The Russian army has just retreated from Kherson, the only regional capital they managed to capture since the February 24th invasion. Sadly and as usual, the Russian army left behind it a trail of death and destruction. They are now entrenched on the south bank of the Dnipro in position to continue to inflict damage from afar. 

The level of destruction in Ukraine is immense and all that’s been destroyed must be rebuilt. Estimates to restore all buildings and infrastructure range from $349 billion to over $1 trillion. Somebody must pay for the reconstruction of Ukraine and it certainly shouldn’t be the Ukrainians, so who will foot the bill?

Who will pay the piper?

The logical funding source for reparations is of course the aggressor, the Russian Federation and its dozens of billionaire oligarchs. I think we can all agree that the state who caused all the damage and destruction must pay, however, I wish it were that simple.

Russia was roundly condemned by the global community when it invaded Ukraine, a sovereign nation that’s been dealing with prolonged aggression from its super-power neighbour since 2014. Invading a sovereign nation is a breach of international law and has led to dozens of countries imposing sanctions on Russia and its oligarchs.

Magnitsky 

Most countries have some form of sanction procedure following the guidelines of the Magnitsky Act in the United States. The Magnitsky Act is the brainchild of American hedge-fund manager, Bill Browder who was one of the earliest western financiers to enter the Russian market and promote investment in Russian businesses. Browder spent ten years in Moscow and discovered wholesale corruption at the highest levels of the country and its largest companies. Not interested in investing in a mafia-like business environment, Browder exposed the corruption and graft in Russia and soon found his fund, Hermitage Capital, charged with tax-evasion. 

Browder was defended by “the smartest Russian lawyer he knew”, Sergei Magnitsky, who was subsequently arrested and died during pre-trial detention in Moscow. Browder’s outrage at the murder of his friend and lawyer manifested itself in a campaign to create a new legislative framework in the United States and allied nations. This legal structure would not only impose sanctions on governments and individuals accused of breaches of international law, but would enable the freezing of their assets be they yachts, mansions and Picassos, or Russian central bank reserves and securities held in banks outside Russia. In 2012 the Magnitskyact was signed into law in the U.S. and Bill Browder went to the top of the FSB’s most-wanted list. He has lived as a Russian fugitive ever since.

Time to make them pay

While the Magnitsky Act is a foundational piece of legislation, when it comes to compensation and reparations, it doesn’t go far enough. Magnitsky allows assets of sanctioned entities to be frozen, but it doesn’t have a mechanism enabling them to be forfeited, auctioned-off and given to the victim, in this case Ukraine. Here is where Canada, home to the largest diaspora off Ukrainians outside Ukraine, stepped up to provide an answer to the limitations of Magnitsky. Canadian Senator Ratna Omidvar proposed a Special Economic Sanctions amendment to Canada’s Magnitysky-type law which provides a mechanism for the Canadian government to forfeit seized assets of sanctioned entities to explicitly compensate victims of illegal aggression.But even the best legislation has its limitations, and this is where my colleagues & I enter the fray. In a conversation with Senator Omidvar just prior to the passing of her amendment, we discussed our work on the guidance note for the Ukrainian government. It became clear that the rapid resolution of civilian restitution claims is directly related to the timely financing of that restitution. Senator Omidvar’s legislation certainly provides the method for western governments to make the aggressor pay reparations. However, it doesn’t provide the means to transfer the money from Canada for example, to Ukraine without violating international laws regarding the sovereign assets of nations. 

It turns out that liquidating assets of Russian oligarchs accused of financing Putin’s regime is fairly easy for any nation armed with a version of Senator Omidvar’s legislation, but rebuilding Ukraine will cost far more than all the proceeds from the oligarchs’ Monets and super yachts combined. So where to find additional funds? The best source for the hundreds of billions necessary is the $350 billion in foreign currency reserves of the Russian Federation held by central banks around the world. 

Money moves

The Senator asked us to consider the challenge of forfeiting assets without violating international laws. We discovered there are some pretty substantial impediments. For example, the obvious way to make Russia pay is for the UN Security Council to award Ukraine reparations. However, as long as Russia and China have a veto, this will never happen. Continued or perpetual freezing of Russian state assets is certainly possible, but that means the funds cannot be used to compensate Ukraine either.

Sovereign wealth is different than personal wealth and it’s intentionally difficult for countries to seize and forfeit another country’s assets - unless you are directly at war with them. This means resolution is in the hands of Ukraine who is at war with the Russian Federation and its oligarch financiers. Ukraine can pursue a case against Russia for war crimes, human rights abuses and the destruction of the country through the International Court of Justice. If successful, Russian sovereign assets are fair game for western nations that abide by international law and the rulings of the ICOJ. However, this could take years or even decades, and Ukraine needs the money now.

There are some interesting legal precedents in the United States and Italy that might provide a quicker solution, but those will require a certain level of dedication and resolve that’s likely lacking in some countries that hold Russian assets. Our team has determined a promising solution may be to involve private finance and investment bankers. People like Bill Browder and his colleagues could provide a financial bridge to Ukraine backed by Russian state assets. This would allow Ukraine time to build a case against the Russian Federation, but that is a topic for another post.  

It's important for the Ukrainian people and western taxpayers to know there’s research being done and plans being made to help Ukraine renew and rebuild after this terrible war - and to make Russia pay. Ukraine has not been alone while fighting and they won’t be alone when it’s over. The Ukrainian army will be victorious thanks to help from western allies, and we are working hard to ensure that the Ukraine and its proud people will emerge stronger and as a valuable member of the west where it belongs. Slava Ukraini! Heroiam Slava!