Frozen Funds: Assessing Claims on Russian Central Bank Assets

[Music]

 

Chayila Kleist:  Hello, and welcome to this FedSoc Forum webinar call. Today, April 24, 2024, we’re delighted to host a discussion on Frozen Funds: Assessing Claims of Russian Central Bank Assets.

 

My name is Chayila Kleist, and I’m an Assistant Director of Practice Groups here at The Federalist Society. As always, please note that all expressions of opinion are those of the experts on today’s call, as The Federalist Society takes no position on particular legal or public policy issues.

 

In the interest of time, we’ll keep our introduction of our guests today brief, but if you’d like to know more about any of our speakers, you can access their impressive full bios at fedsoc.org.

 

Today, we’re fortunate to have with us as our moderator Nitin Nainani, who currently serves as a Law Clerk at Mayer Brown LLP. Nitin is a recent graduate from Cornell Law School, where he served as president of The Federalist Society chapter there for two years. Before going to law school, excuse me, he majored in international studies and political science at Johns Hopkins University and focused on studying power competition in South Asia during his graduate studies at the University of Oxford. And I’ll leave it to him to introduce our panel.

 

As a last note—and then I’ll get off your screens—if you have any questions throughout the program, please submit them via the question-and-answer feature that’s found at the bottom of your Zoom screen so they’ll be accessible when we get to that portion of today’s webinar. With that, thank you all for joining us today. Nitin, the floor is yours.

 

Nitin R. Nainani:  Thank you very much, Chayila. And to everyone able to join us this morning, welcome. I’m excited to host today’s conversation on the debate over seizing Russia’s central bank assets. The ongoing war in Ukraine has sparked discussions amongst the G7 countries about what to do with frozen Russian central bank assets.

 

And in this vein, the U.S. House of Representatives, just this weekend, passed the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act—or the REPO Act—which would allow the U.S. to confiscate Russian sovereign assets that are frozen in the United States and transfer them to assist with Ukrainian reconstruction efforts.

 

Now, naturally, such a proposal comes with questions involving both domestic and international law, and there are risks and policy ramifications that need to be taken into account as well. Today’s panel will parse these and other considerations, but I’ll start first by introducing our distinguished guests, after which we’ll get into directed Q&A. To reiterate what has already been said, audience members are encouraged to leave questions in the Q&A box, and if your question lines up with the ones that I’m asking, I’ll try and incorporate it during our structured questions portion, but if not, I’ll make a point to get to it.

 

Now, without further ado, I’m honored to introduce today’s guest, Professor Ingrid Brunk and Dr. Philip Zelikow.

 

Professor Brunk is a leading scholar of foreign affairs, public international law, and transnational litigation. She joined Vanderbilt’s law faculty in 2007, was appointed director of the International Legal Studies program in 2009, and was appointed director of the Branstetter Litigation & Dispute Resolution Program in 2018. She was named to the newly endowed Helen Strong Curry Chair in International Law in 2015. She served on the board of editors of the American Journal of International Law and on the State Department’s advisory committee on Public International Law.

 

She’s a member of the American Law Institute and was named as a reporter for the Fourth Restatement of the Foreign Relations Law of the United States. She’s received numerous other honors and fellowships, including the Morehead Scholarship at the University of North Carolina at Chapel Hill, a Fulbright Senior Scholar award, the German Chancellor’s Fellowship, election to the German Society of International Law, election to the Order of the Coif, and many teaching awards. She’s also a contributing editor at Lawfare.

 

Dr. Zelikow is the Botha-Chan Senior Fellow at Stanford University’s Hoover Institute. For 25 years, he held a chaired professorship in history at the University of Virginia, and for seven years before that, he was an associate professor at Harvard University. An attorney and former career diplomat, Dr. Zelikow’s federal service includes work across the government in five administrations from Reagan to Obama, and he is a strategic consultant for the current Biden administration.

 

As part of the NSC staff from 1989 to 1991, he took part in the diplomacy to unify Germany and end the Cold War, and as counselor of the Department of State from 2005 to 2007, he had deputy-level policy responsibilities on issues around the world. He is one of the few Americans to have served on the President’s Intelligence Advisory Board for presidents of both political parties. Moreover, he has directed three bipartisan national commissions, which would be the Carter/Ford Commission on Federal Electoral Reform, the 911 Commission, and the COVID Crisis Group. Dr. Zelikow, Professor Brunk, thank you both for joining us today.

 

Dr. Phillip D. Zelikow:  Glad to be here.

 

Prof. Ingrid Brunk Wuerth:  Thank you so much.

 

Nitin R. Nainani:  So I want to start off our conversation today by briefly setting the scene, and I’ll start with you for this question, Professor Brunk. But why would you say that proposals about how to fund Ukraine’s reconstruction and rebuilding are discussed now when there doesn’t necessarily seem to be an end in sight to the war, and why are innovative approaches for funding really gaining steam?

 

Prof. Ingrid Brunk Wuerth:  Well, thanks for that question. Many of these proposals for funding the reconstruction of Ukraine and otherwise providing assistance to Ukraine have been on the table since the full-scale invasion or shortly thereafter. So most of these aren’t new, although there are some new and interesting legal variations. And the question for as to why they are picking up steam now I think is pretty easy to answer just based on the news.

