The G7 Should Act with Urgency to Support an International Claims Mechanism to Seize and Transfer Frozen Russian Sovereign Assets to Ukraine

Remote Visualization

The world’s economic leaders—the United States, Canada, France, Germany, Italy, Japan, and the United Kingdom—will gather in Italy from June 13–15, 2024, for the 50th G7 summit to discuss, among other pressing issues, Russia’s war against Ukraine and how to enable Ukraine to win the war while sustaining international support for full compensation from Russia to Ukraine for damages and for Ukraine’s reconstruction. The transfer of Russian sovereign assets to Ukraine is on the agenda. Ukrainian president Volodymyr Zelensky will participate. The G7 should seize the opportunity to act with urgency on two critical issues: (1) the creation of an international claims mechanism that will hold in trust for Ukraine Russian sovereign assets intended as reparations for Ukraine and (2) an international claims commission to adjudicate allocation of these funds as compensation for damages or reconstruction.

Ukraine will be the G7’s biggest test during the summit: will the G7 countries announce agreement on a consensus approach to utilizing frozen Russian sovereign assets to support Ukraine? If so, what will be the details of the G7’s strategy? This paper seeks to outline the critical questions that must be answered in formulating the G7’s strategy to ensure Ukraine’s survival and economic recovery.

Ukraine’s Funding Needs Are Enormous and Immediate

Just as delay in the U.S. emergency supplemental appropriations package has had grave consequences for Ukraine, any delay in transferring frozen Russian sovereign assets to Ukraine will hinder Ukraine’s prospects to be victorious in its ongoing battle against Russia’s illegal aggression and rebuild its economy for a peaceful, democratic future.

The financing of Ukraine requires large sums of money to cover both military and civilian needs—well beyond the recent emergency supplemental package passed by the U.S. Congress. Ukraine’s military alone likely requires $130 billion annually to ensure a victory on the battlefield. The World Bank estimates that as of December 31, 2023, the total cost of reconstruction and recovery in Ukraine will be at least $486 billion over the next decade, and some experts estimate the cost may run as high as $1 trillion. To ensure that Ukrainians are justly compensated for their losses, the international community should establish an effective international claims mechanism, which requires a compensation fund that holds and distributes the money and an international claims commission to adjudicate claims—and importantly a consensus approach for utilizing the immobilized Russian sovereign assets held by the G7 and by Belgium’s Euroclear.

Russia Should Pay

There is broad international agreement that damages by wrongful state actions require compensation from the aggressor state. Despite this unified legal opinion, the G7 is divided as to whether confiscating Russian sovereign assets is the right approach to compensation. Hesitancy, particularly in Europe, appears to stem from concerns regarding Russian retaliation and from worries that confiscation might undermine the international willingness of nations and investors to hold assets denominated in the currencies of G7 countries. The retaliation fear appears unwarranted as Russia has already taken actions against investment holdings of G7-based companies within its jurisdiction. Concern about the long-term strength of the major reserve currencies is countered by the reality that central managers and investors have no significant alternatives. The long-term price may be higher if Russia is not held accountable.

REPO and PACE Taking the Lead

The Parliamentary Assembly of the Council of Europe (PACE) is out front in calling for the creation of an international claims mechanism. Indeed, pursuant to its action, a registry has already been established in The Hague. In April 2024, PACE passed a unanimous resolution and recommendation calling for the seizure and transfer of Russian sovereign assets to a new Ukrainian compensation fund and the establishment of an international claims commission to adjudicate claims for compensation. Moreover, the U.S. Rebuilding Prosperity and Opportunity for Ukrainians Act (REPO for Ukrainians Act, Public Law 118-50) has placed a mandate on the president to coordinate an international claims mechanism consisting of a compensation fund and a claims tribunal. When they meet in Italy in mid-June, the G7 leaders should endorse the rapid creation of an international claims commission building on the work of PACE.

Establishing a concrete mechanism that determines how the funds will be used may seem to be a daunting task. The good news is that the G7 leaders do not have to start from scratch as there are sound precedents in terms of the structure and operation of a compensation fund and claims tribunal.

Options to Make Russia Pay

The most direct approach is to confiscate all Russian sovereign assets, transfer them to an international compensation fund, and allow the fund to be allocated to approved claims. This is the approach contemplated by both the PACE actions and the new U.S. REPO law. An alternative option is for Ukraine’s allies to lend money to Ukraine and in return Ukraine would pledge as collateral a portion of its claims for war damages against Russia. Since Russia will likely decide not to cooperate, the syndicate of lenders (Ukraine’s allies) can then seize Russian sovereign assets within their jurisdictions as a setoff.

The European Union has an outsized role in making sure that Russia’s sovereign assets are utilized since it is estimated that about $229 billion of the frozen Russian sovereign assets are held in Euroclear, a Brussels-based central securities depository. Currently, a majority of EU member countries appear to support only utilizing future earnings or so-called windfall profits from these frozen Russian assets to compensate Ukraine, but not seizing the underlying assets.

