Speaker 1: Welcome to in the City.
Speaker 2: I'm David Merritt and I'm Francine Lakwa, and this week, Dave,
Speaker 2: we talk about Russia.
Speaker 1: Of course, last week saw the second anniversary of the
Speaker 1: invasion of Ukraine by Russia, and with Western governments all
Speaker 1: trying to figure out how to continue to shore up support,
Speaker 1: there's this debate that's emerging around possibly seizing some of
Speaker 1: the Russian assets that were frozen around the world to
Speaker 1: channel that money into Ukraine, and it's causing something of
Speaker 1: a row between governments and banks around the world.
Speaker 2: As you say, David, it's been twenty four months that
Speaker 2: this war has been ongoing, and it's very clear that
Speaker 2: Ukraine is also becoming more desperate for funding, especially as
Speaker 2: aid from the US is not being unlocked for now.
Speaker 1: Yes, and we all know about the relative failure of
Speaker 1: the Ukrainian counter offensive last year, So governments are really
Speaker 1: agonizing about what can be done to give Ukraine the
Speaker 1: support it needs. And Richie Sunak I saw wrote an
Speaker 1: off ed in the Sundays it's saying that Western nations
Speaker 1: need to be more aggressive in actually seizing those frozen
Speaker 1: Russian assets and then channeling that money back to Ukraine.
Speaker 2: The problem is that if you're a bank, or if
Speaker 2: you're in financial services, you wonder where this ends. So
Speaker 2: a lot of them are pushing back, and they're warning
Speaker 2: the UK government that if there's not the right law,
Speaker 2: it's very difficult to just press the button and sees
Speaker 2: billions of pounds worth of Russian assets.
Speaker 1: That's right. They're worried about getting snarled in legal disputes.
Speaker 1: They're worried about the reputation for London as a center
Speaker 1: if governments can just seize assets like this, And Richie
Speaker 1: Sunak says in his column that there needs to be
Speaker 1: a lawful way of doing this. Is there, in fact
Speaker 1: a lawful way to seize tens or hundreds of billions
Speaker 1: of dollars of another country's money. That's what we need
Speaker 1: to dive into in this episode.
Speaker 2: So with us for this is Stephanie Baker, senior reporter
Speaker 2: on Bloomberg's investigations team. And Stephanie, you've also been calling
Speaker 2: all of your little Black book all the contacts because
Speaker 2: you're writing a book on this.
Speaker 3: Yeah, I've spent the past six months deep into sanctions
Speaker 3: against Russia. My book is coming out later this year.
Speaker 3: It's called punishing Putin inside the economic war against Russia.
Speaker 3: So I've been talking to everyone from oligarchs to US officials,
Speaker 3: people in Brussels, London devising these policies to try to
Speaker 3: slow down Russia's advance in Ukraine.
Speaker 2: So Stephanie, you are the expert in trying to understand oligarchs,
Speaker 2: especially all of this Russian money that for a long
Speaker 2: time was in London that we thought maybe has left,
Speaker 2: But where are we? Did the sanctions work as we
Speaker 2: thought they would.
Speaker 3: There are two buckets of Russian money that have been
Speaker 3: frozen as a result of sanctions. There's the oligarch sanctions,
Speaker 3: which are the mansions and the yachts and the private jets,
Speaker 3: And for any oligarch with assets in London or EU
Speaker 3: or the US with those sort of assets, those are grounded.
Speaker 3: Those are for Then there's a second pot of money,
Speaker 3: which is the Russian Central Bank reserves. And that's a
Speaker 3: pot of about three hundred billion dollars that was frozen
Speaker 3: within days of Russia's invasion in a very unprecedented move.
Speaker 3: And when Rishie Sunak is talking about seizing Russian assets,
Speaker 3: that is the pot of money he's talking about. He's
Speaker 3: not talking about the Oligarch assets. You would need to
Speaker 3: prove that there has been a crime of either sanctions
Speaker 3: of vasion or money laundering, and therefore you could seize
Speaker 3: those assets as the proceeds of a crime, and that
Speaker 3: is happening in the US with some Olivegarch assets. This
Speaker 3: Russian Central bank funds is a much bigger pot of money,
Speaker 3: so much more consequential, and it is not subject to court.
