Analysis-Russia can't match a Western asset seizure, but it can inflict pain

By Alexander Marrow

LONDON (Reuters) - Russia's ability to mete out like-for-like retaliation if Western leaders seize its frozen assets has been eroded by dwindling foreign investment, but officials and economists say there are still ways it can strike back.

The United States wants to seize immobilised Russian reserves - around $300 billion globally - and hand them to Ukraine, while EU leaders favour ringfencing profits from the assets, estimating they will total 15-20 billion euros by 2027.

Much of that money is centrally held, meaning it is accessible if the West decides to go after it.

Russia says any attempt to take its capital or interest would be "banditry" and has warned of catastrophic consequences, although it has been vague about exactly how it might respond.

Former President Dmitry Medvedev on Saturday acknowledged that Russia did not have enough U.S. state property to retaliate symmetrically and would have to go after private investors' cash instead - a step he said would be no less painful.

Reuters spoke to six economists, lawyers and experts who have been tracking the status of assets frozen by both sides since Russia launched its full-scale invasion of Ukraine in February 2022.

The consensus among them was that one of the most likely countermeasures would be to confiscate foreign investors' financial assets and securities currently held in special "type-C" accounts, access to which has been blocked since the war started unless Moscow grants a waiver.

Russia does not disclose how much is in the accounts, held by the country's National Settlement Depository, a sanctioned entity. Russian officials have said the amount is comparable to the $300 billion of Russian reserves frozen.

"Payouts on blocked assets in type-C accounts could start to be seized in favour of the state," said Vladimir Yazev, investment portfolio manager at investment firm Aigenis.

"Additionally, the government may consider measures on blocking non-exchange assets still held by unfriendly countries." These assets include taxes, grants and private donations.

A Russian lawyer familiar with C accounts, who asked not to be named, said that if non-residents decline to take part in an asset swap scheme run by a state-appointed Russian broker, the only remaining option would be confiscation or foreclosure.

Under the scheme, Westerners would get Russians' blocked holdings of foreign securities and Russians get Westerners' blocked holdings of Russian ones. Retail investors wishing to participate have until May 8 to submit offers.

Kremlin spokesman Dmitry Peskov said at the weekend that there was still a lot of Western money in Russia that could be targeted by Moscow's counter-measures. He said the government would also pursue legal challenges against the confiscation of assets.

"Russia...will tirelessly defend its interests," he said.

CORPORATE SEIZURE

On Saturday, Medvedev proposed the confiscation of private individuals' Russian assets as one response to any U.S. seizure of its reserves, adding such a move was justified by the "hybrid war" being waged against Moscow.

The former president, who espouses hardline views towards the West, is a close ally of President Vladimir Putin and maintains influence as deputy chairman of the Security Council of Russia.

However, since Western nations imposed sweeping sanctions in response to the invasion of Ukraine, foreign holdings in Russia have dropped by around 40% to $696 billion, central bank data shows, reducing some of the potency of such a threat.

In addition to stakes in companies and physical assets, Russia could target foreign investment held in securities, according to one of the economists, who asked not to be named because of the sensitivity of the subject.

But experts said the latest published figures from Russia's central bank on foreign direct investment showed that a sizeable proportion of foreign money was likely coming from Russian companies registered abroad.

Russia stopped releasing a country-by-country breakdown after the invasion, but the last such data published for Jan. 1, 2022 showed that Cyprus, where many Russian firms are incorporated, accounted for almost 30% of all Russia's FDI.

Many Russian companies are also incorporated in the Netherlands.

"A chunk of total FDI in Russia is really Russian money already," said Gian Maria Milesi-Ferretti, senior fellow in economic studies at The Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, a U.S. think-tank.

Russia's state-run RIA news agency reported in January that Western firms' assets worth $288 billion were ripe for seizure in Russia, citing January 2022 data.

Reuters could not determine where RIA took its figures from, but central bank figures showed $289 billion in derivative and other foreign investments at that time.

That figure had fallen to $215 billion by end-2023. RIA also said Cyprus and the Netherlands, respectively, accounted for $98.3 billion and $50.1 billion of those assets, implying a high degree of Russian company ownership.

The central bank and finance ministry did not respond to a request for comment on the figures.

'ASSETS FOR A SONG'

Moscow has already forced foreign companies selling assets in Russia to do so at discounts of at least 50%. It has placed other Western assets under temporary management and installed Kremlin-friendly executives.

Western companies have acknowledged losses totalling $107 billion, a significant sum that goes beyond the value of physical assets.

"Russia has already snatched up affiliates of Western firms, often for a song," said Milesi-Ferretti. But the value of seized assets is not just in buildings and machinery, it is also in the technology, know-how and connections attached, he added.

Energy group Shell, fast food giant McDonald's and carmakers Volkswagen and Renault have sold their Russian businesses. Others including Austrian bank Raiffeisen, food group Nestle and U.S. food and beverage giant PepsiCo continue to do business.

Another area of leverage Moscow has is in Europe, where the Brussels-based depository Euroclear holds the majority of Russia's reserves.

Some politicians in the bloc are nervous that the euro could be adversely affected if other countries such as China - a Russian ally - start repatriating reserves as a precaution against them being swooped on down the line.

There is also the risk that Russia could, through court action, try to seize Euroclear cash in securities depositories in Hong Kong, Dubai and elsewhere. The worry is that this could drain Euroclear capital and require a huge bailout.

A Euroclear spokesperson declined to comment on what Russia might do.

"Euroclear of course takes into account all possible risk scenarios and strengthens its capital by retaining Russian sanction-related profits as a buffer against current and future risks," the spokesperson added.

While its ties with the West have frayed, Russia has used a current account surplus of almost $300 billion in 2022-23 to build up overseas assets - likely in so-called friendly jurisdictions that do not openly oppose the war in Ukraine, according to Milesi-Ferretti.

Russia's efforts to reduce its integration into Western financial systems since its illegal annexation of Crimea in 2014 have cut dependence on foreign money, but also limited possible retaliation in any frozen asset fight, he added.

"If the aim is to retaliate, having a smaller amount of assets to seize makes your threat less salient."

(Reporting by Alexander Marrow; additional reporting by Reuters in Moscow and Jan Strupczewski in Brussels; Editing by Mike Collett-White and Daniel Flynn)