Abstract: Analysing the possible ways to solve the fundamental problem, the author emphasizes the importance of the largest land mass of the globe – Eurasia and transport logistics through it. The study provides an overview of potential CO2 mitigation targets for international railway and maritime transport. The author analyses three possible ways of developing Eurasian transhipment lines in accordance with green standards. The main problems and opportunities of railway roads, Southern warm congested waters are considered. Special attention is paid to the development of Northern waters transhipment lines between the most-producing countries of G-7 and advanced OECD markets.
Today the whole world is aware of the global problem of climate warming. Due to the increase in the concentration of greenhouse gases and harmful emissions into the atmosphere, this problem is getting worse every year. Air pollution occurs due to the development of industry, increased transport, and overall economic growth in countries around the world.
Thinking on the question how we can answer the fundamental challenge of global warming, we should understand that the most inhabitant part of the world and the largest landmass of the Globe is Eurasia. Thus, it is the biggest producer of CO2 and, hence, the most polluted part of the world. Also, important to underline that the biggest countries-producers (China) and countries-consumers (West Europe), producing the biggest economic output, are located on the edge of the Eurasia. These countries, which are states of G-7 (Atlantic states and other European countries) and other advanced OECD economies, drive world’s economies and may play crucial role in improving ecology and environmental standards.
It is equally important to emphasize that the most ambitious logistics and infrastructure project of today – “One Belt – One Road” – runs through the vast expanses of Eurasia. Transportation logistics between Far East and Western Europe is vital for world’s economic development, but today we do not have reliable technologies and transport lines. Due to this it is necessary to think on few aspects, which may determine the development of environmentally friendly economies in future:
– reliable transportation (safe and environmentally friendly) ;
– cheapest modes and transhipment lines;
– fastest modes of transportation
The most reliable mode of the transportation is railway. It has certain advantages (compared to air and maritime transport) in the following areas: regularity (rhythmicity), reliability (guaranteed on-schedule delivery and cargo preservation) and the ability to deliver the cargo to any destination.
When comparing cargo transportation from the Far East to West Europe by sea and by rail, the delivery time is often the key argument in favour of the railway. At the same time, the amount of 14 – 15 days is often mentioned. In practice, it takes longer: 35 – 50 days by sea, 28 – 32 days by rail, 6 days by plane and 4 days by roads (See Figure 1). This difference in numbers is caused by the need to form a train, delays at some stations, etc.
Figure 1. Transhipment lines from Far East to Western Europe
Source: IFIMES, 2021
Underlining the reliability of the railway transhipment lines in terms of friendly environmental standards it is assumed that carrying a TEU between the Far East and West Europe using diesel trains would result in emissions of around 0.7 tonnes of greenhouse gas emission. However, the emissions from electric trains could be lower, possibly even falling to zero if they were powered entirely by renewable sources. This suggests that, by using railway mode, the Eurasian transhipment lines are likely to be beneficial to the environment.
While in theory, the implementation of railway electrification and the use of renewable energy sources can reduce greenhouse gas emissions, perhaps even to zero, in practice this process can take decades that our planet is unlikely to have.
This fact makes us think about other possible modes of transportation that are both “convenient” (speed, regularity, and accuracy of delivery), and beneficial to the environment.
The cheapest mode of transportation is by the sea, but it also has some pros and cons. Thus, the warm waters (red) shipping line from Far East to the port of Rotterdam in Netherlands today has great logistics prospects. Currently, 80% of cargo from China to Europe goes through the Atlantic Ocean to the ports of Northern Europe. The warm waters shipping line through the Arabian sea and the Suez Canal to the Balkans reduces the transport time by 7 – 10 days: this is so far the shortest sea route from Far East to Europe (however, to use it to its full capacity, CEE countries need to build the transport infrastructure that the region has a huge need for. This is especially true of the Balkan Peninsula and Ukraine, which are gradually entering a period of stable development after riots and wars that caused serious damage to infrastructure and the economy).
