Up to $300 billion in Russian assets, frozen in the West since the invasion of Ukraine, are racking up profits and interest income by the day. Now, Europe and the United States are considering how to use those gains to help the Ukrainian military as it fights a grueling battle against Russian forces.
There has been debate for months about whether it would be legal or even prudent to seize all frozen assets. While the United States and Britain have favored the seizures, significant objections have arisen from countries including France, Germany, Indonesia, Italy, Japan and Saudi Arabia, as well as officials such as Christine Lagarde, head 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.
So the idea of confiscation seems dead for now. But proposals to seize and use the profits made on those Russian assets — interest on accumulated cash derived from sanctions, said Euroclear, a financial services company — are gaining considerable traction. Both Europeans and Americans believe those profits could be used without posing the same legal challenges or risks to the global financial system.
But they have conflicting ideas about how to use the funds. Europeans would like to move them to Ukraine every year or every two years. Americans want to find a way to get more money to Ukraine more quickly.
Debate over which approach to use is intensifying in the run-up to the Group of 7 summit meeting in Italy next month, when a deal is expected to be reached. Here’s a closer look at the plans.
The European plan
Next week the European Union is expected to formally adopt a long-running and controversial plan to use most of the interest earned on frozen Russian assets in Europe to help arm Ukraine and make Russia pay for the country’s reconstruction. .
After months of talks, EU nations approved the policy in March. Last week they agreed in principle that they would be willing to use 90 percent of the profits to buy weapons for Ukraine through the European Peace Fund, an EU structure to finance military aid and their own military missions.
The remaining 10 percent would go to reconstruction and non-lethal purchases, to satisfy countries such as Ireland, Austria, Cyprus and Malta, which are militarily neutral.
The European proposal only targets profits made by Belgium’s central securities depository, Euroclear, where around €190 billion in Russian central bank assets are held.
The European Commission expects Euroclear to deliver about €3 billion a year that would be transferred to the bloc’s funds every two years, with a first payment expected in July. This is roughly equivalent to what Britain promises to provide Ukraine next year, but pales in comparison to the $61 billion the United States recently authorized.
Euroclear has made around €5 billion in net profits from Russian assets since the invasion. Profits made until February this year will be retained by Euroclear in case of lawsuits, but the European Commission has considered that Moscow has no legal right to the profits.
The American plan
With Ukraine losing ground to Russia and needing funds to buy more ammunition and pay salaries, the Americans argue that it is preferable to get more money to Ukraine as soon as possible.
The United States owns only a small amount of Russian assets, estimated at around $5 billion. But the Americans propose giving Ukraine about $60 billion up front and then using profits from Russian assets in Europe to pay off the debt over time.
They argue that such a step would send an important signal of Western commitment to both Ukraine and Russia. His plan does not exclude the European, but would follow it and then potentially replace it. And it could be fixed before the November elections.
Daleep Singh, a US security adviser and key architect of Western sanctions on Russia, outlined the idea last month in kyiv.
The Biden administration wanted to use interest income on frozen Russian assets to “maximize the impact of these income, both current and future, for the benefit of Ukraine today,” he said.
“Rather than simply transferring annual earnings from reserves,” he said, “it’s conceptually possible to transfer 10 years of earnings or 30 years of earnings,” he said. “The current value of those profits amounts to a very large figure.”
Mujtaba Rahman, managing director for Europe at the Eurasia Group, who has explored the issue extensively, said the advantage of the US plan is that it is a form of “preparing for the future”.
That should avoid the kind of recent, deeply politicized delay in approving aid to Ukraine by Congress. According to Rahman, it would preempt “a possible Trump presidency and also surround Congress.”
The argument
The US plan has raised objections from Brussels, which undermines European control over assets and carries greater risks.
If interest rates fall, Europeans argue, the money earned on Russian assets may not be enough to pay off the debt. So who would be responsible for covering the deficit, the United States or the European Union?
Second, if the war ends in a negotiation before the bond matures, what happens if sanctions on Russia are lifted and Russian assets are returned? Or what if they are eventually confiscated to pay for the reconstruction of Ukraine? In any case, who would be responsible?
European officials suggest the United States should be the guarantor, while the Americans want the Europeans to take responsibility, Rahman said. Some officials suggest that the Group of 7 take responsibility and even issue the bond, but some countries may have legal objections to that plan.
Some Europeans suggest that the European Commission should issue the bond, since the assets are in Europe and therefore have more say in how the money is spent (mainly in European arms manufacturers or companies, for example, than in the Americans). And Europe wouldn’t have to worry about a reluctant Donald J. Trump or Congress.
Confiscation?
Discussion of outright confiscation continues, although it remains unlikely. Seizing the money would be a way to force Russia to pay for Ukraine’s expensive reconstruction, which is estimated to cost at least $500 billion, if not twice as much, since it is unlikely to volunteer to do so.
Nigel Gould-Davies, a former British diplomat who now works at the International Institute for Strategic Studies, a research institution, says Western fears of financial instability are unrealistic.
“Freezing the assets was a much more decisive step than seizing them and did not cause market turbulence,” he said. “If the countries that issue the major currencies (dollar, euro, pound sterling and yen) move together, there will be nowhere else to store large amounts of money safely.”
In a recent essay, Gould-Davies said that, as with the supply of weapons to Ukraine, “an exaggerated fear of adverse consequences is the ultimate form of chronic self-deterrence in economic affairs.”
Such hesitation is especially foolish, he argues, because the economy is “the West’s area of greatest natural strength, against which Russia cannot effectively retaliate.”
Matina Stevis-Gridneff contributed reporting from Brussels.