The Risks - Part 2 - Capital Reserve Flight

The Risks - Part 2 - Capital Reserve Flight

  • Michael Cholod
  • Jun 10th, 2024

My last blog dealt with one of the of the primary risks associated with seizing Russian assets: doing so would trigger international law Sovereign or State Immunity provisions. However, this fear is unfounded as there exists a remedy called Collective Countermeasures that compel law abiding nations to seize Russia’s assets to pay reparations. 

The largest chunk of Russian state assets is the $190 billion immobilised in the Euroclear financial clearing system in Brussels. There’s also another $160 billion immobilised in the UK, US, Japan, Australia and Germany. In fact, the total Russian state assets held in the G7+ nations is closer to $350 billion - not enough to totally rebuild Ukraine and pay victim reparations, but it’s a good start.

In Part 2, I deal with the risk that seizing this $350 billion will cause other nations to remove their savings from the G7+ nations and transfer them to other countries perceived as ‘safer’ places to invest. Called capital reserve flight, this has made G7+ central bankers and politicians nervous that it might cause significant damage to their economies and currencies. This challenge is the easiest to de-risk because it is complete nonsense.

It’s not your war

First, let’s deal with the reality of not seizing Russian reserves. If Russia doesn’t pay for their illegal war, then you and I, the taxpayers of the G7+, absolutely will. Ukraine must be rebuilt once the war is over to avoid the largest country in Europe with the largest, most experienced and best equipped army, descending into chaos.

Ukraine is shattered and suffering from post-traumatic stress disorder, with over 30% of its population spread across Europe as refugees. Without a fully funded rebuilding and reparations programme, refugees will not return home, civilians and military veterans will not receive treatment for PTSD, and the economy will not provide jobs for those able to work. This is a recipe for a disaster of epic proportions and our politicians will have no choice but to tax $2 trillion from the peoples of the G7+.

Would you vote for a politician committing your tax dollars to decades of financial support to rebuild Ukraine? Are your democratic rights less important than Putin’s murderous mobsters and his oligarchs’ right to keep their stolen money, mansions and luxury yachts? If you let your country’s politicians off the hook when it comes to ensuring Russia pays, you will pay and that’s a fact.

Nowhere to run to Nowhere to hide

Second, let’s think rationally about the idea of capital reserve flight as a realistic risk of seizing Russian assets. State reserves, like the $350 billion Russia holds, are the savings of a nation with a balance of payments surplus. Simply put, state reserves are the money a country makes by selling goods and services to other nations. When you export more than you import, the result is excess cash that should be safely placed somewhere to earn interest.

As most global markets for goods like oil, natural gas and microchips are priced in US $, Euros € or Pounds £, most of Russia’s capital reserves are held in these countries and currencies. The irony of the $190 billion in Russian money immobilised in the Euroclear system is that the actual cash is physically held in US, European and UK banks.

The reason most countries keep their money in dollars, euros and pounds is because they are stable currencies from nations with robust legal protection and low inflation. It’s precisely because of this low risk of default or economic collapse that countries like Russia place their money in these countries’ currencies and banks. We would not be discussing seizing these reserves if they were held in Roubles in Russian banks because we would have nothing liquid to seize.

If you want to put your savings in Iran, China or North Korea, there’s nothing stopping you, but no one does because their financial institutions are heavily controlled by kleptocratic authoritarian governments. The idea of capital reserve flight from the dollar, euro or pound caused by seizing the reserves of a criminal state is farcical and it will never happen, period.

It’s all about the proportions

If the G7+ nations want to avoid the risk of capital reserve flight there’s a simple solution: share it. There’s some credibility to the objection of the EU and the Belgians, who host the Euroclear system where the majority of the Russian state reserves are held. They bear a proportionally higher risk of capital reserve flight from the Euro to the dollar if the entire $190 billion is seized and used to fund Ukraine. However, this concern is only valid if just the Euro-denominated reserves are seized.

If G7+ nations agree to proportionally share the risk of seizing Russia’s state reserves, this risk evaporates. For example, if Russian state reserves were seized in annual increments, say $50 billion per year, and that $50 billion was proportionally made up of USD $25 billion, Euro €10 billion, UK £10 billion and Yen ¥ 5 billion, all the currencies would bear a proportional and unlikely risk of flight.

Simple solutions are always the best solutions

The solution to this global debacle is simple: we must all agree that Russia started this war and therefore must pay for it, plain and simple. If you don’t want to pay from your pocket for Putin’s war crimes, you must hold your politicians and bankers accountable for making sure Russia does. The G7+ nations must come to a consensus and work together and get it done as soon as possible.

We should not be banking criminals, kleptocrats and oligarchs. Let them hide their dirty money in Iran, North Korea or China and let them assume the risk that results from their risky business. The best way to end this war and all future wars is to punish aggression with isolation, sanctions and financial risk. The sooner we realise this, the sooner the world will be a better place for us, and an unprofitable place for criminals like Putin and his mob.

Slava Ukraini! Heroiam Slava!