Another significant reason that slows down the speed of transportation, and thus increases CO2 emissions and reduces the level of „convenience” of warm waters transhipment lines – is the high level of congestion in reservoirs. The low cost and the higher degree of safety compared to transportation by land, has led to an increased number of commercial fleets over the past few decades. Thus, the biggest challenge is the problem of the high level of congestion in warm waters. Currently there are several maritime zones of bottlenecks (see Figure 2):
Figure 2. Main maritime shipping routes
Source: Dept. Of Global Studies and Geography, Hofstra University, 2018
- The Straits of Malacca and Singapore (hereinafter SOMS) is the second most important global chokepoint, with over 16 million barrels per day (120,000 ships passes this route each year). It is a vital strategic region for seaborne trade since it is the shortest route between the Pacific and Indian Oceans. This narrow, 550-mile strait is also a major route for oil transportation, hence creating a danger of potential oil spills or collisions, significantly damaging the biodiversity and the marine environment. Moreover, the SOMS is polluted not only by the oil and ships, but also by enormous noise, influencing the marine bio-life. The transhipment line in addition is not considered as a safe pass, since it is beset with challenges, natural (during frequent squalls from the Indian Ocean, visibility can decrease considerably to make it difficult for mariners to navigate) and man-made (piracy).
- The Phillips Channel in the Singapore Strait is just 2.7km wide making it another maritime zone of bottlenecks and potential oil spills. With so many vessels in the crowded Singapore Strait, there is often an increase of incidents.
- From the Straits of Malacca and Singapore, ships make their way to the South China Sea, another zone of unstable waters in the South – East of the Indian ocean. The South China Sea is a prominent shipping passage with $5.3 trillion (nearly one-third of all global maritime trade) worth of trade cruising through its waters every year. Since this zone has emerged as one of the most dangerous flashpoints in the Indo – Pacific over the last decade, the transhipment here is rather unsafe, not mentioning the ecological disasters which are emerging currently there.
- The Strait of Bab-El-Mandeb, one of the World’s Most Dangerous Straits (situated in the high conflict zone between Yemen and Somalia), is also the shortest trade route between the Mediterranean region, the Indian Ocean, and the rest of East Asia. Oil-rich Arabian Gulf nations rely heavily on it: approximately 57 giant oil vessels from these countries pass through the strait each day, over 21.000 each year. This fact makes the straight not only the zone of interests of main powers (and hence high tension in the region), but a big threat to the environment (oil spills).
- The Strait of Hormuz is a strategically important strait or narrow strip of water that links the Persian Gulf with the Arabian Sea and the Gulf of Oman. As one of the busiest shipping lanes in the world, is also one of the most essential ones, due to the amount of oil tankers that navigate these waters daily. Around one third of the world’s oil is transported through this strait, making it essential not only for trade, but for the global economy. The same fact is making this route one of the most dangerous to the environment, considering existent oil spills or collisions.
- The Suez Canal (Including Strait of Gubal) provides the shortest route between the Atlantic and Indian oceans (saves 7000 Km of extra travel). The 120-mile pass goes between Israel and Egypt and passes from the Red Sea to the Mediterranean Sea. 100 boats travel the canal daily and 3.9 million oil barrels travelled daily. Thus Around 8% of global sea-borne trade takes place through it. Despite the projects of Canal’s extension, it’ s waters are still congested, making the usage less safe, extending the time, and raising the costs of transhipments.
- Connecting the Atlantic Ocean and the Mediterranean Sea, the Strait of Gibraltar (including 20 nm either side of Europa Point) is one of the most used shipping routes in the world. The strait is only seven nautical miles (13 kilometres) across at its narrowest and 23.7 nautical miles (44 kilometres) at its widest. Approximately 300 ships cross it every day, about one ship every five minutes, which causes a high amplitude internal wave, upwelling of nutrient-rich water and affecting bio-life, not mentioning the noise pollution and heavy maritime traffic.
- The Bosporus and Dardanelles Straits separate the Sea of Marmara from the Aegean and Black Seas. Both straights are on the Europe – Asia boundary and lie within Turkey. The Bosporus is located on the northern edge of the Maramara and southwestern edge of the Black Sea. Turkish Straits provide the only access between the Black Sea and the Aegean Sea. The Dardanelles, on the southern tip of the Marmara and north-eastern coast of the Aegean Sea (which is connected to the Mediterranean) is wider than its northern counterpart. More than 40,000 vessels are passing through these waters per year, transporting almost 650 million tons of cargo. Located in the conflict of the power’s interests, this zone has been always considered vulnerable in terms of safety, not mentioning significant damaging of local maritime bio life.
