Russia has proposed a response to plans to confiscate its assets in Europe

By Rhod Mackenzie

The authorities are considering how to respond to the European Union's plans to confiscate Russian assets. The Federation Council has proposed to the Ministry of Finance that a mechanism be developed to withdraw funds of foreigners blocked in the Russian Federation, according to Nikolai Zhuravlev, deputy chairman of the upper house of parliament, this was reported by Izvestia. Retaliatory measures could also apply to income from securities held in type “C” accounts. What is the current status of the EU's initiative to confiscate Russian assets, and what will be the impact of mutual seizure of income?

If the EU confiscates Russian assets or income from them, the Russian Federation has the right to apply mirror measures. Deputy Chairman of the Federation Council, Nikolai Zhuravlev, stated that such actions would be considered confiscation of state property.

He suggested that if our income is seized, we should also seize their income in the form of taxes. - The senator called on the Ministry of Finance to develop appropriate legislation to address the issue of income seizure.
Nikolay Zhuravlev clarified that profits on non-resident securities held in special 'C' type accounts may be subject to withdrawal. However, the Russian side should refrain from taking any action first. Measures against the assets of the Russian Federation are possible only in the event of such decisions.

Type “C” accounts are designed for transactions with non-residents involving the purchase and sale of foreign currency, securities, and investments in the Russian economy. Currently, there are restrictions on transactions with these funds. According to the Central Bank, the volume of funds in these accounts exceeded 280 billion rubles in November 2022 and reached 500 billion rubles by the end of March. More recent data has not been disclosed. They receive income from securities that are frozen, causing the volume of blocked funds to constantly increase.
Anatoly Aksakov, the head of the State Duma Committee on the Financial Market, has expressed his understanding of the Federation Council's initiative. He suggested that if there is a risk of confiscation of Russian assets, there are various retaliatory measures that can be taken.

In December 2023, Anton Siluanov, the Russian Finance Minister, stated that Moscow was prepared to take reciprocal measures if the EU decided to use the proceeds from frozen Russian funds.
The Ministry of Finance head stated that there are frozen assets in so-called S accounts that generate significant income. These funds can be used similarly if our 'unfriendly' partners make a decision.

Deputy Foreign Minister Mikhail Galuzin also warned that Russia will take retaliatory measures if Kyiv confiscates its assets. Izvestia made inquiries to the department, Ministry of Finance, and the Central Bank regarding the legal

basis for the EU's ability to confiscate Russian assets.
On February 12, the Council of the European Union approved a regulation that defined the legal basis for the use of profits from the frozen assets of the Central Bank of the Russian Federation. The proposed funds will be sent as a contribution to the EU budget, specifically to a special fund that supports Ukraine. The council and the European Parliament reached a preliminary agreement on February 6 regarding this fund. Artem Kasumyan, a lawyer at the Delcredere Bar Association, noted that one option for withdrawing funds is through levying increased taxes on income from Russian assets.

Since February 2022, the G7 countries, the European Union, and Australia have frozen €260 billion of Central Bank assets, with approximately €210 billion frozen in the EU. However, it is proposed that only the income from these assets be sent to the fund, resulting in a significantly smaller amount.

According to a statement by the EU Council, the regulation requires central depositories that own assets of the Central Bank of the Russian Federation worth more than €1 million to allocate them to separate accounts. Income from these assets should also be kept separately. It is important to note that depositories are prohibited from disposing of the net profit received.
According to German MEP Gunnar Beck, the EU is currently developing a decision regarding the transfer of Russian assets to Ukraine. This process may take several months before it is put to a vote. Beck believes that implementing this decision will not be easy and is unlikely to happen before the European elections and the re-election of the current head of the European Commission, Ursula von der Leyen.
On February 16, Elvira Nabiullina, the head of the Russian regulator, noted that the threat of withdrawing profits from the frozen assets of the Central Bank of the Russian Federation would send a negative signal to foreign central banks. She emphasized that protecting assets from forced collection measures is a fundamental principle of international law.

If the proposals are implemented, Russia may have to take retaliatory measures. European Deputy Gunnar Beck admitted this. The seizure of assets could worsen the already strained relations between the EU and the Russian Federation.

As for the Russian response, Senator Zhuravlev's proposal to seize the income of non-residents through taxes would most likely result in an increased tax rate for them, according to Kira Vinokurova, a partner at the Pen & Paper bar. Alternatively, only income exceeding a certain threshold may be subject to the levy. Furthermore, the expert suggests that increasing the tax rate on non-residents' profits is the most probable option for mirror measures. She explains that the special account type 'C' regime allows for limited cases of fund write-offs, including tax and mandatory payments.

However, the income of non-residents will only be confiscated by the authorities if Russian funds are actually seized in the EU. Dmitry Lesnov, head of the client service development department of the Financial Group Finam, emphasized this.
Simultaneously, an excessively high tax rate or the imposition of additional fees may be deemed as indirect expropriation, which is prohibited by most of the bilateral investment treaties of the Russian Federation, as clarified by Kira Vinokurova.

Furthermore, in the EU, there is a discussion about the appropriation of income from the Bank of Russia, which is not considered a private entity under international law, as explained by Artem Kasumyan from Delcredere. Restricting the property rights of foreign investors may not be a completely symmetrical measure.

According to Artem Kasumyan, if mutual withdrawal of income begins, the climate for the exchange of assets will become even more unfavourable.

This is because in November, Russian President Vladimir Putin signed decree No. 844, which created the legal basis for the exchange of assets blocked in the Russian Federation for frozen securities of Russians in the EU. It is important to note that any modifications made to the original text were solely to improve clarity, conciseness, or formality without altering the core message. Foreign businesses showed interest in the scheme, but Western regulators were not prepared to engage in dialogue with the Central Bank, according to Vladimir Chistyukhin, First Deputy Chairman of the Bank of Russia.