Other than outright confiscation, the options that rely on lending to Ukraine backed by future earnings on frozen Russian sovereign assets may face legal headwinds related to the underlying authority for these types of transactions. If one of these novel approaches is ultimately supported by the G7, then it would be incumbent on the G7 to explain in detail the structure of the transaction and its underlying legal authority if it is to survive domestic skepticism.

The G7 appears in agreement that an international claims mechanism is necessary, but is not united on the approach to financing and so far has only been able to agree on using the interest from seized assets to fund the claims mechanism. “We are making progress in our discussions on potential avenues to bring forward the extraordinary profits stemming from immobilized Russian sovereign assets to the benefit of Ukraine,” a draft statement by the G7 finance officials said. But profits are clearly not enough and provide Russia hope that it can continue waging a war against Ukraine and have the assets unfrozen at some point. The G7 countries should not shy away from the complete transfer of assets and should emphasize the urgency and why it matters.

In general, there is broad agreement on an international claims mechanism for Ukraine consisting of three parts—a registry, a tribunal, and a compensation fund. The United Nations supported such a mechanism eight months after the full-scale invasion as the General Assembly adopted a resolution on Russian reparations in Ukraine. PACE followed similar steps when it adopted a resolution on April 16, 2024, to transfer frozen Russian assets to such a claims fund.

Iraq-Kuwait Precedent

The United Nations Compensation Commission (UNCC) was created in 1991 as a subsidiary organ of the UN Security Council in response to the damages Kuwait experienced as a result of Iraq’s invasion and occupation of its territory in 1990. The 15-member commission had a mandate to process claims and pay compensation for these losses and damages. Thirty years later (ironically on February 22, 2022, two days before Russia’s full-scale invasion), the Security Council unanimously adopted a resolution confirming that the UNCC fulfilled its mandate. As a result, 2.7 million claims were processed seeking $352 billion in compensation, and a total of $52.4 billion in damages awarded to 1.5 million claimants. The figures are expected to be much higher for Ukraine, but the Iraq-Kuwait experience offers a useful precedent. As of January 2024, Ukraine has recorded the damage or destruction of 250,000 buildings, at least 160,000 units of agricultural machinery, 16,000 units of public transport, 3,800 educational institutions, 580 administrative buildings, 426 hospitals, 348 religious institutions, 48 social centers, 31 boarding schools, and 31 shopping centers, according to the Kyiv School of Economics Institute.

The UNCC consisted of a three-part structure—the secretariat, commissioners (who reviewed and evaluated the claims submitted by entities), and a governing council which approved the compensations recommended by the panels. The UNCC also provided a set of legal definitions for damages as it established working groups of lawyers and experts of different fields on damage compensations. It also considered direct and indirect damages, as well as compensatory and punitive damages. Compensation was awarded for the repair or replacement of damaged property, medical bills, lost earnings, and reparations for physical or emotional suffering, among other things. The revenue was generated by Iraqi frozen assets and revenue from Iraqi oil exports. Overall, this was an effective mechanism.

The UNCC, in the context of the Iraqi-Kuwait invasion, is perhaps the most applicable example as it was more recent and successful. It delivered a significant amount of compensation and satisfied the objectives set at the time it was created, and it resulted in Iraqi money being used to compensate Kuwait for the unlawful invasion. Other precedents include the U.S.-Iran dispute—when in 1981 the two countries agreed through the Algiers Accords on a claims commission to settle disputes over the 1979 takeover of the U.S. Embassy in Tehran—and the Eritrea-Ethiopia claims commission, which was set up in 2000 after an armed conflict between the two nations. However, the Iraq-Kuwait example is the most applicable for Ukraine.

Critics might point out that the compensation for Kuwait happened after the war. War, however, has little influence on the compensation process as the mechanics remain the same. Furthermore, the Ukrainian example can set a precedent of a country being compensated during war. Others may say: “Why should Ukraine be the only country receiving a transfer of assets during ongoing conflict?” Ukraine could prove to be a successful example of compensation during war. It might become a deterrent for other countries contemplating aggression. As such, perhaps it would gather strong support from a broad array of nations, including in the Global South.

As with Kuwait, it is the United Nations that is assuming the authority of the international legal framework when it comes to compensating Ukraine for the damages caused by Russia’s aggression. In Ukraine’s case, however, it is the UN General Assembly that called for a claims mechanism to be established, whereas in Kuwait’s situation it was the UN Security Council. But considering that Russia is a permanent member of the Security Council, this option is not a possibility for Ukraine.

As with Kuwait, the international claims mechanism established by the United Nations for Ukraine in 2022 is expected to consist of three major components: a claims registry for damages (which the Council of Europe has already established for Ukraine), an international claims commission for adjudicating claims against Russia, and a compensation fund to hold assets for reparations and reconstruction. The Register of Damage has been accepting claims as of April 2, 2024. The claims commission and compensation fund are being considered, but there are still questions regarding their structure, process of operation, and procedures to ensure full transparency and accountability.