Speaker 3: The people who are pushing this idea are saying it
Speaker 3: would be allowed under the international law called countermeasures, which
Speaker 3: is a state on state action. It would not challenge
Speaker 3: the whole concept of sovereign immunity. Countermeasures is a part
Speaker 3: of international law. It's different from sanctions. It's all about
Speaker 3: compensating victims, and there's precedent for that, but certainly not
Speaker 3: precedent in terms of the scale of the money we're
Speaker 3: talking about right now.
Speaker 1: So, Stephanie, I remember when the central banks there was
Speaker 1: this coordinated announcement. Wasn't there about freezing those assets the
Speaker 1: three hundred billion that you just mentioned right after in
Speaker 1: just in the days after the invasion of Ukraine, And
Speaker 1: I remember talking to a senior official at the Bank
Speaker 1: of England, and they said it was like they were
Speaker 1: actually trying to engineer a crash in the Russian economy,
Speaker 1: And of course the ruble fell sharply at the time,
Speaker 1: but of course has since recovered and the Russian economy
Speaker 1: seems to be doing just fine despite that action. So
Speaker 1: could you explain a little bit about the thinking behind
Speaker 1: that originally freezing those assets and why they don't seem
Speaker 1: to have really changed the game in terms of Russia's
Speaker 1: actions and the fate of Russia's economy.
Speaker 3: Well, the real reason is because Russia is an energy superpower.
Speaker 3: It exports so much oil and gas. Now, Russia's gas
Speaker 3: exports have fallen precipitously as a result of Europe weaning
Speaker 3: itself off of Russian gas, but it is still a
Speaker 3: major It is this world's second largest oil exporter, so
Speaker 3: it was able to earn an enormous amount of money
Speaker 3: in twenty twenty two as a result of high oil
Speaker 3: prices in parts sparked by his own invasion. So that's
Speaker 3: why it didn't have as much of an effect as
Speaker 3: some thought it would. But I would stress that I
Speaker 3: think it is a huge deal that they did this,
Speaker 3: and it is a huge pot of money, and it
Speaker 3: was not something that Putin was counting on. It was
Speaker 3: a surprise, and if you look at what happened with
Speaker 3: the Russian Central Bank funds, he was preparing for this
Speaker 3: day for many years. He had shifted the Russian Central
Speaker 3: bank assets out of dollars into euros, thinking that you're
Speaker 3: rope would be too divided and wouldn't be able to move.
Speaker 3: And I think he was taken by surprise on this.
Speaker 3: And I think although the Russian economy has rebounded, the
Speaker 3: Western coalition has moved to try to cap his oil
Speaker 3: revenues with mixed results. But I think that this pot
Speaker 3: of money is incredibly important and they want it back.
Speaker 1: And we've just seen, obviously after the death of Alexei Navalni,
Speaker 1: another wave of sanctions, both from a Europe and for
Speaker 1: the United States, a whole new raft of measures. Are
Speaker 1: any of these going to have any impact now? Or
Speaker 1: is it just more of the same.
Speaker 3: It was a very long list some of the entities
Speaker 3: that were targeted. I read and I thought, why did
Speaker 3: it take you two years to do this? You know,
Speaker 3: defense manufacturers, you know certain individuals they should have sanctioned.
Speaker 1: I thought there was nothing left to sanction exactly.
Speaker 3: I was surprised there was, you know, entities I'd never
Speaker 3: really heard of. But they should have sanctioned the entire
Speaker 3: Russian military industrial complex, and they didn't. And I've asked
Speaker 3: questions to officials on this, why didn't you? And I
Speaker 3: think the answer I get is that some of these
Speaker 3: Russian factories are producing other things that are important to
Speaker 3: the world economy. But I think they realize that they
Speaker 3: really need to be much more aggressive and really shut
Speaker 3: down Russia's ability to produce weaponry that is ending up
Speaker 3: on the battlefield in Ukraine.
Speaker 2: So, Stephanie, why is it so controversial now what Rishisunak
Speaker 2: is actually proposing. Is it the seizing and giving to Ukraine?
