Everyone wants to take Russia’s money, but it’s a bad idea

The Speaker of the House of Representatives, the Republican Michael Johnsonbrought a ray of hope to those who support Ukraine’s war effort.

On March 31, a Fox Newshe suggested he would try to encourage his divided party to support the call REP law (acronym for Rebuilding Economic Prosperity and Opportunity).

Such legislation would enable the president Joe Bidenin collaboration with its European allies, seize frozen Russian foreign exchange reserves in the West and use them to help Ukraine.

Appropriating these reserves would be convenient from a political point of view.

Since Russia’s invasion of Ukraine in February 2022, the United States and its allies have invested more than a quarter of a billion dollars in the war, with few concrete results. Ukraine has suffered a series of battlefield defeats lately.

Prolonging the war is a project that Americans of all political persuasions have increasingly expressed less willing be financed through taxes.

Johnson supports the Ukrainian war effort and sees supporting it as a responsibility of the American leadership.

But his caucus – more in tune with the Republican voter base – stymied him.

The REPO Act could offer both Johnson and Biden a way to sidestep the controversy.

So far, the idea of ​​supplying Ukraine through a spending law has arisen rejection from Republicans in Congress, who wonder whether American taxes couldn’t be better spent on strengthening the U.S.-Mexico border.

The REPO law, on the contrary, could make “Russia pays the bill of its own aggression,” as a group of academics from the Brookings Institution put it.

Johnson himself describes it as “pure poetry”.

It’s a tempting idea.

Against

But it’s also a bad idea.

In every free country there exists a constitutional suspicion allow the government to do anything without collecting taxes, for good reason.

Taxes and liabilities go hand in hand.

Typically, if citizens don’t pay for a government program through taxes, they do so in a less direct way: by going into debt, for example, or by allowing outsized government participation in some company or other private interest.

The REPO law carries additional risks.

The very act of seizing Russian assets would increase dangers for the American economy, because other countries, not just Russia, would consider it an act of plunder.

This may weaken the status of the dollarr as the world’s main reserve currency.

The dollar is probably the most valuable strategic asset the United States has.

Let’s exercise a certain degree of control on the world economy because the world, for commercial purposes, allows its transactions to pass through our currency.

This leaves us with lower transaction costs and lighter finance burdens.

It gives us space to accumulate debts (34 billion dollars so far) that other countries do not have.

If Russia, China and other diplomatic rivals decide that their dollar assets are vulnerable and that they can no longer rely on the dollar as a medium of exchange, we would feel the painr of that $34 trillion in debt in a way that we don’t currently believe.

Maintaining the benefits of a reserve currency depends on our behavior reliable and neutral custodians of the goods of others.

If we started stealing other people’s money, things could change.

Resources

At the beginning of the war, Russia had approx 600,000 million of dollars in reserves.

This means securities in euros, dollars, pounds, yen and other stable and convertible currencies, as well as gold.

In normal times, Russia, like other countries, manages these currencies to facilitate trade and stabilize its currency.

A small portion of that money – a few billion dollars – is in the United States.

Most of the talk about the seizure of Russian assets is approximately 300,000 million of dollars held in Europe, most in a warehouse in Belgium called Euroclear.

Although the Europeans regulate this money, since the war they have generally followed the United States’ lead in diplomatic and strategic matters.

Some European countries, especially Germany, have urged cautious before deciding to appropriate Russia’s reserves, fearing that such a move could jeopardize the euro’s status as a (minor) reserve currency.

The REPO law could push them to act more aggressive.

The European Union has proposed a compromise between leaving the money alone and seizing everything.

He asked Euroclear to keep it separate accounts the profits generated by its Russian activities.

These profits could then be taxed at a high rate and these profits could be given to Ukraine, a accounting maneuver which is expected to generate approximately $3 billion per year.

Other Europeans have proposed a more reckless strategy.

They claim that the hundreds of billions of Russian dollars should be used as collateral for a large Western war loan to Ukraine, to be repaid with advance compensation, for which the European Union could replace Ukraine as the borrower.

These debates boil down to the difference between freezing assets and seizing them.

In recent months, Biden and his administration have advocated taking direct possession of Russian reserves and using them to finance the war against Russia, a move that would be at least radical, if not completely unprecedented.

Freezing bookings is something that happens regularly.

But seizing them is something that has only been done under circumstances drasticand only to a limited extent.

The United States came to a standstill Iranian assets in the early days of the 1979 hostage crisis, but most of them were freed two years later.

The frozen assets were used to pay war reparations Kuwaiti casualties of the invasion of Iraq in 1990, but this was done according to a plan approved by UN Security Council Next year.

The United States confiscated approximately $1.7 billion Iraq in 2003, but it was in the middle of the war.

And in September last year, Biden himself returned a few billion dollars in frozen assets to Iran as part of a deal that repatriation of Americans imprisoned there.

It usually freezes This did not mean confiscation.

Changes

However, things began to change with the chaotic withdrawal of US troops from Afghanistan in the summer of 2021.

The Biden administration subsequently stalled 7 billion dollars in the country’s reserves and allocated half of it for a compensation fund for the families of the victims of the attacks Sept. 11.

Although it could be said that this was a war measure, this type of seizure was irregular and surprising.

Few saw it as a precedent:

The Russian central bank did not hide its reserves through shell companies or other tricks on the eve of the invasion of Ukraine.

No one appears to have considered the possibility that a foreign banking authority might do so just take the money.

Biden and Johnson, each in their own way, claim the moral leadership of their respective parties.

“American leadership is what holds the world together,” Biden said last fall, saying that walking away from Ukraine would put that leadership at risk. Johnson has accused Biden of “projecting weakness” in his foreign policy and is presenting an alternative.

The biggest concern is not moral but practical.

If the REPO Act were to take effect, currency seizures, currently perceived as a tool of last resort, could become standard operating procedure, to the detriment of the United States.

Any foreign government that might have an opposing American voting bloc – China, for one – would think twice before investing its resources in the United States or one of its NATO allies.

This is not yet a probability, but it is a possibility that no politician of either party should lose sight of.

For decades, the United States has put off difficult decisions at home and abroad and masked partisan divisions with the tens of trillions of dollars that our advantageous international position has allowed us to borrow.

Our options, however, are narrowing.

If Johnson thinks America is “projecting weakness” now, wait until you see the nation. without its reserve currency.

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