What next for Europe’s sanctions on Russia?

Welcome to Free Lunch. Russian president Vladimir Putin’s war against Ukraine rages on. While Kyiv grinds on with its counteroffensive, there has not been a similar redoubling of efforts on the financial side of this conflict. In today’s piece, I highlight some recent contributions on how to move forward on sanctions, and ask why the €300bn question of Russia’s central bank assets does not seem to be getting anywhere. Further down, I give my reflections on the change in tone over the EU in the British Labour party.

The UN General Assembly should be a good opportunity to advance Ukraine’s cause. And both the US and Ukrainian presidents used the occasion to emphasise how Russia must pay a price for its war of aggression, both to weaken its ability to wage war and to deter other would-be aggressors in future.

But what I found the most instructive event this week was far from New York; it was this hybrid seminar hosted by the Kyiv School of Economics and the European Policy Centre in Brussels. With wonderful clarity and concreteness, the Ukrainian and other European sanctions experts explained three things. First, that sanctions are working. Second, what needs to be done next (to pick two things: lower the oil price cap and enforce it much better, and move from “black lists” of banned trades to a universal ban with only a “white list” of exceptions). And third, why: the goal must be to maximally isolate the Russian economy, so as to exact the highest possible literal price for Putin’s crimes so long as he keeps trying to colonise Ukraine.

The participants also briefly called for two measures we pay particular attention to here in Free Lunch: immobilising the non-sanctions-hit export surpluses Russia has accumulated since February 2022 (I wrote about this here), and confiscating and transferring to Ukraine the €300bn or so of Russian central bank reserves already immobilised in the countries imposing sanctions. The former has received no attention at all among policymakers. The latter has — and they have recoiled from going ahead.

Understanding why is crucial for finding a way forward. There have been valiant efforts to disarm worries about international law constraints on confiscation, specifically “sovereign immunity”. Two recent ones include a paper by a group of American lawyers and a new briefing paper by the International Working Group on Russian Sanctions, in turn based on arguments by Philip Zelikow, which we have covered here before. They all advocate a legal strategy of not seeing confiscation as based on sanctions law but on the doctrine of “countermeasures” — “[long-recognised] extrajudicial means of self-help in the international system”, the briefing paper quotes legal scholars as explaining. In lay language: western countries should just go ahead and confiscate by executive or legislative action, as the permitted proportional response to counteract Russia’s much worse law-breaking. They also emphasise that US domestic law gives ample authority to confiscate the limited reserves Russia has there.

But here is the thing with these US-originating and sometimes US-focused arguments. This is one issue that lies almost entirely in the EU’s hands — because the bulk of the Russian reserves sits in a handful of EU countries. And even if the argument about countermeasures is correct and the courts would uphold it if tested, it seems highly unlikely that European governments would try. (Not that the countermeasures doctrine has found any favour with the US government yet, either. But even if they did, I doubt the US could sway an otherwise unwilling EU.)

A report from the EU’s working group on Russian assets from last June states that it “sees no credible legal avenue allowing for the confiscation of frozen or immobilized assets on the sole basis of these assets being under EU restrictive measures [ie sanctions]”. It does not even mention the countermeasures doctrine.

Legal expert Tom Ruys told me “there is certainly some support for the countermeasures route, both in government and academic circles” in Europe. But compared with the US, it may be that “the EU is more concerned with possible precedential effects for the future, more reluctant to depart from established law (also due to its nature as a collection of individual [member states]), and somewhat more sensitive to different views in other countries”. My understanding from insiders in the political process is that Berlin and Paris have been important brakes on a more muscular approach — and that the European Central Bank is surprisingly vehement in its opposition.

Why is the EU so quick to give up on confiscation? For this looks less like genuine political willingness frustrated by legal constraints than legal objection providing a welcome reason not to do too much. At the same time, all of the G7 have politically committed to not returning Russia’s assets until it has compensated Ukraine for the damage it has wrought. But Ukraine needs money to rebuild now.

Some reasons for European half-heartedness are economic. One is self-interested and misguided, namely the fear that confiscating Russia’s assets would ruin confidence in the euro. Another I have heard is altruistic but still misguided: that the consequences of the Versailles treaty show the folly of exacting reparations after a war. But I will address economic arguments such as these in a separate piece another time.