Speaker 2: And is that a legal problem or are there two
Speaker 2: school of thoughts on how dangerous this could be.
Speaker 3: So there's a few misconceptions about this. Under the international
Speaker 3: Law of countermeasures, which is what everyone says, there is
Speaker 3: a legal precedent for doing this. It is not for
Speaker 3: providing military aid. It is only for reconstruction. So you
Speaker 3: could use the money to help war veterans rebuild hospitals,
Speaker 3: bridges and all those things are important in terms of
Speaker 3: Ukraine's ability to withstand Russi assault. But I think that
Speaker 3: there are two schools of thought on this. One is
Speaker 3: that we passed the rubicon when we froze the reserves
Speaker 3: in the first place, and that if there are concerns
Speaker 3: about the stability of the dollar or the euro or
Speaker 3: the yen, then when the Western coalition froze that pot
Speaker 3: of money, that's when the real concern would be. And
Speaker 3: you didn't see anyone moving away from those currencies. There's
Speaker 3: another school of thought that says the freezing is okay,
Speaker 3: it's the real dangers when you actually seize those assets. Now,
Speaker 3: what Rishie Sunek was proposing was using the interest on
Speaker 3: those assets. It's very similar to what the EU has
Speaker 3: been trying to do with their windfall tax. They looked
Speaker 3: at using the interest, they decided that was not legal,
Speaker 3: that the only way to do it was to tax
Speaker 3: that interest, so they weren't actually seizing the money. There
Speaker 3: is a school of thought of like you tax it,
Speaker 3: you sees the interest, it's all violating the principle, and
Speaker 3: so want not just seize the whole pot.
Speaker 1: But the article that Richie's seen that wrote I thought
Speaker 1: there is this contradiction in the middle of it, isn't
Speaker 1: it because he talks about the need for Russia to
Speaker 1: lose this in order this war, in order to preserve
Speaker 1: a rules based what they call the rules based international order.
Speaker 1: But that's exactly the problem with this maneuver, isn't it
Speaker 1: on these assets that there isn't a precedent? It isn't
Speaker 1: according to the rules, and many people deem it to
Speaker 1: be illegal. So how do you think the West are
Speaker 1: going to be able to reconcile those that contradiction.
Speaker 3: I've interviewed three very prominent people involved in pushing for
Speaker 3: this proposal, Larry Summer's former Treasury secretary, Phil Zelikoe and
Speaker 3: Bob Zolik to veteran Republican officials, and they I think
Speaker 3: put it the most succinctly when they wrote a Foreign
Speaker 3: Affairs story about this, and their phrase was bank robbers
Speaker 3: should not expect banks to honor their safe deposit boxes.
Speaker 3: And I think that gets to the heart of the
Speaker 3: matter that Putin can't expect the rules based order or
Speaker 3: to be followed. If he's not following the rules based
Speaker 3: order himself, he has violated that principle and there is
Speaker 3: a precedent for this. The one that most people point
Speaker 3: to is Iraq. Nineteen ninety one, the UN Security Council
Speaker 3: set up a fund freezing Iraqi assets to compensate victims
Speaker 3: of the Iraq invasion of Kuwait, and they paid out
Speaker 3: more than fifty billion over many years. The problem we
Speaker 3: have now is that there is no consensus on the
Speaker 3: UN Security Council because of Russia and China, and folks
Speaker 3: like Bob Zohlik will say, well, that you can't just
Speaker 3: say you can't use the international legal system because Russia
Speaker 3: and China won't agree. That there has to be another
Speaker 3: mechanism for doing that, and that there is a possibility
Speaker 3: of setting up some sort of international institution, whether it's
Speaker 3: through the World Bank or something else where. There is
Speaker 3: a process and it's not just handing over three hundred
Speaker 3: billion to Ukraine immediately. It is putting it in a fund,
Speaker 3: allowing claims to be made with a transparent process, and
Speaker 3: there is an international kind of overseeing of the whole
Speaker 3: the way the assets are handed out.
