Like any other powerful weapon, financial sanctions should be deployed in accordance with international legal principles. That is why the G7 and the G20, together with the international financial institutions, should establish a multilateral framework to govern their use.
LONDON – As Russia’s war against Ukraine has entered its third year, Western governments are finding it increasingly difficult to muster the funding Ukraine needs to defend itself. The European Union struggled to reach a €50 billion ($54 billion) aid deal in February, and the United States remains deadlocked over its own $60 billion funding package. Now, calls to use Russia’s own assets to fund the Ukrainian war effort are growing louder.
At stake are some $300 billion in central-bank reserves, which Western governments – including the EU and the US – froze immediately after Russia invaded, in an effort both to punish Russia and to limit the resources it could use to finance its aggression. It was a radical move: the last time comprehensive financial sanctions were imposed on a major country, with broad – though not universal – international acceptance, was in the 1930s, against Italy and Japan. (The sanctions against Russia triggered by its 2014 annexation of Crimea were far less extensive than those imposed in 2022.)
The US now wants to take an even bolder step, confiscating Russia’s assets and transferring them to Ukraine. Their argument is straightforward: Russia should be made to compensate Ukraine for its illegal and highly destructive war. Russia’s central-bank reserves would fulfill – at least in part – Ukraine’s valid claims for war damages.
But even if the US – with the support of the EU and the G7 – manages to craft a plausible legal argument for confiscating Russia’s reserves, it is not clear that this would be the right move. In fact, seizing Russia’s assets would represent a significant escalation, not only jeopardizing Western dominance in the international monetary and financial system, but also establishing a dangerous precedent in international law.
Financial sanctions are a weapon that affects a country’s external monetary sovereignty and its ability to manage its currency, reserves, and payment system. Like any other powerful weapon, they should be deployed in accordance with international legal principles and clear governance. To this end, the G7 and the G20, together with the international financial institutions, should create a multilateral framework to govern financial sanctions’ use.
Such a framework must recognize the US dollar’s critical role in the international monetary system, as both a vehicle currency and a reserve asset. The dollar’s dominance – its international liquidity and acceptance remain unmatched – means that countries are willing to limit their monetary sovereignty for the convenience of using the greenback. Today, approximately 80% of international trade transactions, and 60% of international payments, are carried out in dollars.
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There is little reason to expect this to change any time soon. As then-US Treasury Secretary John Connally famously put it in 1971, “the dollar is our currency, but your problem.” With the US and its allies embracing financial sanctions to achieve geopolitical objectives, Connally’s dictum might be even truer today, with implications that extend well beyond the war in Ukraine.
Already, some countries and regional blocs – such as the BRICS, which now comprises Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran, and the United Arab Emirates – are pushing for alternative payment systems that are less reliant on the dollar. The China-led Cross-Border Interbank Payment System (CIPS) and Digital Currency Electronic Payment (DCEP) system are intended to act as an alternative to the Western-led Society for Worldwide Interbank Financial Telecommunication (SWIFT) platform.
While the emerging alternative monetary and payment systems would not replace the existing architecture – at least not soon – they could lead to fragmentation of rules, standards, and even institutions, in turn causing even more international tension and instability. What a peaceful and prosperous world actually requires are shared institutions and rules.
The prospect of former US President Donald Trump’s possible return to the White House in 2025 makes a system of global governance of financial sanctions all the more urgent. Regardless of who is in charge in 2025, countries that depend on the US dollar for saving and borrowing, and for invoicing and settling trade transactions, must be able to trust that their assets will not be seized or frozen, and their ability to make international payments will not be curtailed, on a political whim.
A multilateral framework governing financial sanctions would allow for their use in extreme situations, such as when a country violates international law by launching an unprovoked invasion of another sovereign’s territory. As was the case with Russia, this can serve both to punish illegal behavior and curb perpetrators’ capacity to continue engaging in it, while deterring similar behavior by others.
But such a framework would also establish conditions that must be met before sanctions could be applied – beginning with the requirement that a clear breach of international law has occurred – so that they are not imposed on flimsy grounds. And it would include mechanisms to ensure accountability for violations. Only then can the global financial system continue to function in a way that benefits all countries that depend on it, not just those in charge.