Thus, it can be traced that the current sea arteries of warm waters are not just seriously congested, but also dangerous not only for the ecology and because of security reasons (robbery, piracy etc), but also for the stable development of trade and economy. The consequences of these dangers may be fatal in few years, unless the measurements of improving the maritime transhipment infrastructure are not taken.
Thus, the cheapest in the cost, this transhipment line is not beneficial in terms of second criteria – timeframe (See Figure 1).
Another shipping line (cold water – blue line), which arose because of the rapid melting of the Arctic ice cap, opens prospects for the reduction of transport waterways in areas free of ice. Thus, it is another alternative to the main transcontinental routes that pass-through Eurasia, namely land rail (green line), air (white line) and warm southern waters of Eurasia and further to Africa through the Suez Canal (red shipping line). There are basically three possible routes, each of significance:
- the Northwest Passage, connecting the American Continent and Far East Asia;
- the Northern Sea Route, offering a shorter way from Europe to Asia along the Russian Arctic coastline; and
- the Arctic Bridge, connecting Canada and Russia (See Figure 3).
Geographically the position of the North waterways is very beneficial. The Northwest Passage connects the Atlantic and Pacific along the northern coast of North America through the Arctic waters from the Davis straits and Baffin Bay all the way to the Bering Sea shortens the distance between Far East Asia and the American East coast (via Panama) by approximately 7,000 kilometres.
Figure 3. Northern shipping. Major transport routes through the Arctic
Source: Centre Port Canada, 2008.
The Northeast Passage, which connects the Atlantic coast of Western and Northern Europe with the Pacific coast of Northeast Asia via the Russian Arctic coastline, is cutting the distance between the edges of two continents, making it shorter by about 40% in comparison to the traditional, warm seas transport routes via the Suez or Panama Canal.
As it is highlighted in the analysis entitled “IFIMES for the Global Greening Economy (A Brief Impact Study)”, the Arctic Bridge is a seasonal route which shortens the connection between the North American and European continents via the Arctic Ocean. Observation shows that the transhipment route between the North Atlantic and the Pacific Ocean straight over the Central Arctic Ocean (the so-called Arctic Bridge) might be in reach earlier than expected due to climate change. In this case Iceland’s strategic position will change dramatically and could turn the island into an economic hub – a power base for transportation-related services, bringing along a whole new range of economic activities to the Europe.
Thus, in terms of logistics, the cold waters shipping line (blue – Northern sea or Arctic passage) will allow to deliver cargo to Europe by sea faster than the 48 days (that it takes on average) to travel from the Northern ports of the Far East to Rotterdam via the Suez canal, considering that the passage of a cargo ship from Shanghai to Hamburg along the North sea route is 2.8 thousand miles shorter than the route through Suez canal. (i.e., in 2019 the Russian Arctic gas tanker “Christophe de Margerie” reached South Korea from Norway without an icebreaker escort in only 15 days) (See Figure 1).
Another advantage, which play into the hands of the blue transhipment routes is the decrease of using of harmful to the environment material – cement. Building new land infrastructure (especially roads) requires cement, a material that contributes more than 6 per cent of global carbon emissions. Shifting the transportation mode to the sea, therefore, will reduce the amount of roads constructions on the land.
In addition to the time criterion, cold water shipping line is beneficial in terms of capability. It is usually characterized as the shortest sea route between Europe and Asia, the safest (i.e., the problem of Somali pirates) and has no restrictions on the size of the ship, unlike the route through the Suez Canal. Thus, the Arctic route will allow to deliver cargo to Europe faster by sea, reducing the route by 20 – 30%, and hence being more environment friendly (by using less fuel and decreasing CO2 emission) and saving human resources. Nevertheless, the capitalizing on that opportunity requires much work in terms of improved navigation procedure and installation of safety-related infrastructure.
