Inside the City’s fightback over Cameron’s plan to seize £26bn in Russian assets

The banking industry fears a seizure of billions of pounds in Russian assets from UK accounts could cause a worldwide financial crisis, i has been told.

A leading UK banking industry source said there are concerns that David Cameron’s plan to seize around £26bn of assets held by British banks to fund the reconstruction of a post-war Ukraine could cause a worldwide recession bigger than the financial crash in 2008.

Lord Cameron has said there is a moral and economic case for using the £250bn of frozen assets held in Western banks to rebuild Ukraine. Around £26bn of that is said to be held in the UK.

The proposal is part of the Foreign Secretary’s continued push for tougher and better enforced Russian sanctions at the G20 and UN this week ahead of the second anniversary of Vladimir Putin’s invasion of Ukraine on Saturday, and in response to the death of Alexei Navalny.

But the banking industry source warned that it could “cause a liquidity crisis greater than that seen 2008”.

Finance professors told i that while the banks have a clear interest in raising fears about having their deposits seized, “their fundamental point is correct” and Lord Cameron’s plan could backfire if it had “a bigger psychological impact in other countries” such as China.

A second banking source said that if the cash was withdrawn slowly, the situation could be better managed.

It is understood the government is yet to approach the banking industry to discuss the asset seizure plans and that executives are expected to tell ministers that they would struggle to get legal clearance to seize Russian assets as it would have to prove all the cash was obtained via criminal means.

While hundreds of Russian individuals with links to the Kremlin have seen their assets frozen by governments around the world, this mere act of freezing assets does not amount to a criminal allegation.

The high-level UK banking executive said: “We’re talking about an impact that would be greater than the 2008 banking crisis. Banks would go under, and that would lead to a global recession that affects all of us.”

UK banks are believed to hold around £26bn out of £250bn of Russian asset frozen globally since Moscow launched its full-scale invasion of Ukraine almost two years ago (Photo: Clodagh Kilcoyne/Reuters)

Around £230bn of cash in the Western bank accounts of Russian individuals and corporations has been frozen since Vladimir Putin’s full-scale invasion of Ukraine in February 2022. This money has remained in the banking system and is leveraged to provide loans that total a multiple of the original amount.

“This cash is still swilling around the system,” said the banking source. “It’s frozen in terms of those who deposited it not being able to get hold of it. It’s not frozen in the system. Like everyone’s deposits, it is used to finance loans far exceeding that initial £250bn.

“The trouble is that if the banks are ordered to hand that cash over, then those loans would be called in and a panic would spread through the system. No bank has this level of cash just sitting there and being forced to hand it over for Ukraine would lead to banks going under.”

Executives at the world’s leading banks will also tell the Government that any seizure of Russian assets would spark fears among other nations such as China that sanctions could be imposed on them should they act in a way that results in international condemnation.

Bankers are also concerned that any move to take their client’s cash by Governments could lead to them being sued by Russian individuals and institutions, so they will demand an agreement that shows Governments seeking the cash are responsible for any legal actions that arise as a result of any cash being seized.

The source added: “The main concerns we have is proving criminality using existing law to extract those funds, making it clear and auditable that it is going to Ukraine, being mindful of causing a liquidity issue for Western banking, and the risk of withdrawals from other states from Western banking because that, again, would cause them liquidity issue.”

Richard Werner, a member of Linacre College at Oxford University and professor of banking and economics at the University of Winchester, said that while the banks had a clear interest in raising fears about having their Russian deposits seized “their fundamental point is correct”.

“In some way one could put a less dramatic spin to it,” said Prof Werner. “But overall, I would say the banking world’s view is quite accurate.

“Where the banks are rightly concerned is regarding the bigger psychological impact in other countries.

“Other countries, whether it’s Saudi Arabia, a string of Gulf countries, China, Vietnam, and many others will take a different view of UK financial markets and the UK financial system and holding assets in it.

“They may feel that if it can happen to Russia it could happen to them and this could set in motion a withdrawal of funds by nations such as these from the western banking system.”

Prof Werner added that BRIC member nations – the trade group formed by Brazil, Russia, India, China that now also includes Saudi Arabia, the United Arab Emirates, Egypt, Iran, and Ethiopia – are already working on a new global banking infrastructure that is close to being a “credible alternative to the western banking system”.

“Going after Russian assets in western banks could hasten the switch by BRIC nations to their own financial system,” he added. “This is a genuine threat to the world banking status quo, but it could be reversed if governments do not go after Russian money in this manner.”

Surrey Business Schools professor of banking and finance Jon Williams agrees that Lord Cameron’s strategy could backfire.

“History is littered with clues as to what could happen should the government decide to seize Russian central bank assets currently held in western banks, of which around £26 billion is held in the UK. It is largely a story of unintended consequences.

“The UK banks are correct in their analysis of the situation. The conflict in Ukraine is unresolved and the outcome remains uncertain. Hence, Cameron’s proposal is arguably premature. The UK banks are correct to be sceptical.

“An unintended consequence arose from the perceived punishing reparations demanded of Germany by the Treaty of Versailles following the Great War, that some claim resulted in the economic collapse of Germany and fuelled the rise of national socialism.”