The war in Ukraine has been raging for almost two years now. In the early days of Russia’s full-scale invasion, Western countries imposed sweeping sanctions on the Russian economy, a significant part of which was made up of asset freezes on some $300 billion in assets owned by the Russian Central Bank and Russian oligarchs. The war has devastated much of Ukraine’s eastern regions, infrastructure, and cities. The West has pledged to help rebuild Ukraine once the war is over, but such a task will cost billions, if not trillions, of dollars to accomplish. One solution advanced by Western lawmakers is to seize the assets that were frozen by sanctions and donate them to Ukraine to finance its reconstruction once the war is over.
Others have argued that the West should start seizing frozen assets now and use them to pay for the billions of dollars in military and humanitarian aid being sent to Ukraine. Indeed, some Western countries have already begun sending seized assets to Ukraine. Lawmakers have also considered applying this rationale to other sanctions regimes, such as those in place against Iran and North Korea. While using frozen assets to pay for aid and reconstruction may be an economical solution to the problem of raising the capital necessary to rebuild Ukraine, asset seizures can hinder the effectiveness of economic sanctions. Specifically, asset seizures eliminate the incentive for targeted individuals and entities to comply with the demands linked to sanctions after they have been imposed.
The incentive structures of asset freezes
Economic sanctions are designed to invoke a policy change through coercive economic means. Asset freezes, the most common form of targeted economic sanctions (and used interchangeably here), deny a target access to its assets until such point that the target complies with a set of demands. For instance, in March of 2022, $300 billion in Russian Central Bank assets were frozen by the U.S. government and its allies, with the demand that Russia cease its invasion. The logic which underpins asset freezes holds that targets have two incentives to comply with sanctions: 1) not to have their assets frozen in the first place; and 2) to regain access to their assets once frozen.
While the former incentive is only in place at the beginning of a sanctions episode, the latter is active throughout the duration of the sanctions episode. For this reason, targets that do not immediately comply, or accept the demands associated with sanctions, may still do so later in the episode. However, asset seizures remove the latter incentive. If there is no possibility of regaining access to your assets, why comply with the sanctioning state’s demands?
The value of maintaining frozen assets remains very clear. On August 10, 2023, the United States and Iran agreed to a deal whereby U.S. citizens held hostage by Iran would be released in exchange for the release of six billion dollars in frozen assets. The six billion dollars in question are oil revenues frozen by U.S. allies in South Korea. The funds were originally frozen by the Trump administration after America’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA, often known as the Iran nuclear deal). The release of American prisoners was one of many conditions attached to the sanctions imposed on Iran by the Trump administration. While the first incentive was in place in the early days before the sanctions were imposed, the second incentive remains in place to this day and is what made this hostage exchange possible. The Iranian government was incentivised to release the American hostages by the potential to recoup its frozen funds. If the Trump administration had seized the Iranian assets, there would have been no way for Iranian targets to recoup their losses, and thus no incentive to release the hostages.
Accordingly, the benefits of maintaining frozen assets are clear: for the duration of the sanctions episode, there is a lingering incentive for the target to comply with the sanctioning state’s demands. However, the use of asset seizures is not entirely without merit. Western governments may be developing seizure mechanisms mostly as a threat to Russian oligarchs, to increase the incentive to defect against Putin’s regime. The threat of having one’s assets seized at any time may add a degree of urgency to the latter incentive inherent in asset freezes. However, the threat of asset seizures only works so long as the seizure is never carried out, because once the seizure is carried out, the latter incentive is no longer present.
When could asset seizures be appropriate?
While asset seizures do remove the latter incentive, they can reinforce the former. The fear of losing one’s assets completely is several orders of magnitude more coercive than the fear of losing access to one’s assets only temporarily. Thus, while asset freezes remove the incentive to comply with sanctions post-imposition, the incentive not to have one’s assets seized in the first place may drive targets to be more responsive to the sanctioning state’s demands.
Moreover, if the threat of seizures is not enough to induce oligarchs to defect, then the frozen assets may be better used as aid to Ukraine rather than as a bargaining chip with Russia’s elites. Oligarchs may deem loyalty to Putin and the Russian invasion of Ukraine more valuable than the cost of frozen assets seized by sanctions. Therefore, it could be argued that no amount of frozen assets would be sufficient to affect the political conviction of certain individuals targeted by sanctions. Accordingly, the sanctioning state would be better off seizing the assets rather than maintaining the sanctions with the false hope that the latter incentive might still be effective.
Additionally, asset seizures have been used in previous sanctions cases, and to some extent they are already taking place between the West and Russia. Some frozen assets have been donated to Ukraine, such as an AN-124 heavy cargo plane that was seized by the Canadian government. In March of 2022 U.S. asset freezes meant that American Depository Receipts (ADRs; a type of publicly traded company which holds shares in foreign companies so they can be listed on the New York Stock Exchange) holding Russian shares had their assets frozen. It is not uncommon for ADRs to be frozen in the wake of sanctions, and investors generally wait out the sanctions to recoup their funds. However, the Russian government passed a law requiring that all shares in Russian-domiciled companies be held by a Russian shareholder. As a result, ADRs were forced to transfer their shares to Russian citizens, and those who could not comply saw the value of their holdings evaporate. Moreover, some states including Canada and the Netherlands, have already designed legal mechanisms to enable the seizure of frozen assets. The EU is working on a centralised legislation to confiscate the nearly $200 billion in Russian assets it has seized. As the debate over Ukraine’s reconstruction intensifies, it is likely that Western economies will carefully consider asset seizures as a substantial source of funding.
Yet sanctioning states should not look to the unique circumstances of sanctions against Russia when designing future sanctions programmes or considering the implementation of asset seizures in ongoing sanctions programmes. While asset seizures may be a good solution for how to use the hundreds of billions of dollars of Russian assets that were frozen by the West, future sanctions regimes will likely find more utility in maintaining frozen assets as an incentive for policy change. Ultimately, the idea of a one-size-fits-all approach to sanctions design is a fallacy. The unique circumstances of each target necessitate that sanctions planners design mechanisms which are tailored to the target. Therefore, while the specific circumstances of a given target may require the use of asset seizures, sanctions designers should stray away from using them as a catch-all solution to noncompliance.
Note: This article reflects the views of the author and not the position of the DPIR or the University of Oxford.