But the shortening of the transhipment routes and hence slight decreasing of CO2 emissions will not solve the problem completely. The global environmental issue of CO2 consumption should be treated starting from the main root of the problem and in regards with it, Arctic may play the key role.
The projects launched in the Arctic (i.e., project Yamal LNG) meets the goal of reducing the share of coal in total energy consumption in the world’s largest greenhouse gas emitters below 58% by the end of 2020, as this project allows to diversify countries’ energy sources, contributing to its withdrawal from coal use. This, in turn, reduces CO2 emissions within the country and may contribute to the implementation of the same scheme in the framework of the building of the transhipment routes.
The goal to reduce a dependence on coal and fossil fuels requires a huge surge in the use of natural gas, and the adoption of renewable energy. Which is resulting in not only infrastructure constrictions, but also the development of the projects connected with energy (See Figure 4). One of the key factors driving the implementation of this projects is that, unlike traditional fossil fuels, renewable energy sources are widely available around the world. Whether it is solar or wind power, tidal energy or hydroelectric plants, most countries have the potential to develop some clean energy.
Figure 4. Investments into the Renewable energy projects
Source: Boston University Global Development Policy Centre, 2019.
The region covered by new transhipment routes (esp. South – Eastern Europe, Eurasia and South – Eastern Asia covered by Eurasian transhipment lines) has significant potential to be powered by solar energy. Thus, it is estimated that less than 4 percent of the maximum solar potential of the region could meet the countries’ electricity demand for 2030 which gives the world a possible solution to reduce the countries’ need for fossil fuels as they develop.
Only in Europe, due to the implementation of renewable energy projects (i.e., Francisco Pizarro plant in Spain, Nikopol Solar Power Plant, Ukraine, Cestas Solar Farm in Bordeaux, France etc) the solar capacity increased by 36% to 8 GW in 2018. By 2020, several members stated in the European Union pushed to meet their 2020 renewable energy targets.
Along with solar projects, wind onshore wind farms projects (i.e., southeast region of Ukraine, the Fantanele – Cogealac wind park, Romania etc) are also destined to meet increased national energy needs in the wake of phasing out fossil fuel power plants. Thus, the renewable energy potential and cooperation opportunities is a chance for the countries to leapfrog from their carbon-intensive trajectories to low-carbon futures.
Summing up, for now it can be seen that there are two possibilities for developing transport systems and economies in accordance with green standards:
- Transcontinental railroad system (which requires huge amount of investments);
- Optimization of the cheapest mode of transportation (maritime warm waters transhipment lines) (See Figure 3).
But while thinking on the best ways of the decarbonizing of transport connections between the most-producing countries of G-7 (Atlantic states and other European countries) with other advanced OECD economies, all the existing risks (such as “convenience”, roads “safety” (piracy, oil spills), water congestion levels and maritime traffic) should be considered. As it was mentioned above, warm waters transhipment lines (See Figure 1) currently present certain dangers, being high congested and unsafe (both for trade security and environment), and hence rather vulnerable. Due to this fact, it is crucial to consider other alternatives of connecting the biggest countries-producers (China) and countries-consumers (West Europe).
Statistical data on logistics proves, that the development of the cold waters (i.e., Arctic passage or blue line shipping line) route (See Figure 1) drastically reduce the time and distance between the largest G-7 producers and developed OECD markets. Nevertheless, though there is high potential to slash international shipping distances by opening shorter routes in the north, the high risks on these alternative routes are keeping most traffic running over the classic transport routes like the Suez and Panama Canals.
But when building and improving the continent’s logistics chains, it is also important to consider the standardization aspect along the One Belt One Road initiative.
Today countries of Eurasia, not including China, account for about 18% of global GDP and 26% of global carbon dioxide emissions. Current transhipment lines going through these countries are estimated to increase carbon dioxide emissions by at least 0.3% worldwide – but by 7% or more in some countries as production expands in sectors with higher emissions, unless the measures to decarbonize the initiatives are taking. The window for action is narrow: investment decisions made in the coming few years will determine the carbon intensity of critical infrastructure and major real-estate assets that will operate for decades. Thus, by linking policy, finance, and the international community’s expertise and technological resources, it is possible to lay the groundwork for low-carbon development in the countries’ economies. To ensure that development in the transhipment lines does not undermine the global climate agenda, meaningful steps must be taken to reduce substantially the carbon footprint of new investments in these economies.