 

The war isn’t going as well as Ukraine and its allies might have wished. We could say more about why that is. And political winds have changed direction to some extent, and it’s getting harder, harder to provide funding for Ukraine directly through direct aid. So I think those two factors and plus the absolute, incredibly terrible devastation of Ukraine -- I think we’re talking, what, three or $400 billion is now a conservative estimate and what it will cost to rebuild Ukraine. So those sets of factors—many of them are political—I think, are bringing these issues to a head now.

 

Nitin R. Nainani:  So the daily discussion about the war does seem to center more on the military dimension, to the point where it’s sometimes easy to underestimate the civilian toll and the sheer scale of devastation that we’ve seen in Ukraine. Are there any sorts of international efforts that are focused on Ukraine’s reconstruction, whether in the ICJ, the European Court for Human Rights, or any other sort of international bodies?

 

Prof. Ingrid Brunk Wuerth:  There are a wide variety of proposals and ideas focused specifically on the reconstruction, rebuilding, and reparations aspect of the problem. There’s work in the World Bank; there’s work in the IMF; there’s work in the UN. The Council of Europe has set up a register of damages which is designed to provide the best evidence we have as the situation unfolds as to the damages that people are incurring in Ukraine.

 

The International Court of Justice issued a very promising provisional measures opinion and then seemed to dial that back some or dialed it back significantly. We could talk more about the ICJ judgment, but -- the ICJ litigation, but a large -- the most significant part of it has been dismissed. So I don’t see the ICJ as providing relief to Ukraine. The European Court of Human Rights, however, there are a number of very promising cases there as well that might result in a large award of damages.

 

Nitin R. Nainani:  I want to now turn things over to you, Dr. Zelikow. The U.S. and its allies in the G7 have frozen nearly 300 million in Russian central bank assets.

 

Dr. Phillip D. Zelikow:  Billion, not million.

 

Nitin R. Nainani:  Billion, excuse me. You’ve written a number of pieces on this, but you’ve notably called this amount of money “simply game-changing,” going as far as to say that the fight over this money is actually, in some ways, the essential campaign of the war. Could you lay out for the audience what exactly you’ve proposed amidst all these other parallel efforts that seem to be going on for rebuilding Ukraine, which Professor Brunk briefly touched on?

 

Dr. Phillip D. Zelikow:  Sure. This was a war of attrition. So in a war of attrition, it’s a test of industrial staying power. Russia is adopting quite consciously a strategy to try to cripple and destroy the Ukrainian economy, make it impossible for Ukraine to provide that staying power, and expect that its politics will fracture and its capacity to offer strong resistance will fade.

 

Those arguments turn significantly on the financial and economic means available to Ukraine. Most people follow the war as armchair generals, and like kids on a soccer field, everyone is riveted by what’s going on in the battle lines and the glamor of the weapons. But students of military history understand that in wars of attrition, economics and finance are usually the fulcrum on which the war is decided. And that’s very much the case here.

 

So from the beginning, there are people who overestimated and underestimated how long this war would go. My view from very early on was this would be a long war and it would be a war of attrition, and it’s turning out that way.

 

So you have a situation in which Ukraine’s staying power rests on its ability to get outside resources because it’s facing a much stronger and better-resourced aggressor, and the outside resources are constrained by the willingness of taxpayers to put up very large sums of money to help Ukraine. We’re pretty well seeing that willingness being capped in the United States now.

 

And the question naturally has arisen from the start is why should western taxpayers pay the costs of defeating Russia’s aggression when their countries have in their jurisdiction the money Russia had confidently left under their control, money which they promptly froze, mobilized right at the start of this aggression so that Russia has lost control over this money? And the money, $300 billion is a lot of money. If you get into the issue of what is Ukraine’s external budget financing gap in 2024, that’s about 40 billion.

 

If you get into the issue of exactly how much money does Ukraine need to begin a meaningful program of reconstruction and recovery, in the -- the World Bank’s current estimate is against the background of Ukrainian damages of about $486 billion. The immediate urgent reconstruction needs this year, for example, are in the neighborhood of about $10 billion of which -- and then there’s an argument about how much of that Ukraine can meaningfully absorb this year.

 

But if you begin to get a sense of the actual public finance contributions to remedying this damage over the next few years, you’re working at numbers that are somewhere in the vicinity of 40 to 70 billion of outside support through the end of 2026. And you can begin to see then that $300 billion in Russian money—most of it cash—in Western jurisdictions is simply dispositive on these numbers. Those are the scales. If that war chest is made available for the support of Ukraine, that makes it perfectly clear that Ukraine will have the financial and economic staying power to stay in the war. And then that changes the whole narrative of the war from the Russian perspective as well.

 

In the absence of that money, you can see that Ukraine is skating very close to the cliff of disaster that Russia is pushing it towards. So you have this really remarkable historical situation where Russia carried out the largest scale of international aggression since the end of the Second World War—the largest scale of international aggression since the creation of the United Nations.

 

In doing so, it, however, left in the jurisdiction of law-abiding states that oppose this aggression these enormous sums. And there are only two -- and those states then took countermeasures under international law to deprive Russia of the use of this property, which, by the way, would have been unlawful under international law, except for the fact of Russia’s aggression, which is the only reason Russia has not already been able to ask for compensation for this loss of use. And actually, Russia has not even seriously attempted to ask for that.

 

So here’s this money, this enormous, game-changing amount of money. There are only two lawful beneficiaries of this money, only two. The money either goes back to Russia or it goes to Russia’s victims. Those are the only potential lawful beneficiaries of this enormous sum of money. So, in a way, international law is facing this grand test.