Speaker 2: But Stephanie politically, so if this gets seized, and I
Speaker 2: remember at the time when the sanctions were put in place,
Speaker 2: sixty percent of the people that we spoke to were
Speaker 2: one hundred percent in favor, and then the ones that
Speaker 2: maybe worked in more difficult countries said, Liz, you know,
Speaker 2: what does it mean if I'm a big company in
Speaker 2: China and what if something happens politically in China? Does
Speaker 2: it mean that my assets are frozen? So does the
Speaker 2: UK government need to think about the I guess unintended
Speaker 2: consequences of them doing trade with countries that may not
Speaker 2: share our values at all time.
Speaker 3: Yeah, that's a big one. I think that the opposition
Speaker 3: to the seizing of Russian assets often the argument is
Speaker 3: that what happens to the Western companies that are still
Speaker 3: in Russia? And I would argue they should not be
Speaker 3: expecting to get those assets back, and I think it's
Speaker 3: unrealistic for them to think that they will. I think
Speaker 3: that eventually, regardless of what the West does, putin will
Speaker 3: move against those assets. I think it's a naive to
Speaker 3: think that they can get any of that back. And
Speaker 3: you know, yeah, there is a broader I guess argument
Speaker 3: about what this does with China in terms of Western
Speaker 3: companies in China. But the fact of the matter is
Speaker 3: China needs the US dollar, and any country that has
Speaker 3: a trade surplus needs access to fully convertible currency with
Speaker 3: deep capital markets, and that is the United States and
Speaker 3: Europe and the hero.
Speaker 1: I mean, but this is one of the things that
Speaker 1: people are raising an objection to. This, isn't it saying
Speaker 1: that an action like this, a unilateral action, or the
Speaker 1: West acting without the agreements of the entire global community,
Speaker 1: would undermine the dollar and the dollar status, because if
Speaker 1: you can't be sure that your dollars are safe in
Speaker 1: other central banks around the world, then why should you
Speaker 1: keep those assets. You mentioned at the beginning that Putin
Speaker 1: had moved a lot of the assets into euros. But
Speaker 1: do you think this war has got any credibility that
Speaker 1: somehow seizing these assets would shake the foundations of the
Speaker 1: dominance of the dollar.
Speaker 3: Well, that is why there's been such a push to
Speaker 3: have the G seven, the Group of Seven, move in unison,
Speaker 3: so that it's not any one country sticking their neck out.
Speaker 3: That you would have the world's major reserve currencies the dollar,
Speaker 3: the euro, the yen, the pound, and therefore it wouldn't
Speaker 3: be seen as a unilateral action. David Cameron has come
Speaker 3: out very strongly on this. He's been one of the
Speaker 3: most prominent figures to come out early on and argue
Speaker 3: for it forcefully. But the UK doesn't have that much.
Speaker 3: The vast majority of the assets are in Europe. They
Speaker 3: happen to be at Euroclear. So Europe is absolutely essential
Speaker 3: to this.
Speaker 1: And the fact I mean are the European is going
Speaker 1: to get on board with that? Then? Is that where
Speaker 1: the sticking point for this is going to be Because
Speaker 1: the European Union has struggled, of course, with the difference
Speaker 1: of opinions, say between Hungary and France on this issue.
Speaker 1: But we see the G seven members.
Speaker 3: Of Europe agree on this, So you're absolutely right, Europe
Speaker 3: is essential and there is division. France, Germany Italy are
Speaker 3: more suspicious of this. The ECB Christine Legard has been
Speaker 3: also very against it because of concerns about what it
Speaker 3: would do to the euro But there are others within
Speaker 3: the EU that are very supportive of it and think
Speaker 3: that it makes absolutely no sense for the West to
Speaker 3: be sitting on this pot of money. No one thinks
Speaker 3: anyone is going to give this three hundred billion back
Speaker 3: to Putin and frankly it's hard to see in any
Speaker 3: immediate term when Russia will agree to pay war reparations.
Speaker 3: There are a lot of interesting ideas being floated now
Speaker 3: about how you could use these assets as collateral still
Speaker 3: being debated, and maybe that is the ultimate solution, is
Speaker 3: there's some financial engineering that can get around some of
Speaker 3: the legalities that are holding back European countries. I think
Speaker 3: it's going to take some time, but I think as
Speaker 3: the war drags on, I think, given the fact that
Speaker 3: the amount of money Ukraine requires is so enormous, it'll
Speaker 3: be very hard to ignore this pot of Russian money
Speaker 3: and use Western taxpayers funds instead.
