The US Confiscation Policy

The United States plans to develop mechanisms for the confiscation of the property of Russians who have been sanctioned. The seized property would be used to provide assistance to Ukraine. In the near future, such mechanisms are likely to be enshrined in US law. There is a consensus between Congress and the Biden Administration on this issue. The benefits of such a move for the United States will be felt in the near future. Disadvantages will make themselves known later.

First of all, Russia itself would move to confiscate Western-owned assets on its territory. Obviously, Moscow will take such steps with great caution—it is still in Russia’s interests to preserve the remnants of investments and established ties. However, selective and targeted measures are quite possible. In response to the transfer of Russian property to Kiev, Moscow may confiscate some assets in the occupied territories of Ukraine, and the territory itself may be regarded as confiscated property. It can be transferred, for example, to the jurisdiction of the Donetsk People’s Republics. In other words, experiments with confiscation deepen the escalation of the conflict.

Another disadvantage for the United States is the significant loss of leverage over certain segments of the Russian elite. Property and assets were “anchors” for a considerable number of Russian businessmen. The United States and other Western countries were seen by them as a “safe haven” and a place where the rule of law prevails. Now Russia has become their only harbour. This shortcoming may turn into an advantage for the Russian authorities, who will have more opportunities to consolidate the elite. Suspicion of government agencies and financial institutions towards Russians in general (including medium and small businesses and individuals) also reduces the motivation for the emigration of broader sections of Russian citizens.

Finally, the victorious march of the authorities of the US, the EU, and other countries over the fragments of Russian property gives rise to legitimate fears among investors from other countries. A bad signal for them is that the criminal motives for the seizure of property and the related concepts of corruption, kleptocracy and the like “suddenly” became relevant only after the start of the conflict in Ukraine. The question arises: if there was a criminal dossier on the Russians under sanctions, then why was it not released in droves earlier? The answer is simple. Most of the Russians who fell under the sanctions, apparently, simply did not have such a dossier. Or it was not enough for suspicion and charges of criminal offenses (money laundering and so on). Getting under sanctions is a consequence of politics. This means that the confiscation of property has political reasons and is not associated with violation of the law.

On April 28, US President Joe Biden asked Congress to pass new legislation on the confiscation of Russian property. The presidential proposals were previously developed at the level of key agencies responsible for sanctions: the Treasury (financial sanctions), the Department of State (responsible for visa sanctions and political aspects of restrictive measures), the Department of Commerce (export controls), and the Department of Justice (which prosecutes violators of sanctions regimes).

Biden’s proposals include the following:

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First, to create an effective mechanism for the confiscation of property located in the United States and owned by sanctioned “oligarchs” or persons involved in illegal activities. Previously, such property was only frozen, that is, access to it was prohibited, but formally it remained in the possession of its owners. It can be challenged in a US federal court. However, experience shows that previous attempts by Russian business to achieve the lifting of sanctions did not bring much success. It also proposes making it a criminal offense to receive funds directly derived from corrupt deals with the Russian government. The concept of such transactions and their parameters have not yet been deciphered.

Second, the Biden Administration is pushing for a mechanism that would allow the transfer of property seized from the “kleptocrats” to compensate Ukraine for the damage caused by military action.

Third, the confiscation of property that is used to help circumvent US sanctions, as well as the inclusion of sanctions circumvention in the Racketeer Influenced and Corrupt Organizations Act (RICO). The administration also considers it necessary to extend the statute of limitations for money laundering offenses to 10 years.

Fourth, it is proposed to deepen interaction with foreign allies and partners. In the EU, in particular, property worth more than $30 billion has already been confiscated.

In Congress, such proposals have long appeared in the form of a series of bills. During March-April 2022, two such bills were introduced in the Senate (S. 3936 and S.3838) and five in the House of Representatives (H. R.7457, H. R. 7187, H. R.7083, H. R.6930 and H. R.7086). Most of these bills are cosponsored by both Republicans and Democrats, which means they are very likely to attract interparty consensus. It is most likely that the final version of the project will be much more detailed in comparison with the bills already submitted and will take into account the proposals of the Biden Administration.

The new legal mechanism will give the US both advantages and disadvantages. Among the first, it can be attributed the emergence of more effective tools for the final defeat of Russian big business both in the United States and beyond. The US authorities will have more powers for secondary sanctions and enforcement measures in order to prevent circumvention of the sanctions regimes. It is possible that such measures may also be applied to Russian partners from third countries. In addition, such confiscations will make it possible to provide military and financial assistance to Ukraine using Russian money. Washington is already sending billions of dollars to Kiev, and the scope of such assistance is likely to be expanded radically. If the European Union follows the example of the United States (and there is no doubt it will), then Ukraine in the future can count on tens and even hundreds of billions of dollars of assistance from Russian funds. Such a move would be welcomed by taxpayers in the US and the EU. With all their sympathy for Ukraine, they would prefer to assist it at the expense of Russian assets, rather than their own.

While the advantages of these moves will bear fruit in the very near future, disadvantages will make themselves felt later. First of all, Russia itself would move to confiscate Western-owned assets on its territory. Obviously, Moscow will take such steps with great caution—it is still in Russia’s interests to preserve the remnants of investments and established ties. However, selective and targeted measures are quite possible. In response to the transfer of Russian property to Kiev, Moscow may confiscate some assets in the occupied territories of Ukraine, and the territory itself may be regarded as confiscated property. It can be transferred, for example, to the jurisdiction of the Donetsk People’s Republics. In other words, experiments with confiscation deepen the escalation of the conflict.

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Another disadvantage for the United States is the significant loss of leverage over certain segments of the Russian elite. Property and assets were “anchors” for a considerable number of Russian businessmen. The United States and other Western countries were seen by them as a “safe haven” and a place where the rule of law prevails. Now Russia has become their only harbour. This shortcoming may turn into an advantage for the Russian authorities, who will have more opportunities to consolidate the elite. Suspicion of government agencies and financial institutions towards Russians in general (including medium and small businesses and individuals) also reduces the motivation for the emigration of broader sections of Russian citizens.

Finally, the victorious march of the authorities of the US, the EU, and other countries over the fragments of Russian property gives rise to legitimate fears among investors from other countries. A bad signal for them is that the criminal motives for the seizure of property and the related concepts of corruption, kleptocracy and the like “suddenly” became relevant only after the start of the conflict in Ukraine. The question arises: if there was a criminal dossier on the Russians under sanctions, then why was it not released in droves earlier? The answer is simple. Most of the Russians who fell under the sanctions, apparently, simply did not have such a dossier. Or it was not enough for suspicion and charges of criminal offenses (money laundering and so on). Getting under sanctions is a consequence of politics. This means that the confiscation of property has political reasons and is not associated with violation of the law.

Accordingly, investors from other countries may have explicit or implicit suspicions that they may be next in line.

The US has conflicting relations with China, Saudi Arabia, Turkey and a number of other countries. Dozens of bills on sanctions are being introduced in the US Congress on them. It is clear that extraordinary events must occur in order for the Americans to begin imposing sanctions on the Russian model and against the designated countries. Mass confiscations of their property are unlikely, at least for now. But trust is a subtle psychological category. Investors do not always understand the intricacies of politics. This means that they may well have a natural desire to diversify their assets. For American banks and investment funds, this is unlikely to be good news.

First published in the Valdai Discussion Club.