Since the Kremlin launched its full-scale invasion of Ukraine three and a half years ago, Europe has been dithering on what to do with more than $300bn of frozen Russian assets. Faced with deteriorating finances, many countries now finally accept it’s time to act, even if in the short-term this may offer some help to Russia.
The main fear has been that seizing accounts and assets would sacrifice the sacred cow of private property and banking reliability, prompting other major clients — both private and sovereign — to seek safe havens for their billions outside Europe, thereby damaging both the currency and financial sector.
Legal action was also a worry (and is near-inevitable — a lawless Russia loves the delays and difficulties imposed by legal action in the West.) Now it seems the European Union and the UK seem to have decided that rather than slaughter the sacred cow, they will milk it instead.
Western Europe has frightened itself into inaction, but there was never much chance that Russia would be able to unblock its billions. After all, there is both an urgent need and a moral imperative to make the aggressor pay by using Russia’s money for Ukraine’s cause. Quite apart from the need to fight on, Russia has done perhaps $1.16 trillion in damage to its neighbor.
The frozen funds are primarily owned by Russia’s Central Bank. The majority of the Russian funds are held in the EU, with more than half deposited at Euroclear, the Belgian depository and clearing house. With no precedent to follow, European governments have been hesitant to seize assets from a country they are not officially at war with.
It has however, used some of the money to aid Ukraine. As interest-bearing Russian assets mature, Euroclear accumulates cash balances on its books. The clearing house uses these funds to generate interest income, similar to any commercial bank. This income is then seized for Ukraine’s benefit through a special tax. Last year, this interest income amounted to €6.9bn ($8.1bn).
This approach was legally sound. The ownership rights and nature of the assets remain unchanged, and Moscow’s only legal recourse would be claiming lost revenue, which is difficult to prove. The main risk would be a sharp drop in European interest rates, which has not happened.
Now that the US has ended direct aid to finance Ukraine, the need for more cash over a longer period has become urgent. This prompted the EU to present a new plan, details of which remain sketchy, as reported by the Financial Times, which suggested Ukraine might receive about $200bn. The UK holds about $30bn in Russian assets and looks set to mimic the EU program.
The plan would use cash balances in Russia-owned accounts as collateral for new bonds, or use them directly to purchase these bonds. In broad terms, it works as follows: the EU, or a group of participating countries, issues non-interest-bearing bonds. Russian cash balances serve as collateral, and the bonds are sold in tranches to private investment banks.
Alternatively, the cash is used to purchase these bonds in tranches. Ukraine is thought to become the ultimate party liable for the debt, but will only be obliged to pay if the reparation issue is settled. Alternatively, Russian cash is used for the repayment. Both schemes ensure a steady cash flow to Ukraine.
Bond redemption will depend on peace conditions and Russia’s agreement to pay reparations. This fully corresponds to the G7 and EU political position formulated in 2022: Russia will not recover its reserves until there is peace and an agreement on compensating Ukraine for damages.
Formally, Russia would remain the owner of its accounts, but Moscow will be unable to manage these assets, as before. Since the bonds are interest-free, Russia will lose money to inflation annually.
Nevertheless, Russia has grounds to challenge this approach, as such “replacement” would change the composition of its accounts — much like a private individual discovering their cash has become loan collateral or transformed into securities. The EU would need legally solid grounding for its plans.
These are the schemes European Commission President Ursula von der Leyen recently discussed in her annual State of the Union address.
The proposal to seize “or otherwise directly use” Russian assets in an “innovative way to finance Ukraine’s defense” comes from Washington, according to the FT. It quoted a US note sent to G7 partners as suggesting the funds be used “innovatively to fund Ukraine’s defense.” Just a year ago, as a senator, US Vice President Vance opposed seizing Russian assets, and the largest European countries — including Germany, France, and Belgium, in whose jurisdiction the Russian reserves are located — were also unanimously against confiscation.
These radical changes became possible through Germany’s shift in position under the new government of Chancellor Friedrich Merz. Berlin, which more than others feared that seizing Russian assets would undermine the euro’s position as a store of value and Europe’s status as a reliable financial center, changed its approach due to the policy shift in Washington under the Trump administration and fears that further taxpayer-funded aid to Ukraine would aid the rise of the far-right AfD.
Russia will challenge any such moves in court; there are still Western lawyers willing to act for the Kremlin. This despite Putin’s declaration that he considers the $300bn a lost cause, calling it “a price worth paying.”
The new EU-UK plan is unlikely to include provisions banning legal challenges, and so if private banks purchase the new bonds, they become defendants. Legal risk will be embedded in these bonds, cooling potential buyers’ appetite and increasing yields.
If Russian cash is replaced with non-interest-bearing bonds, sovereign countries are likely to become defendants rather than banks, making the system more resistant to lawsuits and value loss. At Belgium’s insistence, the new plan distributes legal risks among all participating countries.
Russia will also formally seize the foreign assets it holds, mostly belonging to Western firms that invested in Russian assets and businesses. Russia locked these assets and the income they generated since 2022 in special accounts. Like the Russian accounts with Euroclear, these accounts belong to their owners, but they can’t do anything with them. The exact amount of money on these accounts is unknown, as some foreigners have managed by hook or by crook to get their money out, while dividends and interest income continue to accrue for the others. A very rough estimate suggests these might total something like
$20bn-$24bn. No doubt these funds have incentivized Western businesses to quietly lobby against Russian asset seizure.
But the money does not belong to Western governments and does not approach the size of the frozen Russian funds.
Overall, Western assets in Russia occupy the same position as Russian assets in the West. Essentially, they are lost. In theory, their seizure would benefit the Kremlin by allowing budget or National Wealth Fund replenishment. But this would come at the price of making Russia even more hostile and risky for international investors.
And while the Russian budget may be an unexpected beneficiary, the sums are insufficient to stave off the spending cuts and tax increases currently under discussion to balance spending and income.
As for Ukraine, it desperately needs the funds for defense, reconstruction, and budget balancing, while Europe needs them to resolve the moral problem of continuing Ukrainian aid without further irritating already angry voters. It was — as some have argued — a blindingly obvious decision for the West to make. Now, after 43 months of war and no end in sight, we seem close to a resolution. The outcome can be summarized in three words: Make Russian pay.
Alexander Kolyandr is a Non-Resident Senior Fellow at the Center for European Policy Analysis (CEPA), specializing in the Russian economy and politics. Previously, he was a journalist for the Wall Street Journal and a banker for Credit Suisse. He was born in Kharkiv, Ukraine, and lives in London.
More on this and other aspects of the Russian economy in a weekly summary produced by the independent publication, The Bell.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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