WASHINGTON: Earlier this year, Saudi Arabia indicated it might sell off some of its European debt holdings if G7 countries proceeded with seizing nearly $300 billion of Russia’s frozen assets, Bloomberg reported on Tuesday.

Sources familiar with the matter disclosed to Bloomberg that Saudi Arabia’s finance ministry expressed opposition to this proposed confiscation, intended to aid Ukraine, during discussions with select G7 counterparts.

The report highlighted Saudi Arabia’s potential influence on European decisions, noting the kingdom’s substantial holdings in euro and French bonds, estimated to be worth tens of billions of euros, which could sway deliberations. However, it emphasized that Saudi Arabia’s holdings alone might not suffice to alter European policy, but the situation could shift if other countries were to follow Riyadh’s lead.

A Saudi official acknowledged the unusual nature of such threats from the government but affirmed that they had conveyed the potential repercussions of asset seizures to G7 members. Another source cited by Bloomberg indicated that Saudi Arabia’s position moderated somewhat after the G7 nations adopted a proposal that avoided direct seizure of the assets.

Analyzing the potential impact of Saudi Arabia’s stance, the report underscored that while the kingdom lacks enough European bond holdings to destabilize the securities market, European officials expressed concerns over a possible “domino effect” if other nations were inspired to dump their holdings in imitation of Riyadh. Such a scenario, though hypothetical, could exacerbate Europe’s economic challenges already compounded by sanctions against Russia.

In response to these developments, European authorities have decided, despite pressure from the United States and Britain, to abstain from seizing the principal sums of Russia’s frozen assets, opting instead to withdraw only accrued interest. As a result, Ukraine is expected to receive commitments rather than direct financial disbursements from these assets.

Reports from European media outlets highlighted the logistical challenges and legal complexities involved, acknowledging that attempting to seize the entire $300bn of Russia’s frozen state assets would be “nearly impossible.” In light of this realization, European Union leaders reached a compromise during a recent G7 summit held in Italy.

Under this compromise, Ukraine is set to receive a $50bn loan, secured by the interest generated from the frozen assets. This approach aims to provide tangible financial support to Ukraine while navigating the legal and geopolitical constraints surrounding the asset freeze issue.

While the United States, United Kingdom, Canada, and other allies advocate for the complete seizure of Russia’s frozen assets to bolster support for Ukraine, certain European officials are hesitant, citing concerns over setting a controversial legal precedent.

These officials worry about potential repercussions, including legal challenges from Russia alleging breaches of international law.

Published in Dawn, July 10th, 2024