Analysing this issue, it is worth mentioning that the carbon dioxide emissions in developed countries have been in decline for over a decade and are at approximately the same level right now they were at 25 years ago, while the developing countries are experiencing an explosion in the growth of carbon dioxide emissions. This is explained by the fact, that developed countries achieved their development on the back of coal, which is now being phased out. On the other hand, developing countries are currently developing by using coal, and that is driving up their carbon emissions. It is also explaining the fact that developing countries are not willing to follow stated “greening” goals, since it will require higher financial costs and longer process of the project’s implementation.
To reach consensus in timing, price, and environmentally friendly standards the growing push to decarbonize economies, implement the green construction methods should be done. Unfortunately, this approach may take decades to be adopted, which our planet may not have. And the understanding of this fact should be the basis for the development of all countries without exception and the logistical development of the initiative “One Belt – One Road” in particular.
Free-Market Capitalism and Climate Crisis
Free market capitalism is an economic system that has brought about tremendous economic growth and prosperity in many countries around the world. However, it has also spawned a number of problems, one of which is the climate crisis. The climate crisis is a global problem caused by the emission of greenhouse gases, primarily carbon dioxide, into the atmosphere. These externalities are chiefly a consequence of day to day human activities, such as the burning of fossil fuels, deforestation, and conventional agriculture. The climate crisis is leading to rise in temperatures, sea levels, and more erratic weather patterns-The floods in Pakistan and depleting cedars of Lebanon are vivid instances for these phenomena, which are having a devastating impact on the planet.
One of the main reasons that free market capitalism has contributed to the climate crisis is that it prioritizes short-term economic growth over long-term environmental sustainability. Under capitalism, companies are primarily motivated by profit and are not required to internalize the costs of their pollution. This means that they are able to pollute without having to pay for the damage that they are causing. Additionally, the capitalist system is based on the idea of unlimited growth, which is not sustainable in the long-term. As long as there is an infinite demand for goods and services, companies will continue to produce them, leading to ever-increasing levels of pollution and resource depletion.
Another pressing issue that free market capitalism is recently going through is that it does not take into account the externalities of economic activities. Externalities are the unintended consequences of economic activities, such as pollution and climate change. Under capitalism, companies are not required to pay for the externalities of their activities, which means that they are able to continue polluting without having to pay for the damage that they are causing. In her book “This Changes Everything: Capitalism vs Climate” Naomi Klein argues that the current system of capitalism is inherently incompatible with the urgent action needed to address the Climate crisis.
To address the climate crisis, it is necessary to put checks and balances over the free market capitalism and/or make a way towards a more sustainable economic system. This can be done through a number of different effective policies, such as:
Carbon pricing: This can be done through a carbon tax or a cap-and-trade system, which would make companies pay for the carbon emissions that they are producing. In the article “The Conservative Case for Carbon Dividends” authors suggest that revenue-neutral carbon tax is the most efficient and effective way to reduce the carbon emissions.
Increasing renewable energy investments: an increment in the investments in clean energy technologies, such as solar and wind power, can result in the reduction in the use of fossil fuels.
Regulating pollution: Governments can regulate pollution to limit the amount of greenhouse gases that are emitted into the atmosphere.
Encouraging sustainable practices: Governments can encourage sustainable practices, such as recycling and conservation, to reduce the use of resources.
It is remarkable that evolving Capitalism can be harnessed to address the climate change. The private sector has the resources and innovation to develop and implement new technologies and sustainable practices, but they need the right incentives and regulations to do so. Finding the balance between economic growth and environmental protection must be a priority for capitalists.
