Rebuilding Ukraine with Russian Capital: A Legal Perspective on Transferring Russian Assets into Ukrainian Hands

Russia’s unprovoked invasion of Ukraine has wreaked tremendous death and destruction on Ukraine, prompting calls for robust economic assistance for the country. While a growing number of Republicans on Capitol Hill have voiced concern over the rising economic costs of US aid to Ukraine, an innovative way of providing Ukraine with economic aid absent the expenditure of additional US resources exists: the transfer of Russian central bank reserves held in the US into Ukrainian hands.[1]

A hypothetical transfer of Russian central bank reserves held in US banks into Ukrainian hands, while doubtlessly morally sound, would also be consistent with the powers granted to the president by the International Economic Emergency Powers Act (IEEPA). It would crucially be consistent with US constitutional law vis à vis the fifth amendment, and it coheres with international legal precedent as well.

US Legal Precedent

The hypothetical seizure and transfer of Russian bank reserves into the possession of the Ukrainian government would have a legal basis under US law. The IEEPA, a piece of legislation passed in 1977, gives the president expansive discretionary power over the assets of foreign entities held in US banks in times of crisis.[2] In particular, the law “may be exercised to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States, if the President declares a national emergency with respect to such threat.” The war in Ukraine doubtlessly reflects an “unusual and extraordinary threat” to the US, thus legitimating the hypothetical invocation of the IEEPA with respect to Russian central bank reserves.[3]

Critics of the transfer concede that the IEEPA enables the president to freeze foreign-owned assets in US banks, yet they simultaneously claim that freezing financial assets is a qualitatively different action than a transfer of ownership of these assets.[4] In the eyes of these critics, any executive action involving seizing and transferring ownership of Russian central bank assets would therefore fall outside the scope of the IEEPA. For their part, these critics acknowledge that the IEEPA is not without exceptions, one of which is manifested in 50 U.S. Code - Sec. 1702 - Presidential authorities, a loophole in the law that allows the president to take decisive action to dispose of foreign-assets in whatever manner they desire in instances in which ‘“the United States is engaged in armed hostilities or has been attacked by a foreign country or foreign nationals.”’[5] Legal commentators like Paul Stephan argue that the US does not find itself in such a situation, further constraining President Biden from providing Ukraine with liquidated Russian central bank reserves.[6]

Stephan and his fellow skeptics are mistaken. Notwithstanding how US soldiers are not directly fighting in the war in Ukraine, the billions of dollars in resources and munitions that the US is providing to Ukraine are certainly suggestive of the US ‘“participating in,”’ albeit indirectly, ‘“armed hostilities”’ in eastern Europe.[7] Proxy wars are still wars. This participatory action consequently frees up President Biden to transfer Russian central bank assets to Ukraine in a manner consistent with the 50 U.S. Code § 1702 - Presidential authorities exception in the IEEPA.[8] Merely citing the fact that the US lacks boots on the ground in Ukraine rings out as a rather weak argument against the notion that the US is ‘“engaged”’ in armed combat. American artillery shells are certainly ‘“engaged”’ in such a manner; the nation as a whole is, by implication, similarly ‘“engaged.”’

Coherence with the Fifth Amendment

In addition to questions over the scope of the IEEPA, questions surrounding the fifth amendment pertaining to the right to due process of foreign governments are also relevant to the US government’s policy options regarding Russian central bank reserves. Proponents of transferring Russian assets into Ukrainian hands like Laurence Tribe and Jeremy Lewin have rightly pointed out the fact that the fifth amendment’s due process clause only offers legal protections for individuals, not for governments.[9] As such, these scholars posit that a move to seize and transfer Russian assets into Ukraine’s possession would not constitute an infraction of the fifth amendment.[10]

By contrast, more skeptical legal scholars like Stephan argue that legal arguments about the treatment of foreign governments falling outside the scope of the fifth amendment are reductive.[11] According to Stephan, the Supreme Court’s ruling in Pfizer, inc. v. Government of India, a case in which the court deemed it appropriate to characterize a foreign government as a ‘“person”’ to provide the government with the legal protections enjoyed by US citizens, implies the necessity of providing foreign governments some form of due process protection.[12] Yet Stephan himself acknowledges that the Pfizer ruling simply concerned constitutional issues surrounding antitrust laws, and he is overeager in presuming that the case assumes a greater relevance concerning precluding presidential seizure of the currency reserves of foreign states.[13] Indeed, such asset seizure is not without US legal precedent. In fact, in Dames & Moore v. Regan, the Supreme Court held that the IEEPA places ‘“control of foreign assets in the hands of the President,”’ effectively enabling the president to take such far-reaching actions as transferring foreign assets to new owners.[14]

