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The Prospective Performance of G7 Finance Ministers and Central Bank Governors at Stresa in May 2024

John Kirton, G7 Research Group
May 11, 2024

When G7 finance ministers and central bankers meet in Stresa on May 23–25, chaired by Giancarlo Giorgetti, Italy's Minister of Economy and Finance, and Fabio Panetta, Governor of the Bank of Italy, they will have much to do on several key issues, building on the decisions they, their ministerial colleagues and their leaders have made in the months before.

Using Frozen Russian Assets for Ukraine

The first key issue is using the Russian assets frozen by G7 members for Ukraine. European Union members agreed on March 8 to use about €3 billion in the profits from those frozen Russian central bank assets to assist Ukraine with badly need military assistance and funds for its post-war reconstruction.

This was a good start, the first baby step forward, on a move that the G7 had been discussing for many months. It could, should and will be built on and made bigger by other G7 members before, and by all together at. the G7 Apulia Summit on June 13–15.

The EU step came with many cautious provisions, to guard against the understandable concerns about legality, financial stability, the centrality of the euro and other G7 member currencies in international finance, Russian retaliation – including against the real and financial assets of G7 members still in Russia – and the desire of neutral EU members not in the North Atlantic Treaty Organization to use the funds for Ukraine's civilian reconstruction, rather than military support now. But the United States is poised to act by adding other instruments, notably a bond to be secured against the future interest on the future profits from the interest the frozen Russian assets. Above all, by the time of the G7's Apulia Summit in mid June, it will be clear that most or all of these caution-creating concerns will have been unfounded, given the evidence from the first use of this instrument, paving the way for G7 leaders to do more. If the military situation in Ukraine deteriorates by then, they could even move from the EU's €3 billion to much closer to the $50 billion the US is promoting.

At Stresa there could be a compromise between the Europeans and the Americans, between the EU with its baby step and the US that has long sought the use of all the $300 billion of frozen Russian assets to assist Ukraine. The EU will face continued pressure from the US to do more, with support from Canada and perhaps the United Kingdom. These ambitious three members will argue that few of the potential costs have yet materialized, and that Ukraine's urgent needs are great. As finance ministers and central bank governors, they will argue that sending more money to Ukraine this way is much better than having their own governments send more money themselves, given the great and growing fiscal deficits and debts in almost all of them, the competing demands such as for dealing with climate change, and the difficulty of getting the US Congress to authorize more with the presidential election only six months away. Central bank governors could add that as their policy interest rates will remain stronger for longer, the interest on Russia's frozen assets will be larger, so there will be more room to do more.

The commitments the G7 finance ministers and central bankers make in Stresa will be stronger than the two they made when they last met, in Washington DC on April 17. There they promised "Russia's sovereign assets in our jurisdictions will remain immobilized until then, consistent with our respective legal systems," and, following up on the G7 Leaders' Statement of February 24, "we will continue working on all possible avenues by which immobilized Russian sovereign assets could be made use of to support Ukraine, consistent with international law and our respective legal systems, with a view to update our Leaders ahead of the Apulia Summit in June."
 
More recently, G7 justice ministers in Venice on May 10 stated: "We also reaffirm that we will continue to explore all possible avenues to aid Ukraine in obtaining compensation from Russia, consistent with our respective legal systems and international law. We acknowledge the Foreign Ministers' statement issued on 19 April which confirmed that they will continue to work and advise ahead of the Apulia Summit on all possible avenues and feasible options by which immobilized Russian sovereign assets could be made use of to support Ukraine, consistent with our respective legal systems and international law.  

So, there will be a move toward a greater G7 consensus to do more.

But the big decisions will be left for the leaders themselves at Apulia to make. There G7 leaders will make stronger decisions than they did at their special summit in Kyiv on February 24 when they declared that "we are determined, consistent with our respective legal systems, that Russia's sovereign assets in our jurisdictions will remain immobilized until there is a resolution to the conflict that addresses Russia's violation of Ukraine's sovereignty and integrity." They also promised that "we will work with partners beyond the G7 which hold those Russian sovereign assets to build the broadest coalition possible to advance these objectives."

