Angell Paradox III: Yachts aren't assets, they're liabilities - costly liabilities
Commentary by Kathleen Tyson - March 10, 2022
This continues the Angell Paradox series on Western sanctions blowback that can be summarised as, 'You loot, you lose'. It's shorter and sillier than I (impaired dollar hegemony) and II (securities markets destabilisation).
Perhaps the stupidest Western sanctions of this mess of more than 2,750 anti-Russian sanctions are the seizures of luxury yachts which may indirectly through shell companies and trusts in tax havens plausibly belong to Russian oligarchs or their family members who may indirectly have influential connections back in Russia. None of these individuals are alleged to have committed any crime or been involved in orchestrating or encouraging Russian hostilities in Ukraine. The seizures have violated Western norms of property ownership and natural justice and lack due process or right of appeal. Seizures make the Western nations shouting 'Western values' to the world resemble the tyrannies they claim to despise.
I have owned four boats, and one thing I know for certain: boats are not assets, they are costly liabilities, and the market for second hand boats is notoriously illiquid, especially at the super yacht end of the spectrum. The value of boats diminishes at a terrifying rate as they stand idle. Boats require insurance, licensing, and constant maintenance, and big boats must be crewed 24x7x365 by a professional crew for maintenance, safety, and security.
Suddenly with the stroke of a pen some Russian officials and oligarchs are state enemies, despite the absence of any declaration of war or evidence of violations of Western laws. This overturns so many principles of corporate law, property law, equal protection, and due process I'd have to go back to law school to list them all.
And it is so very pointless. Seizing the yachts makes nice headlines, but the effect is to relieve the oligarchs of a costly liability. The oligarchs aren't going to pay for a seized yacht when the seizure itself violates their interest in property ownership. We don't yet know who will pay insurance, licensing, maintenance, and staffing. Being sanctioned by the West, the oligarchs are barred from commerce with the companies responsible for the yachts. Will the Western governments assume all the costs or the Western companies involved in the seizure? No one knows.
Well played, oligarchs!
I don't know what the Western states ordering the seizures expect to do with the yachts. They can't sell them unless they clear the title by establishing legal processes for expropriating ownership from the tax haven shells or trusts (which is a slippery slope given how many Western politicians and oligarchs have similar arrangements). Somehow they need to produce a legal rationale that can stand up to legal challenge or appeal, and then guarantee a lawful transfer of title.
And if they could sell them, who would buy them? The West is teaching oligarchs everywhere, including maybe American oligarchs like Jeff Bezos and Larry Ellison, that yachts don't offer stateless security.
With clouded title and the risk of Russian antipathy, who is going to want to buy these yachts except at massive discount to their build costs? They could be mothballed for years, draining Western national budgets. If damaged or left to decay, then the owners may recover from Western marine insurance companies or civil court cases against the companies responsible for maintenance or seizing states. Once again, the Angell Paradox correctly predicts sanctions blowback: 'You loot, you lose'.
UPDATE: 05.04.22 It doesn't matter what size boat you own, your annual running and maintenance costs are going to average 10 percent of the purchase price. It's a rule of thumb that stands the test of time. And now who is going to pay those costs is finally being disputed for the seized Russian super yachts. Maintenance companies and ship yards are still invoicing, but no one is quite sure who, if anyone, will pay the invoices.
Sir Norman Angell won the 1933 Nobel Peace Prize for his insight in The Great Illusion (first published 1910) that whoever wins a war between two developed, interconnected nations, profit from war is impossible. If the victor expropriates from the vanquished they undermine the legal certainty and commercial usage essential to cross-border trade, credit, and joint enterprise. All similar undertakings must be discounted against expropriation risk, rendering everyone in interdependent, developed economies poorer.
More reading: Here's what happens to Russian oligarch yachts after they're seized (CNBC)