Europe's Financial Suicide
Another devastating package of sanctions for Russia is in the works, the nineteenth one, crafted by the bureaucrats in Brussels.
Europe continues to cut off its last remaining ties with the Russian economy.
It is doing so publicly and on principle.
But sanctions don't work, not generally, and not in the long term.
This approach is loud, menacing, and ineffective. You can ban Russian energy companies and prohibit doing business with them in Europe, but they have already mostly repositioned themselves in other markets.
Due to the loss of inexpensive Russian raw materials, the price of European goods has increased, and their competitiveness will likely continue to decline.
The mounting economic challenges facing the European Union are a clear indication of this trend.
The impact of the current European sanctions on Russian banks and financial institutions is minimal as well. Any painful measures Brussels could have taken have already been taken. The key issue here is the frozen Russian financial assets in Euroclear that Europeans are trying to exploit.
For Brussels, there's a sort of charm of frozen assets.
Backed by France, Germany, and several other EU countries, the European Commission's latest scheme aims to provide Kyiv with €140 billion in frozen Russian assets.
However, this plan carries unprecedented risks. Essentially, it is a poorly disguised form of expropriation.
Proponents of the plan argue that it is a loan to Ukraine, secured by the assets' value. Technically, the EU does not dispute Moscow's ownership.
Nevertheless, investors remain unconvinced. The world of big money is built on predictability and a set of widely accepted rules based on the protection of property rights.
Confiscating Russian assets would damage the reputation of European financial institutions. Amid growing macroeconomic pressure on key countries, the EU will scare away those who wish to keep their money in Europe. This will primarily affect countries in Asia and the Middle East.
While these problems may have remained Europe's alone, the EU's actions could still directly harm America.
The devil is in the specifics.
The total amount of frozen Euroclear Russian assets is 258 billion euros. Of that, 55 billion euros are assets of the Moscow National Settlement Depository, which was sanctioned in 2022. Another 10 billion euros are held by Russian banks whose depositors are not primarily on sanctions lists.
Many of these are transfers to Western counterparties, including American ones. For example, there is a 2.25 billion euro deposit that is set to be returned to JPMorgan Chase.
Unsurprisingly, Moscow's counterparts in most cases prefer to keep a low profile and are not eager to loudly defend their rights.
Another issue is the legality of such actions.
In September 2023, the European Union court ruled that individuals not on sanctions lists are entitled to the return of their assets.
However, the Belgian Treasury still refuses to comply with this decision, citing the need to ensure the EU's financial security.
This creates a legal conflict and the basis for numerous lawsuits against the Belgian government. The Belgian Council of State is already considering over 200 similar claims. Naturally, the authorities are doing everything they can to slow down the review and execution process. Nevertheless, the investors who were robbed are unlikely to abandon their property claims.
If the European Commission implements its proposed plan to seize some of Russia's frozen assets, Europe will face systemic consequences. Investors will question the security of their portfolios, and the euro, which has accounted for around 20 percent of global reserves in recent years, will lose its global influence.
Rising political risks will make European assets less attractive, raising borrowing costs and hindering long-term investment opportunities. The success of the Capital Markets Union, which is critical to Europe's future, will be called into question.
However, these unprecedented actions by Europe will directly damage the U.S. dollar.
Additionally, the reputation of Western financial institutions will suffer, which will negatively impact the global economy.
In particular, it is fully understood by Beijing that similar actions may be taken against China in the future. This is particularly crucial in the context of the ongoing intensification of the trade and economic tensions between China and the United States.
Xi Jinping has already demonstrated his willingness to escalate the situation by imposing strict restrictions on the supply of rare earth metals and magnets. Further escalating the trade war and beginning a tough financial confrontation with China hardly serves American interests.
American interests have to come first.
Similar assessments of the consequences of confiscating Russian assets were made in 2023 by Robert J. Shiller, the 2013 Nobel Prize laureate in economics and a professor at Yale University.
Even at the height of the Cold War, the West did not seriously consider plans to confiscate USSR assets due to the risks of losing control.
However, Europe's bold plan signals that the international financial system is entering a new era in which political expediency trumps legal principles.
The U.S. must ensure that Europe's financial recklessness does not harm America's financial health.
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