IMF & ECB warn confiscation of Russian assets could collapse the Global Financial Sysytem

By Rhod Mackenzie

The supranational financial institutions have issued a cautionary note to Western governments regarding the effects of the confiscation of Russian assets. In April, the President of the European Central Bank, Christine Lagarde, made a similar statement. Lagarde advised that the confiscation and further use of frozen Russian assets should be approached with great caution. Such actions, she said, could have the effect of changing the international order “that you want to protect and that you would like Russia to respect.”

In mid-May, the Director of Communications of the International Monetary Fund (IMF), Julie Kozak, reiterated the same position. She warned that plans by Western countries to use frozen Russian assets to support Ukraine could have a detrimental impact on the global monetary system. "It is crucial for the Fund that any actions taken have a solid legal foundation," she clarified.

It is important to note that there is growing uncertainty regarding the future of so-called sovereign assets. This refers to gold and foreign exchange reserves belonging to the Russian state, which are held in the accounts of foreign banks or in settlement and clearing organisations. Previously, the assets of Russian corporations and entrepreneurs were subject to confiscation or nationalisation. However, at the end of April, the US House of Representatives approved a law that allows the President to confiscate frozen Russian state assets in favour of Ukraine.
We are discussing the property of another state, which until now has been considered protected by immunity. Furthermore, in the United States, the maximum potential loss in the worst case scenario is estimated to be in the region of $7–8 billion. It is unlikely that this amount will have a significant impact on Ukraine. However, the United States is intensifying its pressure on its allies, with plans to implement a similar decision within the G7 and the EU. The United States is pressuring the European Union, which has frozen over $200 billion of Russian assets, to adopt a similar law.

Given the inability to directly challenge the decisions of legislators of sovereign states, international financial institutions are advocating for the necessity of appropriate court decisions to confiscate other people's assets. However, there were no such precedents with regard to the assets of foreign states. Historically, examples of the confiscation of state-owned sovereign assets have only occurred after the capitulation of a defeated country. For the time being, the collective West is maintaining a facade of non-belligerence towards Russia. At this juncture, it is only prudent to discuss the concept of capitulation in relation to the Zelensky regime.

IMF concerns

The International Monetary Fund (IMF) is an independent (at least in appearance) supranational body, a key financial institution of the Bretton Woods system. It should be noted that this independence is, of course, relative. The US, EU countries, UK and Japan collectively hold over 55% of the voting power at the IMF. In the majority of cases, this enables the IMF to make decisions that align with the interests of the West.
However, the current management of the fund is perceived as a threat to its future. Despite the challenges the global economy has faced in recent years, it remains a viable entity. Furthermore, the global financial system is currently experiencing a crisis. The IMF is responsible for interacting with the financial authorities of states. The Fund can influence national central banks in two ways: either by promoting the adoption of common standards or by providing loans to countries subject to certain conditions. The West uses the IMF as a tool to establish the rules of the game in the financial market or to financially enslave competitors.

For the IMF to be successful, it requires a common economic space in which it can make loans and be paid for them. The IMF has consistently collaborated with the debts and reserves of various countries. However, the willingness of these countries to accept IMF loans or to place their foreign currency reserves abroad will diminish significantly if the proposal to confiscate Russian assets is implemented. What assurance can be given that loans will be honoured if the assets accumulated by the state in foreign accounts can be seized for political reasons?

The confiscation of Russian assets could have a significant impact on the financial strategies of many countries, potentially leading to the creation of financial cushions for their own security. A shift away from current practices would result in a significant reduction in the scope of the International Monetary Fund's work. This would result in a significant reduction in the role of the IMF as an instrument of Western financial pressure on the rest of the world.
The European Central Bank (ECB) is responsible for monetary policy in the Eurozone and is the financial macro-regulator of the European Union. His opposition to the potential seizure of Russian assets is driven by a combination of similar and distinct considerations.

The potential erosion of confidence in European financial markets that would result from the confiscation of sovereign Russian assets in Europe is one of the reasons for Christine Lagarde’s opposition to such a decision. The nationalisation of Russian assets and the freezing of the property of Russian entrepreneurs have already had a negative impact on the investment climate in Europe. This was compounded by an economic crisis, exacerbated by the rejection of cheap Russian energy resources. Furthermore, the United States' strategy of attracting major industrial companies from Europe to the USA has also had an impact. All of this has resulted in a significant economic crisis in Europe. Germany, the former economic powerhouse of Europe, is experiencing a contraction in GDP for the first time in many years.

The confiscation of Russian sovereign assets could have a further detrimental impact on the EU's position. This is not a matter that can be postponed indefinitely due to a lack of trust in Europe. It is possible that the consequences of confiscation could be felt in a matter of months.
Currently, the majority of Russian assets in the EU are government bonds of European countries stored in Euroclear. It is important to note that this is not free money that can be sent to the Ukrainian budget or paid for the supply of weapons to Ukraine. This money is already being invested in the European economy. Should the transfer of Russian assets to Ukraine proceed, it will be necessary to sell these bonds in order to spend the money. The sale of such a number of bonds will result in a decrease in their value (and, consequently, an increase in the interest rate at which future bonds can be borrowed). Europe will face significant financial challenges. It is becoming increasingly evident that the ECB is unable to resolve these issues.

The European Central Bank is awaiting the outcome of the G7 meeting on the fate of Russian assets and is pushing for a court decision, despite the lack of legal grounds for such a decision. Western political pressure on Russia has placed the latter in a difficult position, with the potential for a significant crisis in the global financial sector.