The Malta Independent 13 June 2024, Thursday
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How the global economy fared following the Russian invasion

George M Mangion Tuesday, 21 May 2024, 14:19 Last update: about 23 days ago

One may cautiously remark that a disintegration of the old order is visible everywhere. Sanctions are being used four times as much as they were during the 1990s.

Start with the European Union, although supposedly more supportive of free trade and more determined to reduce its greenhouse-gas emissions than other economic powers, is on the verge of imposing duties on Chinese electric vehicles. Back to the 1950s, during the onset of the Cold War, this, helped stitch the global partners to act in distinct groups.

At its end, a consensus emerged, however fragile and reviled: that it was easier for economies to grow through integration than self-isolation. In a general comment, one may deduce that three big scourges are undermining globalisation. For a start, we consider the proliferation of punitive economic measures of various sorts, the sudden vogue for industrial policy and the decay of global institutions.

Starting to explain punitive measures. These do not typically take the form of higher tariffs. Russia's defenders complain that Western governments are silently discussing plans to expropriate Russian assets held abroad and divert the proceeds to help Ukraine.

The issue of expropriating Russian assets held abroad to aid Ukraine is indeed a complex and controversial topic that has been raised in the context of the ongoing conflict between Russia and Ukraine. Following Russia's invasion of Ukraine on 24 February 2022, many Western governments imposed severe sanctions on Russian individuals, businesses and government entities.

These sanctions have led to the freezing of a significant amount of Russian assets held in foreign jurisdictions. But war reparations in Ukraine (a potential new EU member by 2035) have risen to over €400bn. This is a steep amount for a war beaten country to raise in the open markets. It sounds rational that billions of dollars in frozen assets could be used to help fund Ukraine's reconstruction and support its defence efforts. The argument is that since Russia's actions have caused immense damage to Ukraine, it is justifiable to use Russian assets to offset some of the costs associated with rebuilding the country and providing humanitarian aid to its people. However, it's not that straightforward.

The unilateral move of expropriating these assets raises several legal and ethical questions. Most countries have laws that protect property rights and due process, making outright expropriation a challenging proposition without specific legislation or international agreements in place.

Quoting international law, the expropriation of assets without due process and fair compensation is generally prohibited. Any move to seize foreign assets would need to navigate the complexities of international law and treaties to which the seizing country is a signatory. One cannot omit to mention the sanctity of property rights and the predictability of legal frameworks are cornerstones of global finance. Any move to expropriate assets could undermine confidence in the system, particularly if it is seen as politically motivated.

In one area, though, there are signs of progress: regarding the destiny of Russia's frozen assets. After Vladimir Putin invaded Ukraine, Western governments quickly locked down €260bn worth of Russian assets, which have remained frozen ever since.

Proposals about what to do with them have ranged from the radical (seize them and hand them over to Ukraine) to the creative (force them to be reinvested in Ukrainian war bonds). Lately the Biden administration wanted to make use of interest income on frozen Russian assets in order to maximise the impact of these revenues, both current and future, for the benefit of Ukraine today.

Income earned on Russia's foreign holdings can be seized in a manner that is both legal and practical. Many of the country's bonds have already matured. Cash from redemption of bonds is held by the depository in which it currently sits until it is withdrawn, paying no interest to the owner.  It's important to note that to date, no broad-based seizure of Russian assets had taken place. Legal experts, governments and international organisations continue to explore the options available within the bounds of international law.

The United States has also been implementing a series of restrictions aimed at curbing China's technological ambitions, particularly in the semiconductor industry. These restrictions are part of a broader strategy to maintain US technological leadership and address national security concerns related to China's growing capabilities in advanced technologies. The US has tightened export controls on advanced computing chips, semiconductor manufacturing equipment and related technologies. The list includes companies like Huawei and SMIC (Semiconductor Manufacturing International Corporation), which have been targeted due to concerns over their ties to the Chinese military and potential threats to US national security. Initiatives like the Chips for America Act aim to bolster domestic semiconductor production and reduce reliance on foreign sources, particularly those in China.

On the security side, there is concern that China's advances in semiconductors and related technologies could have military applications and enable surveillance capabilities that pose risks to US interests and those of its allies. China has responded to these restrictions by accelerating its efforts to develop an independent and self-sufficient semiconductor industry. On a national basis it is investing heavily in research and development, and seeking to source equipment and materials from non-US suppliers.

The dynamic between the US and China in the technology sector remains a key area of strategic competition with global implications for the semiconductor industry and the broader tech landscape. In summary, going back to issue targeting future Russian war reparations, this is a delicate issue. Russia has bonds that have matured and it has not repaid the principal, the holders of those bonds (which could be foreign governments, institutions or individuals) may have a legal claim against Russia.

However, enforcing this claim and actually seizing assets to satisfy it would require legal proceedings and may be subject to the defences Russia could raise, including sovereign immunity. The potential for Russian retaliation and the precedent set by US/EU seizing a sovereign nation's assets are important considerations. Such actions could have far-reaching implications for international relations and the global financial system.


George M. Mangion is a senior partner at PKF Malta




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