 

Is international law capable of adjudicating whether the money should either go back to Russia, who carried out this aggression, or should go to Russia’s victims? And that’s the scale and magnitude of the issue that international lawyers currently confront. My position, as you know, for some -- for since this began, has been that international law can and should find a way in order to make sure that this money goes to Russia’s victims, rather than going back to Russia.

 

Nitin R. Nainani:  So what sort of mechanisms do you envision for administering a proposed approach? How might this be different than using the debt and using Russian reserves as collateral?

 

Dr. Phillip D. Zelikow:  Well, it’s very difficult to use money as collateral that you don’t [inaudible 15:07]. Everyone is drawn to various schemes that they refer to as collateralization or securitization because they don’t know what they are. And so they have a mysterious attraction as if, somehow, this will perform the magic trick.

 

You can’t collateralize property you don’t own. So therefore, when you get into sweating the details of the different bond schemes—and I know of at least five of these bond schemes that I’ve analyzed—there are some really serious problems that one gets into when you get into the tails. And the particular problems really depend on which bond scheme one analyzes. But a fundamental point to remember is that you can’t collateralize things that aren’t your property.

 

And the principal here, I think, is still Russian property. I’ll go back to my fundamental principle. This money, the principle of the money, either belongs to Russia or belongs to Russia -- or it goes to Russia’s victims. There is no other lawful beneficiary. So, right now, the money is simply sitting idle, paralyzed, helping no one, sitting idle while Ukraine is at the point of -- is at the verge of dying. And we’re trying to work on solutions to this problem.

 

The mechanics, by the way, in answer -- direct answer to your question of how this would be done, in my view, in the view of a number of other lawyers who’ve analyzed this, is you would transfer the Russian money, the frozen Russian assets, into some kind of escrowed trusteeship, where the money would be held by the trustees, really for one of these two permissible purposes: either to conserve the principal in order to return it to Russia at some future point, or to distribute money to Russia’s victims. And if you distribute it to Russia’s victims, you then have to credit Russia for that distribution against whatever liability might ultimately be agreed upon for Russia’s responsibility for the damages it has caused in Ukraine and beyond Ukraine. So the mechanics then is how you transfer this to what people can refer to as an international compensation fund.

 

By the way, the REPO Act that you alluded to has not only passed the House. It also passed the Senate yesterday, and it will be signed into law by the president today. So that Act actually explicitly envisions that the money will be transferred into a national account in the United States, and then from the United States, all or most of it could be transferred into an international compensation fund of some kind, which I believe should be a trusteeship in which the money is escrowed for this particular purpose.

 

In my view, the trustees themselves—that is, the intermediary governments—should not try to make this Russian money their property. They should not pocket it and put it in their treasuries. They should instead hold it in escrow to distribute it to those who have been damaged by Russia’s aggression. There are other views on how this would go and exactly at what point the money changes ownership from Russia.

 

But, in my view, the best way to do that is to transfer it to the trusteeship, which holds it in escrow, which would then have a variety of asset management options, including securitization. But the trusteeship would have these limited purposes for how it could actually use this money.

 

As some of you may know, the current prevailing scheme among some European governments is to treat interest earned on a portion of the Russian principle as actually not belonging to Russia at all. The argument is that Russia had deposited certain securities. The securities matured. They turned into cash. The depository then reinvested the cash on its own initiative, and that therefore, the earnings from the reinvestment of this cash actually don’t belong to Russia at all. It belongs to the depository, let’s say, in this case, Euroclear. This is an intriguing legal theory. I think it is a contestable and controversial legal theory, but it’s kind of where some of the Europeans are, and they therefore argue that they can play around with the interest earnings on this Russian cash.

 

One of the problems with various efforts—including, by the way, ideas, to securitize the interest earnings on the cash in order to do a loan based on what’s called the net present value of several years’ worth of these interest earnings—I think on close analysis, these particular schemes may break down, but at the moment, they are the current fashion in the G7 negotiations.

 

But it is useful to note—and I think Professor Brunk might agree—that not every country in the G7 holds the same theory about whether interest earned on Russian principal doesn’t really belong to Russia anymore. I fear that such a theory will not find broad acceptance in Anglo-American jurisprudence, for example.

 

Nitin R. Nainani:  On this note of the divisions within the G7, in particular, what we’ve seen with Europe, Professor Brunk, do you mind describing what exactly are the European concerns here? And from the American standpoint, are there any risks to acting without full support or cooperation with Europe?

 

Prof. Ingrid Brunk Wuerth:  Yeah, thank you. I have so many responses to what’s been said. It’s hard not to jump in. I will say that to the extent that we’re going to confiscate Russian central bank assets and currency reserves, I support doing so with as much international involvement as possible.

 

The REPO Act doesn’t actually require the trusteeship provisions that were just mentioned. The permissible uses of the fund don’t require any international participation at all. So the president can simply send the funds to Ukraine without the variety of protective measures that were just described. So I just put that out as the bill is obviously just being signed into law, so it’s something new. And to the extent people are trying to understand what it provides, I wanted to clarify that I also -- you asked about European mechanisms.

 

I do agree that European countries have a variety of opinions on this. And I share a lot of Doctor Zelikow’s perspective here, although I think we’ll get to some things that we don’t agree on. I think it is hard to confiscate the interest earned on an asset if you don’t own the asset. I don’t think that’s a distinction that works especially well.