The Council of Europe should be mandated to play a leading role in the establishment and administration of the international claims mechanism for Ukraine, but currently there is no clear vision or strategy to bring the claims mechanism into operation since currently there is a lack of political consensus on the utilization of immobilized frozen Russian sovereign assets. G7 leaders should act now and support the full implementation of the PACE recommendations.

The Scope of Claims

An unresolved issue regarding the transfer of assets has to do with the scope of claims that the mechanism will consider for adjudication: should funds be allocated only for reconstruction or physical damage or will funds go to current budget support? Will funds go to support the Ukraine military? Who can file a formal claim—an individual, a legal entity, or only governments? Must claims relate only to damages that happened on Ukrainian territory? May claims relate back to March 2014, when the war initially started, or only to February 2022? Are all Ukrainian citizens allowed to file claims or only those Ukrainians currently residing in Ukraine? 

The Importance of the REPO for Ukrainians Act

The Rebuilding Economic Prosperity and Opportunity (REPO) for Ukrainians Act included within the bipartisan national security supplemental, enacted on April 24, 2024, authorizes the U.S. president to confiscate all Russian sovereign assets in the United States for Ukraine. This new authority includes not just Russian central bank reserves, but all sovereign assets, including state-owned enterprise assets and funds and other property from U.S. financial institutions in correspondent accounts and foreign branches. REPO mandates that the president seek to coordinate with his G7 and EU counterparts on the international claims mechanism—an important aspect of the president’s overall Ukraine strategy since the full-scale invasion. The bill specifically states that the United States should coordinate with allies and partners on this issue.

The U.S. administration is looking for novel ways to provide additional funding for Ukraine at no expense to taxpayers, since the amount required to finance a Ukrainian victory is enormous. It understands that there is no guarantee that the next national security supplemental appropriations legislation will pass, considering the difficulty and delay of the last one. As the administration seeks these novel ways to find substitutes for U.S. taxpayers’ money to finance this monumental sum on a sustainable basis, the first logical approach is the use of frozen Russian sovereign assets. The REPO Act lays out a clear pathway to move forward and provides a model for other G7 and EU nations to follow. Moreover, this approach is consistent with the recent unanimous PACE recommendations. For the first time, the new law gives the president the authority to seize sovereign assets of Russians and potentially Belarusians if the president determines that they meet the criteria of an affiliated aggressor state to Russia. There also is a mandate within that authority to seize assets that also extends to reporting requirements and to coordination with allies regarding the international compensation mechanism. For example, the bill requires U.S. financial institutions to report to the U.S. government their holdings of all Russian sovereign assets. This will allow the United States to potentially identify more assets than it previously estimated.

Transparency, Accountability, and Good Governance

An effective compensation commission needs to be bullet proof from charges of corruption and abuse by ensuring full transparency, public reporting, accountability, and good governance as now required by the REPO Act in the case of the United States. These features will have to be established and overseen by an independent inspection body that ensures that these large sums are being managed fairly. If Ukraine and its partners fail to make certain that the transfer of funds is immune to corruption, then the transfer will likely not happen and needed funds will be delayed in helping Ukraine.

Settlement Consideration

The decisiveness of the G7 leaders on the transfer of frozen Russian sovereign assets to Ukraine may also be entwined with how they view the connection of the issue to ultimate settlement negotiations with Russia. If they see frozen assets as a settlement card with Russia, then the transfer may likely not happen anytime soon. The G7 leaders should be reminded of a more effective approach: if Russia sees that it is losing its frozen sovereign assets scattered in both G7 and EU nations in real time, then it is more likely that it will be forced to reconsider its current posture vis-à-vis Ukraine from both a military and economic perspective. This action will be consistent with how Russia is perceived by the international community represented in the UN General Assembly, which condemns Russia’s illegal invasion of Ukraine and has called for full compensation for all damages. Currently, Russia believes that it can continue attacking and destroying Ukraine and go unpunished, a situation that the G7 should not allow to stand if it is sincere with respect to its full support to help Ukraine and ensure its victory in the face of Russia’s unprovoked and ongoing aggression in violation of international law.

The Project on Prosperity and Development at the Center for Strategic and International Studies convened a scoping session on May 29, 2024, which focused on solutions for an effective international claims mechanism for Ukraine. This commentary was inspired by and resulted from this scoping session.

Daniel F. Runde is a senior vice president, William A. Schreyer Chair, and director of the Project on Prosperity and Development at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Ilya Timtchenko is the program manager and research associate with the Project on Prosperity and Development at CSIS.

Daniel F. Runde
Senior Vice President; William A. Schreyer Chair; Director, Project on Prosperity and Development
Ilya Timtchenko
Program Manager and Research Associate, Project on Prosperity and Development