The free market capitalism has been the driving force behind global economic growth, but at the same time, it has contributed to the ongoing climate crisis. The solution to this problem is not to reject capitalism, but rather to reform it to the societies’ suitable demands. Government should consider providing a level playing field so as to make the probable transition from fossil-based energy systems to Green energy technologies possible. The capitalists should not consider short-termism over long term environmental sustainability. Government intervention to put a price on carbon emissions, invest in renewable energy, regulate pollution, and encourage sustainable practices is necessary to avoid the worst impacts of the climate crisis and build a sustainable future for all. However, here is the catch: Is achieving net-zero-carbon emissions by mid-century a probable target? The answer is quite uncertain, however it is critical point to strive for in the face of escalating Climate Crisis.
Egypt’s “Too Big to Fail” Theory Once Again at Test
Authors: Reem Mansour & Mohamed A. Fouad
In the wake of 2022 FED’s hawkish monetary policy, the Arab world’s most populous nation, Egypt, saw an exodus of about USD20bn of foreign capital. A feat that exerted pressure on the value of its pound against the dollar slashing it by almost half. This led to USD12bn trade backlog accumulating in Egypt’s ports by December 2022.
Meanwhile, amidst foreign debt nearing USD170bn, inflation soaring to double digits, and a chronic balance of payment deficit, Egypt became structurally unfit to sustain global shocks; the country saw its foreign debt mounting to 35% of GDP, causing the financing gap to hover at USD20billion.
While it may seem all gloom and doom, friends from the GCC rushed to inject funds in the “too big to fail” country, sparing it, an arguably, ill-fate that was well reflected in its Eurobond yields spreads and credit default swaps, a measure that assesses a sovereign default risk.
For the same reason in early 2023, the IMF sealed a deal worth of USD3bn, with the government, which unlocked an extra USD14bn sources of financing from multilateral institutions, and GCC sovereign funds, to fill in a hefty portion of the annual foreign exchange gap, albeit a considerable amount averaging USD6bn per annum is yet to be sourced from portfolio investments.
With the IMF stepping in, the Egyptian government agreed on a structural reform program that requires a flexible exchange rate regime, where the Egyptian pound is set to trade within daily boundaries against the US dollar, rationalize government spending, especially in projects that require foreign currency; and most importantly the program entails stake-sales in publicly owned assets, paving the way for the private sector to play a bigger role in the economy.
In due course, through its sovereign fund, Egypt planned initial offerings for shares in companies worth about USD5-USD6bn, and expanded the sale of its shares in local banks and government holdings to Gulf investment funds.
Through the limited period of execution of these reforms, the EGP hit a high of 32 against the greenback, and an inflow of portfolio investments amounting to USD1bn took place, according to the Central Bank of Egypt.
Simultaneously, Citibank International, cited a possible near end of the devaluation of the Egyptian pound against the US dollar. Also, in a report to investors, Standard Chartered recommended to buy Egyptian treasury bills, and pointed to the return of portfolio flows to the local debt market in the early days of January, 2023. Likewise, Fitch indicated the ability of the Egyptian banking sector to face the repercussions of the depreciation of the pound, and that the compulsory reserve ratios within Egyptian banks are able to withstand any declines in the value of the pound because they are supported by healthy internal flows of capital.
While things seem to be poised for a recovery, the long term prospects may lack sustainability. The Egyptian government needs to accelerate its plans to shift gears towards a real operational economy capable of withstanding shocks and dealing with any global challenges. Egypt, however has implicitly held the narrative that the country is ‘too big to fail”. This is largely true to the country’s geopolitical relevance, but even this has its limitations when the price to bail far outweighs the price to fail.
Former President George W. Bush’s administration popularized the “too big to fail” (TBTF) doctrine notably during the 2008 financial crisis. The Bush administration often used the term to describe why it stepped in to bail out some financial companies to avert worldwide economic collapse.
In his book “The Myth of Too Big To Fail” Imad Moosa presented arguments against using public fund to bail out failing financial institutions. He ultimately argued that a failing financial institution should be allowed to fail without fearing an apocalyptic outcome. For countries, the TBTF theory comes under considerable challenge.
In August 1982, Mexico was not able to service its external debt obligations, marking the start of the debt crisis. After years of accumulating external debt, rising world interest rates, the worldwide recession and sudden devaluations of the peso caused the external debt bill to rise sharply, which ultimately caused a default.