 

The Euroclear, however, the proposal that you’ve seen adopted in Europe actually builds on their ability to tax the windfall profits. And this is a little bit more legally interesting, right? So the idea is that Euroclear -- and I should say Europe holds the bulk of these assets. The United States is a much smaller player here.

 

And so the idea is that Euroclear has the power and Belgium have the power to tax the windfall profits earned on Russian central bank assets that are invested there, and they have simply ramped up that tax to 100 percent, which is a little bit different than, at least legally, than saying that you are simply confiscating the interest.

 

So that’s a little bit on the mechanics. I think you lobbed the question to me in terms of what are the risks for the United States of moving forward without the rest of the G7. I think there are a lot: one, I just mentioned, the lion’s share of the money is in Europe, not in the United States. And so whatever we do with the assets we confiscate, it will be very, very important to have Europe on board if we want to see that full $350 billion transferred to Russia.

 

I think the political risks in the United States, however, and this entire endeavor range much further than that. And I’d be happy to dive into what I think those kinds of global risks are if you want. I don’t know if you want to wait to turn to that or want me to talk about it now.

 

Nitin R. Nainani:  That’s definitely on the agenda for later in the conversation.

 

Prof. Ingrid Brunk Wuerth:  I’m trying to stay in my lane.

 

Nitin R. Nainani:  I want to get to these domestic law considerations, though, and I’ll give both of you an opportunity to weigh in on this. But we’ve talked about the REPO Act, which, as we’ve said, has been passed by both the House and Senate and will be signed into law. Why is legislative action even required in this instance? Is there an argument that President Biden already has the appropriate executive power under the International Emergency Economic Powers Act? And I’ll start with you, Dr. Zelikow.

 

Dr. Phillip D. Zelikow:  Yes, and that argument has been made at some length, especially I’ve made it, and Larry Tribe and a group of lawyers working with him made it last year. And in my view, the president had the authority to move under AIPA as a transfer. Tribe goes further and believes that the president also had the authority to vest. I actually don’t necessarily follow him on that point, but I certainly thought the transfer authority was there.

 

But there was obviously -- there was an argument, including arguments inside the U.S. government, among different U.S. government lawyers, about whether the domestic legal authority was adequate for purpose, and the REPO Act then simply settles that matter. There is now no doubt that the president has the relevant legal authority, whatever your interpretation of IEEPA was last year.

 

And the president under that act has many options. As Professor Brunk mentioned, they can actually vest this in the United States treasury and hand it all over to USAID. I think that would be unfortunate, but that authority is there in the act. They could transfer it to Ukraine, but the act, actually, the principal option the act envisions is the transfer of money into what it calls a “Ukraine support fund,” and then the further transfer onward into an international compensation fund that the act hopes will be negotiated among various international partners. But all of those options are there in the act. And the issue of the American domestic legal authority to move against these assets has now been settled.

 

By the way, though it is worth understanding the scope of what assets are touched by this act. It’s commonplace to believe that there are only about $5 billion worth of Russian sovereign assets that are subject to American jurisdiction. That’s not true.

 

I think what’s generally not understood is that the Russians actually moved quite a lot of their U.S. dollar holdings and other foreign currency holdings into offshore accounts. They had always held a lot of their U.S. dollar holdings and offshore accounts. And just before they invaded, in an attempt, frankly, to protect those assets from attention, they moved a lot of those assets into foreign accounts.

 

But I don’t think it’s widely understood that when you move U.S. dollars to foreign financial institutions, the U.S. dollars actually don’t move to foreign financial institutions. U.S. dollars are always held in corresponding accounts of the currency-issuing country. All of the U.S. dollars that are in Russian sovereign assets, all of them, 100 percent, are held in U.S. financial institutions.

 

They are held in correspondent accounts of foreign financial institutions. All the transactions that involve those U.S. dollars run through the correspondent accounts. So, for example, when securities, short-term treasuries matured into cash, that ran through a U.S. bank. When the cash is being reinvested to earn interest, that’s running through a U.S. bank right now, actually, including banks like the New York Fed and Bank of New York Mellon.

 

So, Euroclear’s holdings, by the way, Euroclear’s holdings -- nearly 40 percent of Euroclear’s holdings are not in euros. Nearly 40 percent of Euroclear’s holdings are in pound sterling, U.S. dollars, and Canadian dollars with a little bit of Australian dollars. And all those funds actually are being managed in correspondent accounts in the currency-issuing countries.

 

And I don’t think international banks have forgotten that the United States has jurisdiction over such offshore accounts. International banks that forgot that will remember that between 2008 and 2016, they paid $32 billion in fines and penalties for a whole variety of criminal activity by some of the most famous international banks in the world, including in transactions involving foreigners on both sides, because those transactions involved U.S. dollars that ran through us banks in just the fashion that I’ve described. These included things like sanctions, evasion, anti-money laundering, and so forth.

 

So there is no doubt there are very clear, vivid precedents for the United States being able to establish its jurisdiction over the U.S. currency holdings of foreign financial institutions held through correspondent accounts in U.S. banks. And these, I believe, are on a very, very large scale, probably in the neighborhood of 10 times larger than the publicly reported numbers of U.S. dollars.

 

Nitin R. Nainani:  Professor Brunk, did you want to respond to anything?

