Commentary on Political Economy

Monday 6 May 2024

SANDBU'S RUSSIAN SALAD

 Authoritarians fear transparency — liberal democracies should embrace it


Martin Sandbu martin.sandbu@ft.com · 6 May 2024


In the run-up to Vladimir Putin’s full-scale attack on Ukraine, the US government’s decision to publicise its intelligence on Russian plans turned out to be a strategic triumph. It allowed the west to prepare for the worst, rally domestic public opinion and move more swiftly, forcefully and concertedly than anyone would have expected in the economic and diplomatic war that broke out alongside the one on the battlefield.

Today the US is again in a position to use transparency to secure strategic advantage — and this time, Europe can and should follow suit.

Among the lesser-noticed parts of a new law empowering the US president’s ability to seize Russian state assets (itself a lesser-noticed part of the package of bills passed to fund Ukraine) is a requirement on him to report to Congress what assets the Russian state holds in the US. Technical work is now starting to define the scope of what financial institutions must report and the government make public.

It is essential that the net be cast as wide as possible, and that the EU, the other G7 states, and the remaining countries that have immobilised Russian assets take the same steps. Since blocking Russia’s access to its reserves just days into the full-scale invasion, no sanctioning government has produced a sufficiently public and comprehensive accounting of what assets Moscow held in their jurisdiction before the war and what has happened to them since.

There is an ongoing debate about whether Russian state assets should be seized outright to enforce Moscow’s obligation to compensate Ukraine, with Japan and the EU G7 members the most resistant to doing so. But no good argument has been proffered for keeping secret what those assets are. It took the EU a year to require member states even to collect and share such information internally. What has been said in public has been patchy, short on detail (never more than a single number) and informal. The UK, the US and Canada have been no more transparent.

This furtiveness has been damaging. It has signalled to Putin that the west is weak-willed. It has sustained confusion and ignorance in the public debate on how to help Ukraine financially. Above all, it may have obscured even to the top policymakers and our political leaders what our full range of policy options are.

The Repo Act, the new US legislation mandating more disclosure, illustrates the problem. Its “Sense of Congress” portion references media reports that only $4-5bn of Russian reserves are in the US. But we know from Euroclear, the Belgium-domiciled custodian of most of the blocked assets (which has been more forthcoming with numbers than any government), that it has accumulated around $15bn in US dollar cash as Russian-owned dollar-denominated securities have matured.

This cash sits somewhere in the US financial system, presumably in Euroclear’s correspondent bank(s). And the Russian central bank may have other holdings with private US financial institutions. Only a detailed public accounting including transaction histories since before the full-scale invasion will fill these holes in our knowledge.

Conversely, transparency can be a strength. Repo refers not just to central bank reserves but to Russian state assets generally. The US has an opportunity to cast a light on where other parts of Moscow’s money may lie — such as any nonsanctioned dollar payments to stateowned energy companies for oil and gas in the past two years. Such “shadow reserves” of accumulated export surpluses are of the same scale globally as the blocked central bank assets. But finding them requires detailed transaction histories and the broadest possible interpretation of “state assets”.

A warning for Europeans to heed: the embrace of transparency offers a firstmover advantage. If the US, UK and Canada publish everything they know about Russian reserves, they will expose Euroclear balances of nearly $60bn in their financial institutions or central banks. In the last instance, the “Anglo” members of the G7 could home in on this money and treat it, too, as arising from Russia’s reserves and subject to possible seizure.

The G7 would be better served by a race to the top on openness about Russian state assets. It would clear much of the fog, regain initiative in the economic security arena, and reset some of the political stand-off on how to fulfil the unanimous promise to make use of the blocked reserves for Ukraine’s benefit.

And it would, finally, demonstrate once again that in a battle between democracy and authoritarianism, democracies have as much to gain from embracing transparency as authoritarians have reason to dread it.

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