Controversy over how to use frozen Russian assets to help Ukraine

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2 days ago

The £38m superyacht Phi should be earning her owner about £563,000 a week, hosting ultra-rich holidaymakers on trips around the sparkling Mediterranean. Instead, she is stuck at a dingy mooring in Canary Wharf, shrouded in scaffolding, her smart blue paintwork peeling and her electrics failing.
And that is where, for the foreseeable future, she will stay, after the Supreme Court last week dismissed an appeal against the vessel's continued detention. More than three years after the Russian invasion of Ukraine, the judgment raised a question: what is the future of Russian assets frozen by the British state?
In March 2022, Phi was in the UK having the finishing touches put to her plush interiors, which include an 'infinite' wine cellar, fluted leather wall panelling, an outdoor cinema and a freshwater swimming pool.
Then Russia invaded Ukraine and the British government launched an aggressive round of sanctions against the Russian state and individuals connected to it.
Since then, it has frozen £25bn of Russian-owned assets – including Phi. According to the judgment there is no evidence that her owner, Russian businessman Sergei Naumenko, has any connection to Vladimir Putin. He has not been sanctioned and internet searches reveal almost nothing about his life and business interests.
The value of the Phi is dwarfed by that of other frozen Russian sovereign assets: held in Belgium, they are worth about £160bn. Nevertheless, former transport secretary Grant Shapps said detaining the yacht had 'turned an icon of Russia's power and wealth into a clear and stark warning to Putin and his cronies'.
The Supreme Court's judgment, which also covered a case brought by the oil tycoon Eugene Shvidler, offered a more solid rationale: 'The very considerable income that Mr Naumenko claims that he could earn by chartering out the Phi to other wealthy people is likely to make its way to Russia,' it said. 'In this way it would be used to contribute to the Russian economy' – thus funding the Kremlin's war with Ukraine.
Tom Keatinge, director of the Centre for Finance and Security at the Royal United Services Industry think tank, says this is typical of the government's approach to sanctions. In 2022, the focus was on taking headline-grabbing 'trophy' assets from big-name oligarchs. Now, this 'has shifted to a focus on how to seize for the benefit of Ukraine'.
To an extent, this is working. The frozen funds have accrued interest, so even if the government can't use the assets directly, it can at least spend the interest they earn to benefit Ukraine.
In June, the UK used £70m of interest payments received on frozen Russian funds to supply Ukraine with 350 missiles. UK government ministers have also stated an aim to direct the £2.5bn proceeds from Roman Abramovich's sale of Chelsea Football Club n 2022 to Ukraine. A government payment of £2.26bn into the Extraordinary Revenue Acceleration scheme, an international loan scheme designed to help Ukraine fund its war, will be repaid using profits from sanctioned Russian assets.
However, physical assets, such as buildings and superyachts, are harder to manage.
Phi is 'a mess', says Guy Booth, the vessel's captain. 'The paint on her hull is peeling off because it's been constantly rubbing on the fenders in exactly the same place for three years. The technical spaces are a mess, and 40% of our onboard machinery is inoperable.'
Although the government's Office for Financial Sanctions Implementation (OFSI) has issued a special licence to allow maintenance of Phi, Booth says insurers won't provide cover, so he cannot take engineers on board. The Department for Transport has engaged with the insurance industry over the matter.
So far, the government's options regarding tangible assets, such as Abramovich's £150m, 15-bedroom mansion on Kensington Palace Gardens, have been limited. Selling them off would be regarded as expropriation, which the government is eager not to be accused of, in order not to frighten off other international investors.
Another option might be to ask oligarchs to voluntarily give up their assets. In June 2023, the government offered a route for sanctioned individuals who say they support Ukraine to 'donate their frozen funds for Ukrainian reconstruction'. However there was no offer of sanctions relief in return for such a donation.
In his Mansion House speech in June, the foreign secretary, David Lammy, announced that London would host a Countering Illicit Finance Summit, which will bring countries together to work on an international solution.
'I think there could be potential in creating new laws to look at taking that from freezing to seizing, but it would need very careful balancing with property rights,' says Ben Cowdock, senior investigations lead at the Transparency International charity. 'At the moment, every country is doing something a little bit different.'
In the meantime, Phi waits for the courts to decide her fate. Naumenko intends to take his case to the European Court of Human Rights, says Booth, although there is concern that she might not last if the wheels of justice turn slowly.
To restore her to her former glory – with a new coat of paint, plus the electrical work and carpentry that should have been addressed during regular maintenance stops – would cost up to £8m, says Booth.
There have, he adds, been a series of small fires on board, which present a risk to the residents and businesses around her mooring. Each time, 'we assemble on the quay and then we assess whether we're going to enter the ship and combat the fire, as we would if we were at sea, or whether it's better just to let it burn, and let the City of London firefighters deal with it'.
A Department for Transport spokesperson welcomed Tuesday's ruling, saying: 'This decision reinforces the UK government's determination to disrupt Russia's economic war machine and return peace to Ukraine.'
Photograph by Sophia Evans/The Observer