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LONDON – As Russia’s war against Ukraine has entered its third year, Western governments are finding it increasingly difficult to muster the funding Ukraine needs to defend itself. The European Union struggled to reach a €50 billion ($54 billion) aid deal in February, and the United States remains deadlocked over its own $60 billion funding package. Now, calls to use Russia’s own assets to fund the Ukrainian war effort are growing louder.
At stake are some $300 billion in central-bank reserves, which Western governments – including the EU and the US – froze immediately after Russia invaded, in an effort both to punish Russia and to limit the resources it could use to finance its aggression. It was a radical move: the last time comprehensive financial sanctions were imposed on a major country, with broad – though not universal – international acceptance, was in the 1930s, against Italy and Japan. (The sanctions against Russia triggered by its 2014 annexation of Crimea were far less extensive than those imposed in 2022.)
The US now wants to take an even bolder step, confiscating Russia’s assets and transferring them to Ukraine. Their argument is straightforward: Russia should be made to compensate Ukraine for its illegal and highly destructive war. Russia’s central-bank reserves would fulfill – at least in part – Ukraine’s valid claims for war damages.
But even if the US – with the support of the EU and the G7 – manages to craft a plausible legal argument for confiscating Russia’s reserves, it is not clear that this would be the right move. In fact, seizing Russia’s assets would represent a significant escalation, not only jeopardizing Western dominance in the international monetary and financial system, but also establishing a dangerous precedent in international law.
Financial sanctions are a weapon that affects a country’s external monetary sovereignty and its ability to manage its currency, reserves, and payment system. Like any other powerful weapon, they should be deployed in accordance with international legal principles and clear governance. To this end, the G7 and the G20, together with the international financial institutions, should create a multilateral framework to govern financial sanctions’ use.
Such a framework must recognize the US dollar’s critical role in the international monetary system, as both a vehicle currency and a reserve asset. The dollar’s dominance – its international liquidity and acceptance remain unmatched – means that countries are willing to limit their monetary sovereignty for the convenience of using the greenback. Today, approximately 80% of international trade transactions, and 60% of international payments, are carried out in dollars.
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Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
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There is little reason to expect this to change any time soon. As then-US Treasury Secretary John Connally famously put it in 1971, “the dollar is our currency, but your problem.” With the US and its allies embracing financial sanctions to achieve geopolitical objectives, Connally’s dictum might be even truer today, with implications that extend well beyond the war in Ukraine.
Already, some countries and regional blocs – such as the BRICS, which now comprises Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran, and the United Arab Emirates – are pushing for alternative payment systems that are less reliant on the dollar. The China-led Cross-Border Interbank Payment System (CIPS) and Digital Currency Electronic Payment (DCEP) system are intended to act as an alternative to the Western-led Society for Worldwide Interbank Financial Telecommunication (SWIFT) platform.
While the emerging alternative monetary and payment systems would not replace the existing architecture – at least not soon – they could lead to fragmentation of rules, standards, and even institutions, in turn causing even more international tension and instability. What a peaceful and prosperous world actually requires are shared institutions and rules.
The prospect of former US President Donald Trump’s possible return to the White House in 2025 makes a system of global governance of financial sanctions all the more urgent. Regardless of who is in charge in 2025, countries that depend on the US dollar for saving and borrowing, and for invoicing and settling trade transactions, must be able to trust that their assets will not be seized or frozen, and their ability to make international payments will not be curtailed, on a political whim.
A multilateral framework governing financial sanctions would allow for their use in extreme situations, such as when a country violates international law by launching an unprovoked invasion of another sovereign’s territory. As was the case with Russia, this can serve both to punish illegal behavior and curb perpetrators’ capacity to continue engaging in it, while deterring similar behavior by others.
But such a framework would also establish conditions that must be met before sanctions could be applied – beginning with the requirement that a clear breach of international law has occurred – so that they are not imposed on flimsy grounds. And it would include mechanisms to ensure accountability for violations. Only then can the global financial system continue to function in a way that benefits all countries that depend on it, not just those in charge.