Why seizing and selling Russian assets is dogged by legal issues

Good morning and welcome to Europe Express.

It’s a short but packed week, with leaders exceptionally gathering in Davos for a summer edition of the World Economic Forum (here’s the FT primer on it).

One idea that may pop up in the various forums ahead of next week’s EU summit is the idea of seizing and selling off Russian assets to pay for Ukraine’s reconstruction.

We’ll also look at what finance ministers meeting in Brussels today and tomorrow for their regular eurogroup-Ecofin combo are likely to discuss. One emerging prospect is the need for an extra EU budgetary top-up, given all the Ukraine-related expenditure, as the FT reports.

And with the World Trade Organization’s ministerial meeting fast approaching, we examine its checklist of reforms.

EU institutions (and some capitals) are engaging in the tradition of faire le pont (around Ascension day, for those observing), so we’ll be off on Thursday and Friday, and back in your inboxes on Monday.

To confiscate or not; that is the question

Valdis Dombrovskis, European Commission executive vice-president, struck an uncompromising note last week when asked about the idea of confiscating Russian assets to pay for the reconstruction of Ukraine, writes Sam Fleming in Brussels.

There was, he said, a principle of “aggressor pays” that applies, as he called for the net to be cast wide when it comes to examining the confiscation of both private and public Russian assets. “We must make Russia pay for the damage it is creating,” the Latvian commissioner said.

Behind the scenes, the topic is proving a divisive one between member states, some of which are wary of the legal and political tripwires the EU will encounter as it examines asset confiscation.

Diplomats last week debated whether asset confiscation should be discussed at EU leaders’ level as soon as this month’s European Council meeting, after the topic appeared on draft summit conclusions. Opinions varied sharply.

As a reminder, there are two main avenues for Ukraine’s allies to pursue here: either confiscating the frozen assets of Russian oligarchs who have been placed under sanctions, or seeking to liquidate some of the frozen assets of the Russian central bank.

The former route is less lucrative in terms of the money raised, but it may be legally easier to pull off than the latter, which would mark an extraordinary precedent and raise complications within international law.

The draft European Council conclusions would have EU leaders welcoming “efforts made with a view to providing for appropriate confiscation measures, including exploring options aimed at using frozen Russian assets to support Ukraine’s reconstruction”.

But in a meeting of EU diplomats on Friday a number of member states sounded wary about the idea of having a leaders’ debate on the topic, according to people familiar with the meeting, noting how delicate it is, as well as the need to ensure compliance with national and international law.

Among the countries that are cautious in this area is Germany, where even enforcement of asset freezes is patchy, because of constitutional law restrictions. The country’s fundamental law explicitly says that expropriation by the government can occur only “for the public good” and must be combined with compensation — which could open the door for massive compensation lawsuits from Russians hit with sanctions.

The upshot is that it is not yet clear if the wording will make it on to the EU leaders’ menu when they gather a week from now.

That said, the commission is pretty active in this area already. This week it is due to propose a new directive on asset recovery and confiscation, along with a council proposal on adding the evasion or violation of sanctions to criminal law.

The latter is important, because it is easier to engineer the seizure of assets as part of a criminal process, and not all member states currently have sanctions evasion on their list of offences.

Chart du jour: Deglobalisation talk

Read more here about why talk about deglobalisation among companies has mounted in recent weeks. Mentions of nearshoring, onshoring and reshoring on corporate earning calls and investor conferences are at their highest level since in nearly two decades.

Fiscal rules, postponed again

The commission is expected today to confirm its proposal that the EU’s debt and deficit rules should remain suspended for another year as it releases a swath of economic recommendations to member states in its “semester” process, writes Sam Fleming.

The intended suspension of the Stability and Growth Pact (SGP) until 2024 is not without controversy inside the commission, given that the latest growth forecasts by no means show the kind of nosedive in output that accompanied the EU’s initial decision to freeze the rules in 2020.

The commission’s latest forecast was for 2.7 per cent growth this year and 2.3 per cent in 2023, in both the eurozone and the EU as a whole.

EU fiscal hawks are already warning of the risks of fiscal indiscipline being taken too far. Germany’s finance minister Christian Lindner said in an interview with the Financial Times over the weekend that the fact that member states are now able to deviate from the SGP doesn’t mean they actually should do so.

