Introduction to the Economic Case
The debate around using frozen Central Bank of the Russian Federation (CBR) assets to support Ukraine has sparked intense discussion. From an economic perspective, there are several key arguments to consider, including the costs associated with supporting Ukraine, the potential for investment, and the potential impact on the global economy.
The Cost Argument
One of the primary concerns is the financial burden placed on European taxpayers to fund Ukraine’s defense and reconstruction. With estimates suggesting that the annual cost of sustaining Ukraine in the war is around $100 billion, and potentially $150 billion to support a Ukrainian victory, the financial implications are significant. However, with $330 billion of Russian taxpayers’ money currently frozen in Western jurisdictions, it raises questions about the morality of expecting European taxpayers to cover the full cost.
Supporting Ukraine: A Cost-Benefit Analysis
From a cost-benefit perspective, supporting Ukraine is a sound investment. By providing $150 billion over two years to ensure a Ukrainian victory, Europe can avoid the potential long-term costs associated with a prolonged conflict. In contrast, failing to support Ukraine could lead to increased defense spending, potentially reaching 2-3% of GDP ($600-900 billion) per annum, to counter the Russian security threat.
The Investment Argument
Another key consideration is the potential to use frozen CBR assets as an investment opportunity. By establishing a sovereign wealth fund structure, co-managed by the G7 and Ukraine, these assets could be invested in a portfolio of emerging market debt, generating returns of 8-10%. This could provide Ukraine with the necessary funds to cover its annual budget financing needs, without touching the underlying assets.
Investing in Ukraine’s Future
By investing frozen CBR assets in Ukrainian Eurobonds or other emerging market securities, Ukraine could gain access to the full $330 billion in assets for defense and reconstruction purposes. This approach would not only support Ukraine’s immediate needs but also provide a long-term investment strategy, generating returns that could benefit both Ukraine and the European economy.
The Retaliation Excuse
One of the concerns raised about seizing CBR assets is the potential for Russian retaliation, including the seizure of Western assets in Russia. However, it is essential to recognize that Russia is already engaging in such activities. Furthermore, Western companies that invested in Russia despite warnings from their governments should not expect to be bailed out by Western taxpayers.
The Reserve Currency Excuse
Another argument raised is that seizing CBR assets could impact the reserve currency status of the Euro and other G7 currencies. However, this concern is unfounded, as the immobilization of CBR assets in 2022 had little impact on markets or bond prices. Additionally, any attempt by countries like Saudi Arabia or China to move away from G7 reserve currencies would be self-defeating, as it would lead to a flight back to quality and increased reserve currency status for G7 assets.
The Consequences of Inaction
In reality, failing to seize CBR assets could have more significant consequences for the Euro’s reserve currency status. A prolonged conflict in Ukraine, or a Ukrainian defeat, could lead to increased defense spending, higher budget deficits, and lower growth, ultimately undermining the credibility of the Euro and the European project.
Conclusion
In conclusion, the economic case for seizing frozen CBR assets to support Ukraine is clear. By providing a significant source of funding for Ukraine’s defense and reconstruction, these assets can help bring an end to the conflict, reducing the long-term costs and risks associated with a prolonged war. Furthermore, investing these assets in a sovereign wealth fund structure can generate returns that benefit both Ukraine and the European economy, while minimizing the risks of retaliation or impact on reserve currency status. Ultimately, it is essential to recognize the moral and economic imperative of using these assets to support Ukraine and ensure a stable and secure European future.
