There is too much we don’t know about Russia’s central bank reserves

It has been a good month for sanctions policy: just in the past few weeks, the EU import ban and G7 price cap on Russian crude have been extended to refined oil products, and the tenth EU sanctions package has been agreed, alongside similar sanctions in its partner countries. As I wrote last week, while most sanctions developments have involved those on economic flows in and out of Russia — much of the current effort is to scrutinise those flows more closely to prevent sanctions circumvention — there is much more to say on how we impose sanctions on economic “stocks”, in particular on Russia’s state assets abroad. Over the past few months, I have been looking closely at this with my colleagues Claire Jones and Daria Mosolova. In a series of articles I will share what we have learnt.

Before even looking at how effective the sanctions on Russia’s reserves have been, and what to do next, we should understand better what precisely has and hasn’t been done. When I first started looking at this issue, I naively assumed that the sanctioning coalition would assemble a “master list” of all Russia’s central bank reserves — we frequently hear that more than $300bn has been blocked. Indeed, I was puzzled why they wouldn’t have published it. The reason, it turns out, is that no such master list exists. To this day, the EU does not know the amount, location and form of the assets the Russian central bank holds within the bloc’s jurisdiction.

I have had many conversations with people who have expressed disbelief that this information should be lacking, so I am clearly not the only one who presumed these assets were closely monitored. In fact, several people who are well placed to assess this have assured me that the right decision makers “must know”. But the European Commission president has now publicly admitted in a speech what my background conversations and leaked commission documents indicated. Under Sweden’s lead, the EU has just set up a working group to examine what can be done with the Russian reserves — and its chair, Anders Ahnlid, told me that mapping out the information on “what assets there are and where the assets are . . . is an important task”. But that means that a year into these sanctions, this has not yet been achieved.

Where, then, does the “more than $300bn” number come from? From Russia itself. The central bank’s last public report on gold and foreign exchange management, from January 2022, breaks down its international reserves by type of asset, by currency, by jurisdiction, and by risk rating. Looking at jurisdictions, between 55 and 66 per cent (depending on what is in the “others” category) of reserves were held in countries that would soon block access to them.

Since the war started, the central bank has not updated these numbers, but it does still publish its total reserves on a weekly basis. When Russia invaded Ukraine, they amounted to $629bn. Applying the latest known geographic distribution to this total gives a rough range of $345bn to $415bn in deposits and securities that the CBR owns but is prevented from using (exchange rate movements mean the real number could be somewhat different, though not much).

It is a puzzle that sanctioning governments, at least in public, have relied for so long on Russia’s own numbers rather than their own. They can, of course, establish their own information. By definition, national central banks know how much others have on deposit with them. Their governments can require them to report the amounts (whether publicly or not). They can put the same requirement on providers of custodial services for their public debt securities, which make up the bulk of CBR foreign exchange reserves. No doubt many governments do.

But it is clear that they don’t do so publicly — we have asked a lot of central banks and came up empty-handed — and there is no systematic sharing of this information between the sanctioning governments. Otherwise, the EU would not be in the dark about the total amount of Russian reserves it has blocked. The only government I have seen publish the amount of CBR assets in its country is France. Last year its finance minister said €22bn had been immobilised. Others are not telling us as far as I have seen (but I will gladly be corrected by eagle-eyed Free Lunch readers).

Why do we not know? The answer relates to another too little-known fact. The CBR’s assets are not technically frozen. Politicians may slip up in their descriptions — Ursula von der Leyen herself used the term “frozen” in the speech I mentioned above. But the Bank of Russia does not figure on the EU’s sanctions list, and so does not fall under the regulation on asset freezes.

Sanctions experts make sure to describe the sanctions affecting the CBR as “immobilising” or blocking” (but not freezing) the reserves. In the EU, this is implemented through a ban on EU residents’ engaging in any transactions “related to the management of reserves as well as of assets of the Central Bank of Russia”. That ban, however, lives in a different EU regulation. And the reporting requirements in the two regulations are quite different — and in the case of the central bank sanctions, too weak. The fact that they were significantly tightened in the EU’s tenth sanctions package, agreed just a few days ago, proves as much.