 

Prof. Ingrid Brunk Wuerth:  I wanted to point out that the legislation actually requires -- the REPO Act actually requires that the president turn the money over to the Ukraine support fund. And then it is interesting that the fund is then available to the secretary of state in consultation with USAID.

 

I mention this because I think the bill has improved in a number of ways since its earlier versions. And this is an example, I think, of how the bill is trying to introduce just a few inter-branch checks on the way the process of actually dispersing their money would work. So it’s the secretary of state who actually makes the disbursement decisions, not the president.

 

And there are some fairly modest and weak reporting requirements and then a few possibilities for Congress through joint resolutions and acted as law to avoid the transaction. So there are a few very modest checks, interagency, interbranch checks in the executive branch and Congress. Just for those who are interested in how the bill is structured, there’s a very, very limited provision for judicial review, which I don’t think probably makes sense for us to talk about. But we are a bunch of lawyers, and anyone who wants to go look, it’s interesting.

 

So on the reach of the U.S. government here, I just want to highlight a couple things that I think are important as we think about this in terms of U.S. power generally. Yes. The United States has power here because of correspondence accounts. We have power here because the dollar is cleared through dollar-denominated transactions. And we have power here because the United States and the Fed have long been a repository for central bank assets deposited from abroad.

 

And in a world in which there’s a great deal of disagreement in the international economic system, one area around which there has been great consensus is that foreign central bank assets deposited in any country in the world are not seized, especially foreign currency reserves. I would point out that the United States has benefited itself tremendously from this system. Our sanctioning power overall, across a very large number of issues, depends on countries using the dollar.

 

Yes, Russia took their assets out of the United States and took them to the European Union before they invaded Ukraine. That was a miscalculation on a number of fronts, but it shows that countries can and do strategically move around their money. And I think the longer-term consequences of the action that we’re about to take need very careful consideration.

 

And I would just note for folks, at the very beginning of the war, it was predicted that our sanctions, our freezing of Russian central bank assets would bring the Russian economy to its knees. This was widely described in February, March, and April of 2022. But it turns out a lot of countries didn’t join us in our sanctions. Our soft power has diminished our ability to convince India, for example, to join us. India didn’t.

 

India is a major reason India’s -- Russia’s sale of oil to India has given Russia access to the hard currency it was denied when its central bank assets were frozen. That has been a tremendously powerful source of money for Russia. India and other countries perceive the United States as using a double standard, employing international law when they like, when we like, and ignoring it when we don’t. These are real risks to the United States and real risks to our international economic power. And I think they suggest that President Biden should move extraordinary, extraordinarily carefully before he uses the power that he’s been granted to confiscate these assets.

 

Nitin R. Nainani:  With that, I want to segue to hone in on these [inaudible 34:56] --

 

Dr. Phillip D. Zelikow:  Could I answer that, please?

 

Nitin R. Nainani:  Sure, go ahead.

 

Dr. Phillip D. Zelikow:  This argument, we’re now moving from a legal argument to a policy argument. There’s not really an international law barrier to seizing the central bank assets of an outrageous international aggressor that they wanted to entrust to the whole -- to the custody of law-abiding states.

 

I mean, the notion that, “Well, yeah. Russia is this gigantic villain, but we really like Nabiullina, their central bank governor. She’s really great. And so we’re happy to continue.” I mean, we came -- we got over that problem at the outset of the invasion so that when we froze the Russian assets and the Russian central bank lost control of its property for the last two years, that was a shock. And everyone predicted that there was going to be all this political risk and that the Chinese might move their money around.

 

And there has been zero empirical evidence for this proposition, zero in the behavior of the dollar, in the euro, and foreign exchange. The issue has been analyzed by people like Brad Setser, by analysts at the New York Fed. If you look at where the FX holdings actually are and who has them and if you look at what the alternatives are for them for people to move their money, this is one of the reasons I joined with some of the leading financial experts in the world, like Larry Summers, the former Treasury secretary, Robert Zoellick, the former president of the World Bank, in making the arguments that, actually, there’s no real threat here to the international financial system.

 

It is true, a threat, that if you carry out an outrageous act of international aggression, don’t assume the rest of the world is going to hold your money for you. And that’s actually a somewhat salutary threat. So there is then this issue of whether or not, as a policy matter, we’re going to give the money back to Russia or distribute it to its victims.

 

But the precedent of seizing control of the Russian central bank’s property has already been set. Markets have already priced in the political risk. What is going on now in reality behind the scenes, behind all the discussions about legal issues, if you talk to the leading officials in the French government, for example, are private threats, private threats that—and/or to leading officials in the German government—private threats the Russians are making about how they’re going to retaliate against German companies and German investors, private threats that are being made by the Chinese and by the Saudis to threaten not to buy French sovereign bonds.

 

This is not threats to the euro, not threats to the dollar. These are specific, targeted threats against specific countries in order to keep them from doing things that are averse to Russia’s interests. And folks around the world are then going to have to make a choice as to whether or not they’re going to yield to those threats or not. But I think, now, we’re moving it from the legal domain to the policy domain. And in the policy domain, obviously, I have a view.

 

Prof. Ingrid Brunk Wuerth:  Well, let’s stick to the legal domain for a minute because the distinction between freezing assets and confiscating them as a matter of international law is absolutely clear. There is a reason that countries around the world quickly froze Russian central bank assets, as they did, with little discussion.

