation”. This standard implies that the obligations in question are co-dependent. The classical case would be a disarmament treaty, which only works if all states fulfil their obligations, but I would say that similar considerations apply to Article 2(4) of the UN Charter, specifically in the context of the European security architecture established after 1990. The founding document of this architecture, the Paris Charter, emphasizes specifically the importance of peaceful dispute settlement. If one follows this line of argument, the states imposing sanctions on the CBR may undertake countermeasures that are proportionate as long as Russia’s violation of Article 2(4) UN Charter endures. Noteworthy is the requirement established by Article 50 of the Articles on State Responsibility, which highlights that sanctioning states remain bound by their human rights obligations. The impact of the sanctions on the Russian population therefore needs to be closely watched and considered, not only as a matter of prudence, but one of law.
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