The more immediate issue, I think, is the peculiar legalism of the EU and EU countries. The EU itself is at heart just a network of laws, but whose existence makes extraordinary levels of trust between sovereign nations possible (no border controls, anyone?). So it was never going to be likely for the EU to self-consciously reach for “extrajudicial means of self-help”. The more prosaic way to describe this is that it really, really matters to have a good case when something is challenged at the European Court of Justice. (The sorry fate of past “misappropriation sanctions” against corrupt officials in other countries is instructive.) And I don’t think even the most eminent US legal scholars can guess with certainty how the ECJ would rule.

That is not an excuse for dismissing the countermeasures route; at the very least, it is shocking that EU authorities have not published a full legal analysis of the argument and debated it politically. By all means, we should push for this. But politically, it is imperative to find other routes too. And I think what would get more politicians on board would be an EU-based court ordering Russia to pay reparations to Ukraine, after which confiscation could be pursued as a much simpler matter of enforcing compliance with the court ruling. That would seem all the more appropriate as the process of setting up a register of damages has been started.

I defer to lawyers on the legal process that could produce such a ruling. But politically, what matters is to get the ball rolling on the process and stand ready to confiscate as soon as legal conditions permit. That means preparing any required legislation and a special court if necessary, completing the register of damages, and starting the associated work of setting up an institution that would actually manage the reparations money. The test for Europe’s leaders is whether they will put political energy into this sort of work — and not just twiddle with windfall taxes on the small profits made by the custodians of Russian reserves.

This is not something the US can do nor really force the EU to do if it does not want to. Yet the moral case for transferring Russian reserve assets to Ukraine is unanswerable, and the urgency of doing so could not be greater. So far, European leaders do not show that they see it this way. That has to change.

Labour’s pro-European turn

Back in little Britain, the most excited talk has been about Labour party leader and presumptive next prime minister Sir Keir Starmer vowing (in an exclusive interview with the FT) to create a better relationship with the EU. There is nothing substantially new, of course, beyond the intention to use a scheduled future review of the UK-EU trade deal to remove some barriers to trade. But the tone is a change — a promise of more ambition, and even more importantly, a willingness to say that closer links are better for the UK. The contrast is with the speech Starmer gave last year with a list of goals so modest that it rather put an end to real pro-European temptations, which was no doubt its goal.

If the form promises more yet the content is unchanged, how should we interpret the new Labour message? I can think of three ways. One is that Starmer has no intention to go any further than the marginal tweaks to the EU-UK relationship he had already set out, but that the more EU-positive shift in the polls means it behoves him to now make it sound bigger than it is. The second is that he and his team really believe that the upcoming review of the current deal will actually unlock significantly bigger changes. In the first case, we will not get much; in the second case, we will also not get much because it is wrong to think that the review is an opportunity for much at all.

(It’s unlikely to come to very much, as I suggested last week. Read my colleagues’ explainer or if you have more time, a new report from the UK in a Changing Europe think-tank, for reasons why the EU has little more to offer.)

The third possibility is, however, much more intriguing. It is that Starmer judges the time is ripe to begin preparing public opinion for a much bigger pro-European shift after the election. The rhetorical move would draw on the fact that he simultaneously promises substantially small measures but imaginatively big improvements. “You elected me to get a better Brexit,” you can hear him saying, “and I have tried through the review of our existing deal. But Boris Johnson’s legacy was so poor that it still holds us back. To get the change you elected me for, we need to unshackle us from it and aim higher.”

Highly speculative and even more highly unlikely, I know (though some may say it’s what Starmer has done with his erstwhile leftwing promises to win the Labour leadership). But perhaps it would be the best outcome of the three?

Other readables

• More tea leaves for those trying to peer into the EU’s future: the Franco-German working group on treaty reform has just published its report. You will get my reflections on it soon!

• Finally some focus on the opportunities artificial intelligence brings: tailoring education to each learner is within our grasp, says Andy Haldane.

• My FT colleagues explain why the supposed Chinese threat to Europe’s carmakers is not all it’s cracked up to be.

Numbers news

Source: Economy - ft.com