And for high-debt countries, among them Italy (here is FT’s deep-dive into the country’s economic woes), the message from Brussels remains that current spending needs to be kept in check, even while investment demands rise. One country heeding that message is Portugal, whose finance minister has vowed to push through policies aimed at removing his country from the top three most indebted economies in Europe (just behind Greece and Italy), to protect families and businesses from the impact of higher interest rates.

For the commission, the key goal is ensuring the growth rate of current expenditure is kept below potential GDP growth rates in high-debt economies.

The semester recommendations come alongside meetings of finance ministers both today and tomorrow. Among the items on the agenda are the eurogroup’s upcoming decision on the next chief of the European Stability Mechanism.

And for EU finance ministers tomorrow one key question is whether Poland will finally drop its opposition to the minimum effective corporate tax rate that the EU is seeking to implement pursuant to last year’s OECD deal.

France’s finance minister Bruno Le Maire has been pushing for a deal on the corporate tax rules under France’s EU presidency, but the clock is ticking given Paris’s six-month stint expires at the end of June.

What’s in a meeting

In Geneva the World Trade Organization is preparing for a much-hyped ministerial meeting that is on course to achieve very little, writes Andy Bounds in Brussels.

It is three weeks until trade ministers finally jet in for their get-together dubbed MC12, which has been delayed for a year by the Covid-19 pandemic.

The extra time has not brought the big trading blocs any closer together on the issues that need settling, however.

There are four priority topics, and despite tireless work by some WTO ambassadors and officials, and director-general Ngozi Okonjo-Iweala, agreement is far away. Here are some of the key topics.

• An intellectual property waiver to allow developing countries to manufacture Covid vaccines. A deal between the four main interested parties — the EU, US, India and South Africa — was discussed last week and hit heavy opposition. The US wants China excluded from any deal to allow poorer countries patent waivers to make western vaccines. The UK and Switzerland, with big pharmaceutical industries, are demanding a bigger role in talks.

• Farm policy: Talks on abolishing hidden export subsidies, domestic support, and opening up markets to imports are stalled. But with India determined to defend its vast grain stockpiles and export bans, “WTO members are unlikely to agree on anything substantial on agriculture”, says Peter Ungphakorn, a former WTO official and trade commentator.

• Fishing: Colombia’s WTO ambassador Santiago Wills has been working overtime to eliminate the most damaging overfishing practices. He said on Friday that there were “positive vibes” but added “we are not done yet”. “It is clear that to reach an agreement before MC12, we must get this done no later than the week of May 30, which I see as ‘fish decision week’”. Again, India is blocking a deal by demanding poorer nations are exempted from some provisions.

• WTO reform: There has not been a meaningful multilateral trade deal since it was founded in the 1990s. The appeals panel that hears disputes is not functioning because the US refuses to nominate members. Ministers are likely only to agree to set up a group to examine reform to report back to the next ministerial meeting, hopefully in one year’s time.

Expectations are low overall. Asked what the best achievement from MC12 would be, one senior EU official said: “Having a meeting.” 

What to watch today

1. EU affairs ministers and, separately, eurozone finance ministers meet in Brussels

2. Ukraine’s president Volodymyr Zelensky addresses World Economic Forum in Davos

3. European parliament chief Roberta Metsola visits Israel

. . . and later this week

1. EU finance ministers meet in Brussels tomorrow

2. Nato and EU leaders speak at the World Economic Forum tomorrow and Wednesday

Notable, Quotable

The situation is evolving and WHO expects there will be more cases of monkeypox identified

• Smallpox jabs: With cases of the new monkeypox disease on the rise, EU’s infectious-disease agency is to recommend that member states devise vaccination strategies with existing smallpox jabs, as there is no approved monkeypox inoculation as of yet.

• Borne identity: Élisabeth Borne, France’s new prime minister-to be, is the daughter of a Resistance fighter and more of a political animal than most give her credit for, although she still needs to prove she can connect with a broader public.

• Lithuanian freedom: As of yesterday, Lithuania became fully independent of Russian oil, gas and coal — in what its government described on Twitter as a “mission possible”.