I am told the reason why Russia’s official reserves could not be treated like normal frozen assets has to do with the degree of sovereign immunity afforded in international law. But that does not justify the lax reporting requirements: if they can and should be tightened up today, they could and should have been tighter from the start. I also asked Tom Ruys, a professor of international law at Ghent University, if immunity principles prevent making CBR holdings public. He pointed out that individuals under sanctions, such as oligarchs, may have a right to privacy, but “I fail to see . . . what international law obligation would prevent the disclosure of the amounts held by the CBR”.

All of which leads to the question: is this a problem? Is it so important to know the details of the reserves, as long as Russia can’t touch them?

If you have to ask the question, I’m not sure there is much I can say to convince you. But it does matter very much indeed. Partly because there is an intensifying debate about whether to confiscate the reserves or otherwise mobilise them to fund Ukraine’s reconstruction — hence the creation of the working group headed by Ahnlid — a debate I will discuss at length later this week.

And partly, because transparency is a good way to minimise errors and discrepancies. Go back to the French example. If the CBR is to be believed, it has somewhere about €70bn worth of reserves in France. Even allowing for exchange rate fluctuations, that’s a big gap from the €22bn announced by Paris. Perhaps the French figure is only money held with the Banque de France — the Bank of Russia says it puts on average about two-thirds of its foreign exchange holdings in securities rather than in central bank deposits. But wouldn’t it be good to know?

One expert friend, in response to my mention last week of shortcomings in the reserves sanctions, wrote: “My understanding so far is that it’s perhaps the most solid of the sanctions in terms of not being vulnerable to circumvention: I have heard nothing whatsoever suggesting that [Vladimir] Putin could regain access to that money.”

My worry is: how would we know? If we don’t know what reserves we have blocked access to, it is hard to know if the blocks have been circumvented. Making sure would require compiling the full list of CBR assets in the sanctioning countries at the time the sanctions were imposed, and periodically check they were all still there over time. Making them public would crowdsource the scrutiny.

I also have no indication any circumvention has happened. But I do have some indications of how it could happen. One reserve manager suggested to us that even if Russia doesn’t have access to the reserves, it could theoretically use them as collateral for liquidity with friendly central banks in non-sanctioning countries (no suggestion that this has actually happened). That would be risky, of course, since the friendly central bank may struggle to seize the collateral in case of a default, and it would therefore no doubt command a premium borrowing rate. But is it inconceivable, given the current legal situation that the reserves are not outright frozen, the EU’s transactions bans explicitly “do not apply extraterritorially”, and access will one day be restored to Russia?

Another speculative possibility is that the KGB tradition of holding assets abroad in the name of proxy entities — “friendly firms” — did not end with the Soviet Union. That’s unlikely. By all accounts, the modern CBR has long been thoroughly professional and those I have talked to have never heard a whiff of any possibility that some reserves may be hidden in this way. But the best way to be sure would be to tally up the CBR’s published figures against the sanctioning countries’ own.

At a practical level, all of this may be irrelevant. Fear of the US, which is more willing to impose secondary sanctions, may be enough to scare off any circumvention. And as international balance sheet guru Brad Setser told me, Russia doesn’t need to mobilise its blocked reserves: it has built up so much unsanctioned money it can use instead. I will address that topic next week. For now, it seems that the sanctioning coalition’s inattention to mapping and reporting the details of the CBR’s assets over the past year has been at best complacent. And the lack of interest in reporting this information publicly is even worse.

Other readables

• Russia’s war against Ukraine is often seen in the west about who gets to govern which territories. In my column this week, I argue it is just as much a conflict over how they are governed.

• Habemus deal — or as I see it, the UK finally decides to take yes for an answer! Here is the FT’s explainer of the new Windsor framework for Northern Ireland.

• Once the car industry goes fully electric, it will employ many fewer workers than today, explains Peter Cambell. (The battery recycling industry, in contrast, may need a lot more.)

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