 

Their economists did debate what effect that would have. And as I said, because U.S. soft power has declined, we were unable to get many countries to join us. And so the freezing of the assets didn’t have the economic effect that we had hoped, but they quite simply didn’t violate international law, which is why countries imposed them almost immediately after the invasion. Why --

 

Dr. Phillip D. Zelikow:  So, Professor Brunk, may I ask you a question?

 

Prof. Ingrid Brunk Wuerth:  I did not interrupt you once.

 

Dr. Phillip D. Zelikow:  Okay.

 

Prof. Ingrid Brunk Wuerth:  I let you talk for a long time on a wide variety of topics. It’s difficult to keep up with without interrupting you.

 

There’s a distinction in international law between freezing and expropriating assets. Those distinctions arise from bilateral investment treaties. There is not a bilateral investment treaty enforced between the United States and Russia, but there is customary international law. The distinctions also arise under the law of foreign sovereignty immunity.

 

And so when Venezuela’s central bank assets were frozen, for example, immunity was not one of the issues that Venezuela raised. When you move to compensation, you almost -- in confiscation, you almost invariably raise a host of foreign sovereignty immunity issues. It is these international legal issues that the European Central Bank is concerned about that they invited me and a wide variety of other people to speak on.

 

I, too, have had backroom conversations with people, and I can tell you they care about international law. They see the distinction that I’m describing. And this explains why it has taken so long to get the measures of confiscation in place. It is a concern with international law.

 

Now, I want to be clear. I want to see Russia lose this war. I want to see Ukraine compensated. But I think we act too quickly if we destroy the rules-based international order in some purported attempt to uphold it.

 

As far as the outrageous illegal aggression by Russia, I agree 100 percent. There are many people around the world who view U.S. actions in similar terms. We don’t need to share that view; we don’t need to agree with it. But if we want to maximize U.S. soft power, we need to pay attention to it. The going alone hasn’t worked here, and I’m not sure it will in the future either. Thank you for not interrupting.

 

Nitin R. Nainani:  I want to --

 

Dr. Phillip D. Zelikow:  The question is this. Do you believe that it would have been lawful to freeze and control of Russian central bank assets if Russia had not invaded Ukraine? Russia’s central bank lost control over its property on a massive scale. If Russia had not invaded Ukraine, would it have been lawful to freeze those assets?

 

Prof. Ingrid Brunk Wuerth:  I mean, at some point, a freezing could morph into an expropriation, but the law of immunity doesn’t prevent freezing. We freeze foreign sovereign assets all the time. We froze in Afghan. We’ve frozen Venezuelan central bank assets. We froze Iranian central bank assets. The European Union has frozen Iranian central bank assets. The rubber meets the road when it comes to confiscation in each and every case. So, yeah. I mean, there might be some ancillary concerns, again, about when [inaudible 42:24] --

 

Dr. Phillip D. Zelikow:  But you lose all the interest on your money, right? Russia has lost billions of euros in interest because it’s lost control of this money. Unless, of course, ultimately, the money just goes back to Russia.

 

Prof. Ingrid Brunk Wuerth:  Well, I agree with you that the money shouldn’t go back to Russia. A number of the precedents cited in support of confiscations point the way forward here. Usually, what happens is there is a post-war peace agreement that provides for the payment of reparations. This is how it worked in World War I and World War II. I am not advocating for the return of central bank assets to Russia.

 

The other precedent that’s often cited here -- other precedents involve a UN Security Council resolution, which is meaningful under international law and is also not present here. But to your question, “Can central bank assets be frozen?” maybe there’s a case about the doctrine of non-interference in domestic matters. Maybe there’s a line with expropriations. Maybe there’s some bilateral investment concerns that would come into play but nothing like confiscations. [CROSSTALK 43:39].

 

Dr. Phillip D. Zelikow:  So you agree then that Russia should not get the money back? So, therefore, our only disagreement is you believe the only scenario in which the money is distributed is where Russia agrees to the distribution. Am I right?

 

Prof. Ingrid Brunk Wuerth:  No. We talked at the beginning about the possibility of the judgment of the international court, for example, the European Court of Human Rights.

 

Dr. Phillip D. Zelikow:  Russia has withdrawn from that jurisdiction in this matter. So Russia refuses to submit to ICJ litigation [inaudible 44:13] --

 

Prof. Ingrid Brunk Wuerth:  I said the European --

 

Dr. Phillip D. Zelikow:  -- the provisional orders.

 

Prof. Ingrid Brunk Wuerth:  I said the European Court of Human Rights, not the ICJ.

 

Dr. Phillip D. Zelikow:  Russia is outside of their -- Russia has withdrawn from their purview as well.

 

Prof. Ingrid Brunk Wuerth:  I think there’s the -- so your question to me was, “Is the only possible way Russia’s consent?” My answer to that is no. There might be an international -- there could be an international judgment that provided for the return of the assets.

 

Dr. Phillip D. Zelikow:  Which Russia, you think, would comply with?

 

Prof. Ingrid Brunk Wuerth:  Don’t know. Post-war treaties, countries have signed off [inaudible 44:47] --

 

Dr. Phillip D. Zelikow:  That’s different. A post-war treaty is different.

 

Prof. Ingrid Brunk Wuerth:  Well, that is another --

 

Dr. Phillip D. Zelikow:  If your scenario is the Russia-surrender treaty, that’s --

 

Prof. Ingrid Brunk Wuerth:  [Inaudible 44:54].

