EU Eyes Bold Move to Unlock Billions in Frozen Russian Assets

The debate surrounding the use of immobilised Russian Central Bank assets to provide financial support to Ukraine has resurfaced, with several EU member states, including Sweden, the Netherlands, Spain, and Poland, backed by the Baltics, leading a renewed push. This initiative aims to channel the estimated €210 billion held in these assets towards Ukraine, which is grappling with escalating war costs. However, this campaign has quickly encountered a familiar opponent: Belgium.

Belgium currently hosts the vast majority of these assets within Euroclear, a financial depository located in Brussels. The country expresses significant apprehension that any action to redirect these funds to Ukraine could expose it to unforeseen risks and substantial litigation. Euroclear itself is already engaged in a lawsuit in Russia. Last year, Belgium played a pivotal role in scuttling a previous proposal to convert the €210 billion into a zero-interest credit line for Ukraine, and its foreign minister, Maxime Prévot, has affirmed a similar stance, stating, "The reasons behind our opposition have not magically disappeared. Using these assets through a process amounting to confiscation would entail very significant risks."

Amidst this deadlock, a new concept is gaining traction: to relocate the sovereign assets currently held at Euroclear into a new custodian entirely owned and controlled by the European Union. Proponents of this idea believe it would alleviate the liability and exposure for Euroclear and, consequently, Belgium. Ukraine's finance minister, Sergii Marchenko, has expressed strong interest in this proposal, suggesting it could simplify the process and mitigate risks by making it a "joint responsibility of the European Union," with all 27 member states collectively signing an accord, thereby avoiding complex national guarantees and offset mechanisms.

This "custodian for all" concept, though not entirely novel, has been championed by "The Russian Transfer" project, led by Hugo Dixon, Lee Buchheit, and Daleep Singh. They advocate for using the emergency powers outlined in Article 122 of the EU treaties to transfer Russian assets from Euroclear and private banks to an EU-owned custodian, citing public security and financial stability concerns. Article 122, requiring a qualified majority, was previously invoked to indefinitely immobilise these assets. This proposed EU custodian would not be a corporate entity, thus avoiding domicile in any single member state that Moscow could target. Belgium would also be indemnified for the "slim risk" of damages incurred from the transfer, as mandated by EU regulation. The Russian Central Bank would remain the nominal owner, entitled to recover funds only after paying war reparations to Ukraine. A historical parallel cited is the US transfer of $1.7 billion in Iraqi sovereign assets to a special account at the Federal Reserve Bank of New York in 2003.

An alternative strategy has been put forth by Karel Lannoo, chief executive at the Centre for European Policy Studies. He proposes a Special Purpose Vehicle (SPV) that would hold the entire €210 billion in Russian assets but leverage only their extraordinary revenues, estimated at €4 billion annually, to back the issuance of bonds. This approach would allow the EU to mobilise larger upfront sums for Ukraine while ensuring the principal €210 billion remains untouched. Under Lannoo's model, the European Stability Mechanism (ESM), established as a eurozone firewall, would provide the necessary guarantees for these bonds. The SPV idea was even mentioned by the European Commission in a previous options paper, though it noted higher funding costs compared to traditional common borrowing.

While proponents believe changing custodianship could overcome Belgium's objections and unlock substantial financial aid for Ukraine, the broader concerns about financial stability persist. Last year's plan collapsed partly due to fears that foreign states and investors might perceive such a move as asset confiscation, leading them to relocate their own assets and trigger a reputational crisis for the eurozone. This risk heavily influenced the European Central Bank (ECB), whose president, Christine Lagarde, privately advised EU leaders to act in concert with other Western allies to avoid isolating the eurozone. The ECB, Euroclear, and some member states remain wary of any high-risk proposal that could prompt an investor exodus, destabilise financial markets, and undermine the euro, especially amidst current global turbulence. It remains uncertain whether a change in custodianship alone will sufficiently allay these deep-seated concerns.