The European Central Bank cautioned that seizing the Russian Central Bank’s assets would have consequences for the euro. Invest Foresight asked Alexander Abramov, Head of the Laboratory for Analysis of Institutions and Financial Markets at the Russian Presidential Academy of National Economy and Public Administration, about the risks for the euro and what would happen with the frozen assets.
— Is there a possibility to actually confiscate the Central Bank’s foreign reserves? Is there a legal or economic framework for such a move?
— I think it is unrealistic unless the EU adopts some special legislation for this. As it is, property rights, including the right of central banks to various assets and reserves, are clearly and consistently protected by international law. Moreover, from the legal point of view, the central bank is a state body. Therefore, I must repeat, outright confiscating such assets would require a very specific law stipulating this.
— Given the general political situation in Europe, can such a law be adopted? Or, given that it is a collegial project in EU policy-making, the initiative will most likely be blocked by one of the parties?
— Any law can be adopted – theoretically, at least. Another thing is that such a law is unlikely to have many supporters today, even in Europe.
— Why?
— The conflict between Russia and Ukraine has uncertain prospects right now. A law like this can be adopted as a form of implementing some agreements reached. But without a clear idea of where Russia’s special operation in Ukraine is going to or a potential settlement formula, such a law does not make much sense. It has no future.
— As I understand it, a hypothetical situation where the European Parliament actually passes such a law could discourage other countries from keeping their foreign reserves in euros because it would give the EU a new pressure tool, in fact, a tool for blackmail.
— In any case, this situation would make many investors and business leaders very uneasy. As I see it, such a law could only be passed if it ensured the implementation of some very specific agreement. This should rule out the risk of a similar sanction being imposed against any other players, even potentially. A law of this kind must be unique and effective a very specific situation. Secondly, I think that stirring panic over this is the last thing Europe wants right now. For example, India has ordered a large batch of aircraft from European manufacturers. Any move that can, even potentially, antagonize their counterparties in major deals like this, especially those paying in euros, would make no sense whatsoever. And many people in the European Union are perfectly aware of this.
— Still, if Europe goes through with seizing the Russian assets, what are the immediate risks for the international role of the euro?
— It is not so much about risks for some centralized reserves. The most obvious problem in this case is that the move will put at risk the reserves of central banks around the world that are stored in euros.
It will also lead to a growing distrust of the euro as a currency for storing reserves and increasingly prompt countries to try to protect their money by shifting to other currencies. For example, the Indian buyers of Airbase aircraft that I mentioned might just try to avoid any shocks the euro will be prone to after the seizure of Russian reserves, and opt for other forms of financial settlements, other currencies.
— How can Russia respond if the European Union finds a way to do this?
— This deal can be endlessly litigated in court, and courts are unlikely to support it. Its legal consequences will be felt for years. In fact, courts have no grounds to view a country’s central bank as a public authority responsible for state policy. The constitution, too, states that the central bank is an independent agency.
— So what will happen with Russia’s frozen assets?
— For reference, seizing international reserves is not something unheard of; this has happened with Libya and Iran. In both cases, the assets were eventually released as soon as the parties reached some settlement of the conflict that had prompted this countermeasure.
The same is going to happen now. The money can only be used with Russia’s consent as part of some package settlement deal.
— Will these reserves depreciate?
— The reserves are invested in state securities. Either way, my opinion is that the Bank of Russia’s management of these reserves produced very modest revenue. So, their profitability will not change drastically and remain, more or less, at the same level.
— Why store reserves abroad?
— Countries do this to hedge their reserves against currency risks. Unlike the National Wealth Fund, the status of this money managed by the Central Bank is more uncertain. It is believed that, in the event of a currency crisis, the reserves are supposed to support the ruble if it collapses against major world currencies. I want to stress that hedging is the main purpose.