 

Dr. Phillip D. Zelikow:  Right. I’m saying you don’t think Russia is about to surrender. You don’t think Russia is about to sign a treaty [inaudible 45:01] --

 

Prof. Ingrid Brunk Wuerth:  I don’t think the conversation goes very well with you telling me what I think, honestly. If you’d like to ask what I’m thinking, I’m fine, but I don’t -- it’s just not a mode of conversation that I appreciate. I won’t purport to tell you what you think, and if I have uncertainties, I’ll be sure to ask. It’s not a mode of discourse I find helpful.

 

Dr. Phillip D. Zelikow:  No, but you were saying that [inaudible 45:21] world is substantially siding with Russia on this, and so I thought --

 

Prof. Ingrid Brunk Wuerth:  I’m not substantially siding with Russia.

 

Dr. Phillip D. Zelikow:  All right. So your scenario then -- just work through the scenarios of how the victims get the money since you agree Russia shouldn’t get it back. You have a scenario in which there is a treaty in which Russia agrees to give it to Ukraine. You have a scenario in which an international court, someday, in a litigation that is at best years away from resolution, might make an award with which Russia might comply. Those are your scenarios for how the victims get the money?

 

Prof. Ingrid Brunk Wuerth:  Those are the best scenarios. Yes.

 

Nitin R. Nainani:  I’m going to step in here and ask a different question. Now, Dr. Zelikow, you’ve -- earlier, you mentioned how confiscating Russian central bank assets would be a countermeasure. And Professor Brunk, you’ve written that it’s difficult to characterize the confiscation of Russian central bank assets as a countermeasure for a number of reasons. Do you mind kind of describing what those are?

 

Prof. Ingrid Brunk Wuerth:  Yes. And I should say here, this is an -- just for those listening who might not be aware of how this works, countermeasures and foreign sovereign immunity and law that governs expropriations are customary international law. So for the most part, they’re not written down in a treaty.

 

And custom does evolve and change over time. And the idea here, which is very well-established international law, is if the confiscation of Russian central bank assets violates international law, that those violations can be, in some sense, excused through the doctrine of countermeasures. So countermeasures would allow the United States to, for example, to take an action that would be otherwise unlawful under international law because Russia has violated itself, violated international law.

 

There are a couple of constraints on when countries can use countermeasures. The primary purpose of countermeasures is inducement. They do not serve as an equitable self-help remedy. So, for example, sometimes, countries will suspend trading privileges or suspend the use of their airspace. And the idea is they can do so even if it would otherwise violate international law to induce their counterparts to comply.

 

The use of third parties—and here, that means the United States—expropriating money on behalf of another state, Ukraine, that’s called third-party countermeasures, that’s quite controversial in and of itself. Using them as simply an equitable self-help remedy, “You should pay. Therefore, we’re going to take your money,” it does not satisfy the requirement of inducement. That is what countermeasures is built on. And we can talk. They need to be temporary; they need to be reversible. Those are kind of parts of the inducement.

 

I will say there is -- in the REPO Act, we characterize the conduct of the United States as countermeasures. And I think that’s very significant in international law. There is very little precedent in this for doing this. There’s no precedent that involves central bank assets. And so, yeah. If the United States wants to push customary international law in this direction, if this is the way we want to do it, this will be a sea change in the doctrine of countermeasures. I guess I’ll leave it at that and turn it back over.

 

Dr. Phillip D. Zelikow:  I think Professor Brunk has accurately described the doctrine of countermeasures. What she does do, though, is she emphasizes one definition of the word “induce” and not the other. Open up any dictionary. Look up the definition of the word “induce,” and you’ll find two definitions. Definition number one is to persuade. Definition number two is to cause something to happen.

 

So, for example, if a doctor induces labor, the doctor is not persuading the baby to come out. The doctor is causing something to happen. That’s the second definition of “induce.” So she argues that you can only use countermeasures to persuade. I argue that, actually, you can also use countermeasures to cause something to happen, which, in this case, is the payment of compensation to Russia’s victims as the only alternative to giving the money back to Russia, which we both agree is something that should not happen.

 

So then we come to the issue of self-help and the standing to take third-party countermeasures, which is an important issue and one which really troubled a number of governments for a long time. The United States government worked through this issue last year, as did the British government and the Canadian government. And there are two views on this: one is the view that third-party countermeasures are permissible in what international lawyers refer to as an erga omnes form of standing. And Professor Brunk is very familiar with this argument.

 

Some countries accept erga omnes standing, including in other cases currently in the ICJ. Some lawyers, including the United States government’s lawyers, don’t like erga omnes standing. So instead, the United States government said, “We have standing to participate in countermeasures in this case because we have been “specially affected” by Russia’s aggression. That is an alternative basis of standing.

 

It’s a very traditional basis of standing that arises out of the Vienna Convention of the law of treaties itself, in that the United States and a number of other countries, especially in Europe, have been quite distinctively especially affected by Russia’s aggression with all sorts of costs that have been inflicted on them by Russia’s aggression. And that injury gives them another basis of standing to participate in countermeasures. And I think that’s the theory on which our government and the British government, for example, have chosen to rely.

 

Nitin R. Nainani:  I want to very briefly touch on the issue of sovereign immunity. And, Professor Brunk, you mentioned this earlier. Does sovereign immunity bar only judicial proceedings, or would this also apply to seizure by the executive branch in this case, even if there is congressional approval?

