By Alexandre Moelle
LONDON (Reuters) – Russia’s ability to take similar retaliation if Western leaders seize its frozen assets has been eroded by declining foreign investment, but officials and economists say there are still ways to fight back.
The United States wants to seize stranded Russian reserves – around $300 billion globally – and hand them over to Ukraine, while European leaders favor ring-fencing profits from those assets, saying they will reach 15 to 20 billion euros by 2027.
Much of this money is held centrally, meaning it is accessible if the West decides to take it.
Russia says any attempt to seize its capital or interests would be “banditry” and has warned of catastrophic consequences, although it remains vague on exactly how it might respond.
Former president Dmitry Medvedev acknowledged Saturday that Russia does not have enough U.S. state assets to retaliate symmetrically and should instead go after the liquidity of private investors — a move he said would be no less painful .
Reuters spoke to six economists, lawyers and experts who have been tracking the status of assets frozen by both sides since Russia launched its full-scale invasion of Ukraine in February 2022.
The consensus among them was that one of the most likely countermeasures would be to confiscate the financial assets and securities of foreign investors currently held in special “Type C” accounts, access to which has been blocked from the beginning of the war, unless Moscow grants a waiver.
Russia does not disclose the amount of accounts held by the country’s National Settlement Custodian, a sanctioned entity. Russian officials said the amount was comparable to the $300 billion in frozen Russian reserves.
“Payments on assets blocked in type C accounts may begin to be seized in favor of the state,” said Vladimir Yazev, investment portfolio manager at Aigenis investment company.
“In addition, the government could consider measures to block non-traded assets still held by hostile countries.” These assets include taxes, grants and private donations.
A Russian lawyer familiar with C accounts, who asked to remain anonymous, said that if non-residents refuse to participate in an asset trading system run by a state-designated Russian broker, the only remaining option would be confiscation or seizure.
Under this project, Westerners would obtain blocked assets in foreign securities from Russians and Russians would obtain blocked assets in Russian securities from Westerners. Retail investors wishing to participate have until May 8 to submit offers.
Kremlin spokesman Dmitry Peskov said over the weekend that there was still plenty of Western money in Russia that could be targeted by Moscow’s countermeasures. He said the government would also take legal action against asset forfeiture.
“Russia (…) will tirelessly defend its interests,” he said.
BUSINESS SEIZURE
On Saturday, Medvedev proposed the confiscation of Russian private assets as a response to any US seizure of its reserves, adding that such a measure was justified by the “hybrid war” being waged against Moscow.
The former president, who takes a hard line on the West, is a close ally of President Vladimir Putin and retains his influence as vice chairman of the Russian Security Council.
However, since Western countries imposed drastic sanctions in response to Ukraine’s invasion, foreign assets in Russia have fallen by around 40% to $696 billion, according to central bank data, thereby reducing the power of such a threat.
In addition to stakes in companies and physical assets, Russia could target foreign investments held in securities, according to one of the economists, who requested anonymity due to the sensitivity of the subject.
But experts said the latest figures released by the Russian central bank on foreign direct investment showed that a significant proportion of the foreign money was likely to come from Russian companies registered abroad.
Russia stopped publishing a country-by-country breakdown after the invasion, but the latest data released on January 1, 2022 showed that Cyprus, where many Russian companies are incorporated, accounted for almost 30% of all Russian FDI.
Many Russian companies are also incorporated in the Netherlands.
“A lot of the total FDI in Russia is already actually Russian money,” said Gian Maria Milesi-Ferretti, a senior fellow in economic studies at the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, a group of American reflection.
Russian state news agency RIA reported in January that assets of Western companies worth $288 billion were ready for seizure in Russia, citing data from January 2022.
Reuters could not determine where RIA got its figures from, but the central bank’s figures at the time showed $289 billion in derivatives and other foreign investments.
This figure had fallen to $215 billion by the end of 2023. RIA also said that Cyprus and the Netherlands accounted for $98.3 billion and $50.1 billion of these assets respectively, implying a high degree of participation Russian in business.
The central bank and finance ministry did not respond to a request for comment on the figures.
“ASSETS FOR A SONG”
Moscow has already forced foreign companies selling assets in Russia to do so at discounts of at least 50%. He placed other Western assets under temporary management and installed pro-Kremlin leaders.
Western companies have recognized losses totaling $107 billion, a significant sum that exceeds the value of physical assets.
“Russia has already bought up subsidiaries of Western companies, often for fun,” Milesi-Ferretti said. But the value of the seized assets lies not only in the buildings and machinery, it also lies in the technology, know-how and connections attached to them, he added.
Energy group Shell, fast food giant McDonald’s and carmakers Volkswagen and Renault have sold their Russian operations. Others, including Austrian bank Raiffeisen, food group Nestlé and US food and drink giant PepsiCo, continue to do business.
Another area of Moscow’s influence is Europe, where Brussels-based custodian Euroclear holds the majority of Russian reserves.
Some politicians in the bloc worry that the euro could be affected if other countries such as China – an ally of Russia – start repatriating their reserves as a precautionary measure to avoid them being used for term.
There is also the risk that Russia, through legal action, will attempt to seize Euroclear’s cash in securities depositories in Hong Kong, Dubai and elsewhere. The worry is that this could drain Euroclear’s capital and require a huge bailout.
A Euroclear spokesperson declined to comment on what Russia might do.
“Euroclear of course takes into account all possible risk scenarios and strengthens its capital by retaining the profits linked to Russian sanctions as a buffer against current and future risks,” added the spokesperson.
As its ties with the West have frayed, Russia has used a current account surplus of nearly $300 billion in 2022-2023 to build up assets abroad – likely in so-called friendly jurisdictions that do not do not openly oppose the war in Ukraine, according to Milesi. -Ferretti.
Russia’s efforts to reduce its integration into Western financial systems since its illegal annexation of Crimea in 2014 have reduced its dependence on foreign money, but have also limited possible retaliation in any fight against freezing of assets, he added.
“If the goal is to retaliate, having a smaller amount of assets to seize makes your threat less significant.”
(Reporting by Alexander Marrow; additional reporting by Reuters in Moscow and Jan Strupczewski in Brussels; editing by Mike Collett-White and Daniel Flynn)
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