25 March, 04:03 PM

Russia Must Pay Reparations

Anders Åslund

U.S. economist, senior fellow at the Atlantic Council

Vladimir Putin's war of aggression in Ukraine offers ample grounds for G7 countries to seize Russian assets within their jurisdictions to finance postwar reconstruction. These funds should be administered through a new multilateral body to ensure full transparency and sound public procurement.

While Russian President Vladimir Putin’s troops in Ukraine have been bogged down, Ukrainian forces have started regaining territory.

Ukraine’s Ministry of Defense issues daily reports on how many military assets Russia has lost. Three weeks after Russia’s invasion, the ministry said that 15,600 Russian soldiers had been killed – as many as the Soviet Union lost during nine years of war in Afghanistan.

The Ukrainians claim that they have taken out 40% of the 120 Russian battalion tactical groups deployed to Ukraine. The Russian army appears to be close to its breaking point and may yet be chased out of Ukraine.

Though it is far too early to declare any kind of victory, it is not too early to start thinking about what to do for Ukraine after Russian forces depart. Following Ukraine’s two previous national mobilizations – the Orange Revolution in 2004 and Euromaidan in 2014 – the momentum behind reform quickly petered out.

This time, the West needs to do more to help Ukraine get across the finish line, as Poland and others did after 1989.

Russia’s indiscriminate bombing and similar terrorist tactics have generated massive losses. Ukrainian President Volodymyr Zelensky’s economic adviser, Oleg Ustenkoestimates that the damage to his country already exceeds $100 billion – a reasonable tally, though it cannot yet be verified.

The Vienna Institute for International Economic Studies puts the cost of restoring the occupied Donbas region at $22 billion; and Ukrainian corporate claims at the Permanent Court of Arbitration in The Hague amount to about $10 billion. All these are claims on the Russian Federation, which should be compelled to pay reparations to Ukraine.

Fortunately, delivery of reparations payments is entirely possible. G7 countries have sensibly decided to freeze the Russian central bank’s currency reserves within their respective jurisdictions. All told, these funds are substantial, amounting to around $400 billion. They can now be confiscated – through national legislation in each country – on the grounds that Putin is committing crimes against humanity and the crime of aggression.

Russia’s offenses are not in question. On March 16, the top United Nations court, the International Court of Justice in The Hague, ruled by a vote of 13-2 (with Russia and China’s representatives dissenting), that Russia “shall immediately suspend the military operations that it commenced on 24 February.”

And earlier this month, the UN General Assembly demanded, by an overwhelming majority, that Russia “immediately, completely, and unconditionally withdraw all of its military forces from the territory of Ukraine within its internationally recognized borders.” Russia’s permanent membership of the UN Security Council does not give it immunity from international law. As US President Joe Biden has correctly pointed out, Putin is “a war criminal.”

In response, Putin has accused the United States and the European Union of defaulting “on their obligations to Russia” by freezing its international currency reserves. Apparently, he wants the world to believe that this “offense” is equal to his own war of aggression, with its thousands of unjustified murders, crimes against humanity, and war crimes.

Sticking to international law, G7 members should announce their intention to seize Russian funds and make clear to the Kremlin that it will have to pay for everything that it destroys in Ukraine.

The more damage it causes, the greater the deduction of funds from its account balances. This money should then be deployed through appropriate channels to benefit Ukraine.

To that end, the G7 can establish a Ukrainian Development Authority and select an oversight board to ensure good governance. The UDA should involve all relevant friendly international bodies – the EU, the US, the United Kingdom, Canada, the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development, the European Investment Bank, and the United Nations. Russia and its allies should be kept out.

The UDA should have several functions, the first of which is insurance. Ukrainian state agencies, companies, and individuals will have billions of dollars’ worth of insurance claims for the property that has been destroyed. Rather than being turned over to private and international insurance companies, these claims should be directed to the UDA. Otherwise, no one in Ukraine will be able to obtain any insurance for years. The risks – and thus the fees – would be prohibitive.

After Libyan agents planted a bomb on an airplane that blew up over Lockerbie, Scotland, in 1988, Libya eventually agreed to pay $2.7 billion in compensation to the victims’ families. Russia’s war of aggression in Ukraine falls into the same category: it is a terrorist attack, only on a far larger scale. And with the Lockerbie precedent, we can already judge how much compensation Russia will owe to its Ukrainian victims (or their families).

Ukraine also will need a kind of Marshall Plan for its reconstruction. Before the war, Zelensky gained popularity among Ukrainians with his push for road construction – a sorely needed infrastructure investment program that will now be needed even more. The UDA should assist in such efforts and provide ample financing for highways, ports, airports, railroads, and other forms of critical infrastructure.

The UDA should also be in charge of public procurement, as this is traditionally Ukraine’s greatest source of corruption. Fortunately, Ukraine has already developed an excellent electronic system, ProZorro, to improve transparency and ensure that money is used as directed. To reinforce honest governance, all legal disputes should be sent to international arbitration (which is usually in The Hague or in Stockholm).

But Ukraine cannot succeed unless its business environment improves. Postwar international support therefore will need to be conditioned on sound institutional reforms. The first step should be to reform the government itself so that it starts functioning normally. The top priority is to establish rule of law and reinforce property rights by reforming the judiciary, the prosecution services, and the State Security Service. Another priority is to sell off the thousands of state-owned companies, which breed corruption and waste, and implement proper corporate governance in the rest.

Finally, reform and financing will be needed to support Ukraine’s social sector – from health care to education. Although the human costs of Putin’s war are incalculable, the economic toll is not. Whatever the total comes to, Russia should foot the bill.

This column was first published by Project Syndicate. NV is republishing it with a permission from the author. 

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