 

Prof. Ingrid Brunk Wuerth:  Yeah. It’s a great and theoretically rich and practically rich question. So, if you look at -- there is a draft convention on jurisdictional immunities drafted by the UN. It’s widely understood as reflecting customary international law. That convention, like the U.S. statute, called the Foreign Sovereign Immunities Act—like the U.K. statute on immunities, like the Australian Statute on immunities, and like every other statute on immunities—describes immunities as a bar or a prevention of the exercise of judicial power.

 

Immunity is a defense to an exercise of judicial power. If Russia bombs our central bank and melts our gold bars and hurts our assets, that is a bad thing that violates international law, and it is a thing that was done to our central bank assets, but it is not a thing that violates the law of immunity.

 

In that sense, law of immunity is pretty narrow. But in most systems, the way money changes hands -- how does one person get money that belongs to someone else? In most systems, you need judicial power. So the limitation on judicial power is, in that sense, extraordinarily powerful, but it doesn’t limit, really, executive branch actions. And honestly, there’s literally no state practice that suggests that it does. The state immunity acts in countries is exactly, and this is why you can freeze assets. You can freeze assets without implicating the Foreign Sovereign Immunities Act because you don’t need judicial power to do it, and the act only applies to judicial power.

 

So, in a sense, I actually think the REPO Act is probably avoided a large part of the work I do and the problems that I identify most frequently because by enabling an executive branch seizure, it mostly avoids the problem of immunities. Yeah, I’ll leave it at that to answer your specific question.

 

Dr. Phillip D. Zelikow:  This is one of the points on which Professor Brunk and I agree. From the beginning, I’ve always argued this should be done as an act of the state, not through court action. And so there’s really not a sovereign immunity issue here.

 

A lot of people tend to confuse and blur the doctrine of sovereign immunity, which is meant as keeping courts from interfering with the executive prerogative to conduct foreign relations. It’s almost a jurisdictional kind of rule.

 

They confuse sovereign immunity with another very important value, which is the value of sovereign equality. I think it is the value of sovereign equality that Professor Brunk is especially concerned about in trying to limit the ability of one sovereign to confiscate the state assets of another sovereign. And so the tension in this case—and as viewers can tell, there is a certain amount of tension in the legal arguments here—I think, is between the weight one places on the value of sovereign equality and the weight one places then on the compensation of the victims in a case of a violation of international law.

 

Myself and the colleagues, the international law colleagues who’ve joined me, tend to emphasize the urgent need to provide the compensation to the victims, even at the expense of the ordinary norms of sovereign equality and comedy that should ordinarily govern the relations between states. But they’re important values on both sides. And the challenge for international law in this case is to decide how to weigh those values.

 

Nitin R. Nainani:  Go ahead.

 

Prof. Ingrid Brunk Wuerth:  I just wanted to -- the UN General Assembly has voted a number of times on the Russian aggression in Ukraine and overwhelmingly condemned it. The vote that was really close, though, and the vote that went very differently was a vote on reparations in the UN General Assembly—13 votes against.

 

And this was the most mild statement of reparations in the UN General Assembly. They said nothing specific, said nothing about foreign sovereign immunity, nothing -- no details, nothing about central bank assets even—just a very banal duty to provide reparations. Thirteen votes against and seventy-four abstentions.

 

And this was the spirit in which many countries offered comments. States suffering from foreign interference, colonialism, slavery, oppression, unilateral coercive measures, illegal blockades, and other internationally wrongful acts also deserve the right for remedy, reparation and justice.

 

And I would just say, today, in a world in which our definition of “outrageous illegal aggressor states” we may not agree on who we think the outrageous illegal aggressor states are. In fact, I think one of the problems around the world at the moment is there is less and less agreement about who that is.

 

So we can put our norms aside, we can march in and say, well, Russia is a super bad actor, and we will make it right. I don’t think the rest of the world is going to find that very convincing. And as you said yourself, this is putting aside the norms that generally apply here because we’ve decided who the global aggressor is. As I hope I’ve made perfectly clear, I agree with the characterization of Russia as a terrible, aggressive power and a violator of international law. But I think we need to pay a lot of attention to what the rest of the world thinks.

 

Dr. Phillip D. Zelikow:  I’ve spent a fair part of my career paying attention to a lot of what the world thinks about many issues. I will just say this. I think we’re facing the supreme test of international law in our generation. We’re facing the largest act of international aggression since the United Nations was created. Either Russia will pay for its aggression or it won’t. We’ll set a precedent one way or the other. Depending on the precedent we set here I think will help determine the future of international law.

 

Nitin R. Nainani:  I see that we’re short on time, so I just want to wrap things up by giving a sincere thank you to Dr. Zelikow and Professor Brunk for sharing their time with us. We’re grateful for your insights and your perspectives. I’d also like to give a special thanks to Vince Vitkowsky and Doug Gates for helping make today’s discussion possible. To those that have tuned in, thank you for joining us. I’m now going to turn things back over to Chayila.

 

Chayila Kleist:  I’ll echo those thanks. Really appreciate you all carving out the section of your -- or your days—this morning for some of us—to join and have this conversation. Thank you also to the audience for joining and participating. We welcome listener feedback by email at [email protected]. And as always, keep an eye on our website and your emails—excuse me—for announcements about other upcoming virtual events. With that, thank you all for joining us today. We are adjourned.

 

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