At Apulia, the leaders will probably remove the February 24th condition that a "resolution to the conflict" must come first. They could proceed with a menu of options, with each member choosing to act in a way consistent with its own distinctive national legal system. They would thus sing in harmony, not in unison, as the traditional G7 phrase says.

In terms of the legal and political risks of confiscating interests, several leading international lawyers say it is fully legal to use the Russian assets for Ukraine, even in the ways the US now wants, although others disagree. Moreover, the reputational and deterrence risks of inaction are stronger –  the G7 would appear to be retreating from its strong support for Ukraine or appear disunited on this central issue, which in both cases would aid Russia, China, North Korea, Iran and other authoritarian governments expanding their assaults on democracies. Italy's Prime Minister Giorgia Meloni, to the surprise of many, has become a very strong supporter of Ukraine. As host of the G7 this year and its high-profile summit, she has a great incentive to keep the G7 united and do so in a more pro-Ukrainian way.

Russia will certainly try to retaliate, including by nationalizing G7 members' firms and other assets still operating in Russia. But these are stranded, shrinking assets anyway, and not large enough to harm any G7 economy. Russia has long tried to create a BRICS-centric alternative to the G7-centred international payments system and use of the US dollar, but has had very little success.

Because most of the frozen Russian assets lie within the EU, the EU is far more at risk than the US, Japan, the UK or Canada are. Several EU members are also much more geographically exposed to any Russian military incursions than the other G7 members, which all have oceanic buffers (even Japan whose Northern Territories are still annexed and militarily occupied by Russia).

The risk of the EU becoming perceived as an unsafe place for foreign investment is small and not a serious one, apart from a concern that China might well think so if it invades Taiwan. The greater concern for the EU is the impact of the US Inflation Reduction Act and Chips Act, and of EU's moves to greater tariffs on Chinese exports of electric vehicles and other green products into the EU.

Russia's seizure of Italian-owned Ariston Group's assets in Russia, along with a similar move against a German firm, is illegal. It is unclear if the EU compensation mechanism, which Italy supports, would provide these firms funds from the EU's frozen Russian assets, the interest on them, the regular or special EU funds, or in other ways. Using the frozen Russian assets for this purpose would reduce what Ukraine would get, and thus provide an incentive for Russia to nationalize more G7 firms in, Russia, without paying any compensation of its own.

It is likely that the full G7 will collectively condemn Russia's move, and demand that Russia return the assets and pay full compensation for the assets, at a price decided along with others, rather than by Russia alone.

The G7 may also consider granting Ukraine a loan guaranteed by the interest earned on the frozen Russian assets, which would reduce the legal problems, although Russia would argue that interest belongs to them. Such a loan would not be confiscating the assets as such, as those could be held or even returned at full value, once the loan is repaid.

Other Subjects

Other issues will be on the agenda at Stresa, including sanctions and international taxation reform.

G7 finance ministers and central bankers will discuss sanctions on Iran. They will even make decisions, and stronger commitments than the one they made in Washington to "ensure close coordination of any future measure to diminish Iran's ability to acquire, produce, or transfer weapons to support its destabilizing regional activities." They will need to tighten enforcement on the sanctions to prevent it from supplying further military assistance to Russia. But they will also want to do so in ways that do not escalate the military conflict between Iran and its proxies and Israel in the Middle East.

On the new international corporate taxation regime agreed by G20 leaders and the Organisation for Economic Co-operation and Development, G7 leaders play an important role in trying to get the US Congress to agree to fully accept both pillars of the Inclusive Framework. There is agreement that not on the US-based digital firms that must pay taxes where they make their profits, as well as a minimum 15% tax. US president Joe Biden and his Democrats have called for the latter, and they and some Republicans know they need new sources of revenue to stop the massive increase in the US government's fiscal deficits and debt. But it is unclear how much political capital he wants to spend on this, before the presidential elections in November.

In Washington in April, G7 finance ministers and central bankers made 45 commitments on a range of subjects, as indicated in Table 1. They will address all these issues again at Stresa, and probably others from Italy's list of Apulia priorities, such as artificial intelligence, migration and refugees, and partnership with Africa.

G7 Finance Commitments, Washington, April 2024

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