After six years of economic reform in Russia, privatization and macroeconomic stabilization had experienced some limited success. Yet in August 1998, after recording its first year of positive economic growth since the fall of the Soviet Union, Russia was forced to default on its sovereign debt, devalue the ruble, and declare a suspension of payments by commercial banks to foreign creditors.
In Egypt, although the country remains to face a number of challenges, signs remain relatively less worrying than 2022, as global sentiment suggests that leverage will be provided in the short-term at least. Egypt’s diversified economy, size and relative regional clout may very well spare the country the fate of Lebanon. However, if reforms do not happen fast enough, the TBTF shield may become completely depleted.
Hence, in order to avoid an economic fallout scenario a full fledged support to the private sector’s local manufacturing activity and tourism is a must. Effective policies geared towards competitiveness are mandatory, and tax & export oriented concessions are required to unleash the private sector’s maximum potential and shift Egypt into gear.
Sanctions and the Confiscation of Russian Property. The First Experience
After the start of the special military operation in Ukraine, Western countries froze the assets of the Russian public and private sector entities which had been hit by blocking financial sanctions. At the same time, the possibility that these assets could be confiscated and liquidated so that the funds could be transferred to Ukraine was discussed. So far, only Canada has such a legal mechanism. It will also be the first country to implement the idea of confiscation in practice. How does the new mechanism work, what is the essence of the first confiscation, and what consequences can we expect from the new practice in the future?
Loss of control over assets in countries that impose sanctions against certain individuals has long been a common phenomenon. The mechanism of blocking sanctions has been widely used for several decades by US authorities. A similar methodology has been adopted by the EU, Switzerland, Canada, Australia, New Zealand, Japan and some other countries. Russia and China may also resort to these tactics, although Moscow and Beijing rarely use them. In the hands of Western countries, blocking sanctions, however, have become a frequent occurrence. Along with the ban on financial transactions with individuals and legal entities named in the lists of blocked persons, such sanctions also imply the freezing of the assets of persons in the jurisdiction of the initiating countries. In other words, having fallen under blocking sanctions, a person or organisation loses the ability to use their bank accounts, real estate and any other property. Since February 2022, Western countries have blocked more than 1,500 Russian individuals in this way. If you add subsidiary structures to them, their number will be even greater. The volume of the property of these persons frozen abroad is colossal. It includes at least 300 billion dollars in gold and foreign exchange reserves.
This is not counting the assets of high net worth Russian individuals worth $30 billion or more which have been blocked by the G7 countries. However, the freezing of property does not mean its confiscation. Although the blocked person cannot dispose of his assets, it formally remains his property. At some point, the sanctions may be lifted, and access to property restored. In practice, restrictive measures can be in place for years, but theoretically, the possibility of recovering assets still remains.
After the start of the special military operation (SMO), calls began to be heard in Western countries to confiscate frozen property and transfer it to Ukraine. Confiscation mechanisms have existed before. For example, property could be confiscated by a court order as part of the criminal prosecution of violators of the sanctions legislation. However, such mechanisms are clearly not suitable for the mass confiscation of property. Blocking sanctions are a political decision that do not require the level of proof of guilt that is required in the criminal process. To put it bluntly, the hundreds of Russian officials or entrepreneurs put on blocking lists for supporting the SMO did not commit criminal offenses for which their property could be subject to confiscation. The sanctions have spurred the search for such crimes in the form of money laundering or other illegal operations. But the amount of funds raised in this way would be a tiny fraction of the value of the frozen assets. To implement the idea of confiscation of the frozen assets of sanctioned persons and the subsequent transfer of the proceeds for them, Ukraine needed a different mechanism.
Canada was the first country to implement such a mechanism. The 2022 revision of the Special Economic Measures Act gives Canadian authorities the executive power to order the seizure of property located in Canada which is owned by a foreign government or any person or entity from that country, as well as any citizen of the given country who is not a resident of Canada (article 4 (1)). The reason for the application of such measures may be “a gross violation of international peace and security, which has caused or may cause a serious international crisis” (Article 4 (1.1.)). The final decision on confiscation must be made by a judge, to whom a relevant representative of the executive branch sends a corresponding petition (Article 5.3). Furthermore, the executive authorities, at their own discretion, may decide to transfer the proceeds from the confiscated property in favour of a foreign state that has suffered as a result of actions to violate peace and security, in favour of restoring peace and security, as well as in favour of victims of violations of peace and security, or victims of violations of human rights law or anti-corruption laws (art. 5.6).