Speaker 2: But Stephanie could argue that sanctions so far have not
Speaker 2: really deterred Putin and his resolve of getting Ukraine. So
Speaker 2: would this make a material difference on the Ukrainian side
Speaker 2: of winning the war.
Speaker 3: I've talked to the Ukrainians on this. I mean, the
Speaker 3: latest World Bank estimate is that it will cost four
Speaker 3: hundred and eighty six billion to rebuild Ukraine. And the
Speaker 3: task that they are facing is enormous. It is hundreds
Speaker 3: of bridges, thousands of kilometers of roads, water supply from
Speaker 3: the Nova Kokovka dam collapse last year, There's just an
Speaker 3: enormous amount electricity substations, what have you. And the argument
Speaker 3: is that, Okay, this money can't be used by weapons,
Speaker 3: but just being able to rebuild homes and allow people
Speaker 3: to return is going to increased Ukraine's resilience to resist
Speaker 3: the Russian attacks. So I think it is important, and
Speaker 3: I think it doesn't make sense for Western taxpayers to
Speaker 3: be paying for Ukraine's reconstruction when there's this Russian money
Speaker 3: on the table.
Speaker 2: Stephanie, did you think that actually, by imposing sanctions on
Speaker 2: oligarchs that was supposedly to touch Putin's money, almost his
Speaker 2: direct money, because we can't find a bank account, right,
Speaker 2: did you think at the time that would have made
Speaker 2: more of a difference.
Speaker 3: I was always suspicious of the oligarch sanctions. There are
Speaker 3: kind of two oligarchs, two sets of oligarchs. There that
Speaker 3: the oligarchs that got rich off of Putin directly either
Speaker 3: running state owned companies or getting state contracts, and they
Speaker 3: were very beholden to him. And then there were the
Speaker 3: sort of first wave oligarchs who got rich in the
Speaker 3: nineteen nineties and had a slightly more precarious position visa
Speaker 3: VI Putin. And I've interviewed some of these guys, and
Speaker 3: I think the way Putin exercises power is such that
Speaker 3: it's very hard for them all to band together to
Speaker 3: try to sort of overthrow him or change who sits
Speaker 3: in the Kremlin. So I think they could have been
Speaker 3: a little bit more sophisticated about the way they targeted
Speaker 3: these guys to try to encourage splits at the top.
Speaker 3: But they've been rolling out all these sanctions, it's very
Speaker 3: hard for them to know who's who.
Speaker 1: Stephanie, with all of the way you've been tracking this,
Speaker 1: do you see and the drum beat on this seizure
Speaker 1: question seems to be getting louder with Richie's we've got
Speaker 1: the British Prime Minister coming out strongly for what we've had.
Speaker 1: Biden mentioned it. Do you see this now as sort
Speaker 1: of inevitable? And maybe it's dressed up in some of
Speaker 1: these ways you've talked about, whether it's the interest only
Speaker 1: at first, or financial engineering somehow to make it seem
Speaker 1: palatable or legal and given a legal stamp. But what
Speaker 1: does the next few months look like? Is this something
Speaker 1: that's going to happen imminently?
Speaker 3: In your opinion, I think we're going to be talking
Speaker 3: about it a lot for the next few months, and
Speaker 3: I think it will happen. I can't tell you when
Speaker 3: or how long it will take, and I think a
Speaker 3: lot of that will depend on getting agreement in Europe
Speaker 3: because that's where most of the assets are. But I
Speaker 3: think eventually it will happen in one way or another.
Speaker 2: Stephanie Baker, thank you so much.
Speaker 3: Thank you.
Speaker 2: Thanks for listening to this week's in the City. We'll
Speaker 2: be back next week, but in the meantime, if you
Speaker 2: like our show, please head on over to Apple Podcasts
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Speaker 2: This episode was hosted by me Francine Laqua with David Merritt.
Speaker 2: It was produced by Sammersati, additional editing by Rishi bou
Speaker 2: Jay Cole, and special thanks to Stephanie Baker.