International Law & Compensation

International law also manifests the legality of the theoretical transfer of Russian central bank assets to Ukraine. Specifically, in Ukraine v. Russian Federation, the International Court of Justice (ICJ) ruled that ‘“the Russian Federation shall immediately suspend the military operations that it commenced on 24 February 2022 in the territory of Ukraine,”’ later arguing that their ruling established ‘“international legal obligations”’ for Russia.[15] Helping Ukraine rebuild itself with liquidated central bank reserve capital would doubtlessly reflect the fulfillment of such an “international legal obligation” –– one that crucially need not require Russian approval.[16] Indeed, Philip Zelikow cites a quotation attributed to the legal scholars Bernhard Graefrath and Manfred Mohr that affirms the notion that, ‘“in cases of aggression … the [compensation] obligation is not open to negotiation. It has to be accepted by the Aggressor state.”’[17]

The International Law Commission’s Articles on the Responsibility of States for Internationally Wrongful Acts (ARSIWA) are instructive in this regard as well. Concerning Russian actions in Ukraine, the ARSIWA has contended, among other things, that, ‘“to induce Russia to stop its aggression and compensate Ukraine and other damaged states, all those [damaged] states can take countermeasures [against Russia] ….”’[18] President Biden’s hypothetical transfer of Russian central bank assets could therefore be seen as a ‘“countermeasure,”’ as a compensatory attempt to assist Ukraine withstand –– and rebuild itself after –– the Russian invasion. Such a focus on compensation differentiates the move from one involving a focus on punitive damages: a compensatory focus also consistent with international legal precedent.[19] For example, Zelikow cites the fact that the UN induced Iraq to use its own oil revenues as compensatory capital for its unprovoked aggression of Kuwait in 1991, compensatory capital payments that Iraq itself had no veto power over.[20]

The theoretical transfer of Russian central bank reserves held in US banks into the possession of Ukraine would have a legal basis under the IEEPA, the US Constitution, and internal law. In policy terms, critics of an attempt to transfer frozen Russian bank reserves into Ukrainian hands overstate the risks of the move with regard to international trust in the US dollar as a reserve currency.[21] US dominance in international finance remains undisputed, and China’s militaristic machinations of late, as well as its recent domestic political upheaval, make the prospect of the yen overtaking the dollar as the world’s reserve currency far-fetched. In the realm of geostrategy, this hypothetical transfer maneuver may also deter geopolitical aggression in other theaters in the future. China would certainly be rather alarmed by the move; thoughts over the fate of their own currency reserves in US banks would almost certainly seep into their strategic calculus regarding an invasion of Taiwan. Aside from being legally sound and morally just, this proposed move may thus have a profound deterrent effect on aggressors in the international sphere.

[1] Abutaleb, Yasmeen & John Hudson. “Inside the growing Republican fissure on Ukraine aid,” The Washington Post (October 2022): https://www.washingtonpost.com/politics/2022/10/31/republican-split-on-ukraine-aid/.

[2] Stephan, Paul. “Giving Assets to Ukraine –– Freezing Is Not Seizing,” Lawfare (April 2022): https://www.lawfareblog.com/giving-russian-assets-ukraine-freezing-not-seizing.

[3] International Economic Emergency Powers Act, 50 U.S.g Code § 1701 - Unusual and extraordinary threat; declaration of national emergency; exercise of Presidential authorities (1977).

[4] Stephan, “Giving Assets to Ukraine.”

[5] Stephan, “Giving Assets to Ukraine.”

[6] Ibid.

[7] Ibid.

[8] 50 U.S. Code § 1701

[9] Tribe, Laurence & Jeremy Lewin. “$100 Billion: Russia’s Treasure in the U.S. Should Be Turned Against Putin,” The New York Times (April 2022): https://www.nytimes.com/2022/04/15/opinion/russia-war-currency-reserves.html.

[10] Laurence Tribe & Jeremy Lewin, “$100 Billion.”

[11] Stephan, “Giving Assets to Ukraine.”

[12] Ibid.

[13] Ibid.

[14] Philip Zelikow, “A Legal Approach to the Transfer of Russian Assets to Rebuild Ukraine,” Lawfare (May 2022): https://www.lawfareblog.com/legal-approach-transfer-russian-assets-rebuild-ukraine.

[15] Philip Zelikow, “A Legal Approach.”

[16] Ibid.

[17] Ibid.

[18] Ibid.                  

[19] Ibid.

[20] Ibid.

[21] Ibid.
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