The first target of the new legal mechanism will be the Canadian asset of Roman Abramovich’s Granite Capital Holding Ltd. The value of the asset, according to a statement by Canadian authorities, is $26 million.
Roman Abramovich is on the Canadian Blocked List, i. e. his property is already frozen, and transactions are prohibited. Now the property of the Russian businessman will be confiscated and, with a high degree of probability, ownership will be transferred to Ukraine. This is a relatively small asset (from the standpoint of state property), but the procedure itself can be worked out. Further confiscations may be more extensive.
The Canadian experience can be copied by other Western countries. In the US, work on such a mechanism was announced back in April 2022. although it has not yet been adopted at the legislative level. In the EU, such a mechanism is also not finally fixed in the regulatory legal acts of the Union, although Art. 15 of Regulation 269/2014 obliges Member States to develop, inter alia, rules on the confiscation of assets obtained as a result of violations of the sanctions regime. The very concept of violations can be interpreted broadly. So, for example, Art. 9 of the said Regulation obliges blocked Russian persons to report to the authorities of the EU countries within six weeks after blocking about their assets. Violation of this requirement can be regarded as a circumvention of blocking sanctions.
There are several consequences of the Canadian authorities’ initiative.
First, it becomes clear that the confiscation rule is not dormant. Its use is possible and is a risk. This is a serious signal to those Russians and Russian companies that have not yet come under sanctions, but own property in the West. It can be not only frozen, but also confiscated. This risk will inevitably be taken into account by investors and owners from other countries, which could potentially be the target of increased Western sanctions in the future. Among them are China, Saudi Arabia, Turkey, and others. It is unlikely that the confiscation of Russian property will lead to an outflow of assets of these countries and their citizens from Canada and other Western jurisdictions. But the signal itself will be taken into account.
Second, the Russian side is very likely to take retaliatory measures. Western companies are rapidly withdrawing their assets from Russia. The representation of Canadian business in the Russian Federation was small even before the start of the operation in Ukraine. If the practice of confiscation becomes widespread, then the Russian side can roll it out in relation against the remaining Western businesses. However, so far, Moscow has been extremely hesitant to freeze Western property. While the US, EU and other Western countries have actively blocked Russians and their assets, Russia has mainly responded with visa sanctions. The confiscation could overwhelm Moscow’s patience and make the retaliatory practice more proportionate.
Finally, the practice of confiscation modifies the very Western idea of sanctions. It currently implies, among other things, that the “behavioural change” of sanctioned persons would result in the lifting of sanctions and the return of property. The freezing mechanism was combined with this idea. However, the confiscation mechanism contradicts it. Sanctions now become exclusively a mechanism for causing damage.
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By ETHAN BILBY ‘Items in this section have limited availability due to supplier production issues,’ ‘Sorry, temporarily out of stock’ and...
Astana hosts 18th Iran-Kazakhstan Joint Economic Committee meeting
The 18th meeting of Iran-Kazakhstan Joint Economic Committee meeting was held on Thursday in Kazakhstan’s capital Astana, at the end...
The importance of Iran’s membership in the SCO
The members of Majlis (the Parliament) have approved the emergency of the plan of Iran’s commitments to achieve the position...
Sabah: ‘The Americans have deceived themselves, the Europeans and Ukraine’
The US is repeating the same mistakes as in Iraq, Afghanistan, Libya and Syria. Now – in Ukraine. So it...
Saudi-Chinese Friendship: Should India be Concerned?
Saudi Arabia hosted the grand China-Arab summit in December last year and leaders of the two nations deliberated on future...
China’s assurance of Rohingya repatriation between Myanmar-Bangladesh
We now have new hope thanks to news reports that were published in the Bangladeshi dailies on Tuesday and contained...
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