Nearly $300 billion in Russian assets, frozen in the West since the invasion of Ukraine, accumulates profits and interest income day by day. Now Europe and the United States are considering how to use those gains to help Ukraine’s military as it wages a grueling battle against Russian forces.
There has been debate for months about whether it would be legal or even wise to completely confiscate frozen assets. While the United States and Britain favor confiscations, significant objections have come from countries including France, Germany, Indonesia, Italy, Japan and Saudi Arabia, as well as officials like Christine Lagarde, director of the European Central Bank.
They argue that confiscation would set a bad precedent, a violation of sovereignty and could lead to legal challenges, financial instability and retaliatory seizures of Western assets abroad.
The idea of confiscation therefore seems dead for the moment. But proposals to seize and use the profits made on these Russian assets – interest on accumulated cash from sanctions, said Euroclear, a financial services company – are gaining significant ground. Both Europeans and Americans believe that these benefits could be used without raising the same legal challenges or the same risks for the global financial system.
But they have conflicting ideas about how to use the funds. The Europeans would like to transfer them to Ukraine every year or every two years. The Americans want to find a way to get more money to Ukraine more quickly.
The debate over which approach to take is intensifying in the run-up to the G7 summit in Italy next month, where it is hoped an agreement will be reached. Here’s a closer look at the plans.
The European project
The European Union is expected to formally adopt next week a controversial and long-standing plan to use most of the interest earned on frozen Russian assets in Europe to help arm Ukraine and make Russia pay for rebuilding the country.
After months of negotiations, EU countries approved the policy in March. Last week, they agreed in principle that they would be willing to use 90% of the profits to buy weapons from Ukraine through the European Peace Facility, an EU structure intended to finance military aid and its own military missions.
The remaining 10 percent would be spent on reconstruction and non-lethal purchases, to satisfy countries like Ireland, Austria, Cyprus and Malta, which are militarily neutral.
The European proposal only targets profits made by Belgian central securities depository Euroclear, where around 190 billion euros of Russian central bank assets are held.
The European Commission expects Euroclear to pay around 3 billion euros a year that would be transferred to the bloc’s funds every two years, with the first payment expected in July. This is roughly equivalent to what Britain promises to provide to Ukraine next year, but it is small compared to the $61 billion the United States recently authorized it.
Euroclear has made around €5 billion in net profits from Russian assets since the invasion. Profits made through February this year will be retained by Euroclear in the event of legal claims, but the European Commission has ruled that Moscow has no legal right to the profits.
The American plan
As Ukraine loses ground to Russia and needs funds to buy more ammo and pay salaries, the Americans argue that it is better to send more money to Ukraine as quickly as possible.
The United States holds only a small amount of Russian assets, estimated at approximately $5 billion. But the Americans propose giving Ukraine some $60 billion upfront, then using the profits from Russian assets held in Europe to pay off the debt over time.
Such a move, they argue, would send an important signal of Western commitment to Ukraine and Russia. Their project does not exclude the European one, but would follow it and could possibly replace it. And this could be organized before the November elections.
Daleep Singh, US security adviser and key architect of Western sanctions against Russia, described the idea last month in Kyiv.
The Biden administration wanted to use interest income on frozen Russian assets to to “maximize the impact of these revenuesboth current and future, for the benefit of today’s Ukraine,” he said.
“Instead of just transferring the annual profits from the reserves,” he said, “it is conceptually possible to transfer the 10 or 30 years of profits,” he said. “The current value of these benefits represents a very significant figure. »
Mujtaba Rahman, managing director for Europe at Eurasia Group, who has studied the issue extensively, said the advantage of the US plan was that it provided a form of “future-proofing”.
This should avoid the kind of recent, deeply politicized delay in congressional approval of aid to Ukraine. According to Mr. Rahman, this would “anticipate a possible Trump presidency and also bypass Congress.”
The argument
The US plan has sparked objections from Brussels, saying it undermines European control over assets and carries greater risks.
If interest rates fall, Europeans say, the money earned from Russian assets may not be enough to repay the debt. So who would be responsible for making up the deficit, the United States or the European Union?
Second, if the war ends in a negotiation before the bond matures, what will happen if sanctions against Russia are lifted and Russian assets are returned? What if they were ultimately confiscated to finance the reconstruction of Ukraine? In both cases, who would be responsible?
European officials suggest the United States should be the guarantor, while the Americans want the Europeans to take responsibility, Mr. Rahman said. Some officials suggest that the Group of Seven take responsibility and even issue the bond, but some countries may have legal objections to the plan.
Some Europeans suggest that the European Commission should issue the bond, since the assets are in Europe, and thus have more say in how the money is spent – mainly for European arms manufacturers or companies, for example, rather than for American companies. And Europe wouldn’t have to worry about a reluctant Donald J. Trump or a reluctant Congress.
Confiscation?
The debate over outright confiscation persists, even if it remains unlikely. Seizing this money would be a way to force Russia to pay for the costly reconstruction of Ukraineestimated to cost at least $500 billion, if not double, as he is unlikely to volunteer to do so.
Nigel Gould-Davies, a former British diplomat now at the International Institute for Strategic Studies, a research institute, says Western fears of financial instability are unrealistic.
“The freezing of assets was a much more decisive measure than their confiscation and did not cause any market turbulence,” he said. “If the countries that issue the major currencies – the dollar, the euro, the pound sterling and the yen – move together, there will be nowhere else where large sums of money can be held safely. »
In a recent testMr Gould-Davies said that, as with arms deliveries to Ukraine, “exaggerated fear of adverse consequences constitutes the latest form of chronic self-deterrence in economic affairs”.
Such hesitation is particularly foolish, he argues, because the economy constitutes “the West’s greatest natural force, against which Russia cannot respond effectively.”
Matina Stevis-Gridneff contributed to reporting from Brussels.
