LONDON – The European Commission has a plan to help finance the reconstruction of war-torn Ukraine using Russian state assets. It’s a bold move and a sign of a shift towards something that once seemed impossible.
It would be an unprecedented legal undertaking, strongly desired by Ukraine and its allies, but which is already stirring up a storm among governments. The EU executive’s intention to give its weight to such a move – confirmed on Wednesday by Commission President Ursula von der Leyen – will require delicate politics in the coming months.
The plan is fraught with political, legal and economic risks. It has implications for the role of foreign reserves in stabilizing currencies, as well as for the international protection of state property – and could potentially be debated endlessly in court. The idea of making the aggressor pay war damages is not new, but it would be to bet on foreign reserves frozen under Western sanctions.
“On the one hand, it is a matter of international law that Russia, as the aggressor, is responsible for reparation for the damage it is creating,” European Commission Executive Vice-President Valdis Dombrovskis told POLITICO. “On the other hand, it is also a question of EU taxpayers’ money. The more we allocate Russia’s resources to rebuilding Ukraine, the less funds will be needed from the EU. »
Sixteen months after Russian President Vladimir Putin’s invasion, Ukraine is facing a reconstruction bill that exceeds $400 billion. While the EU has been at the forefront of offering support and this week the Commission called for an increase in its long-term budget to provide Ukraine with €50 billion in grants and loans until 2027, it is a tough act of balance as Europeans face rising cost of living.
That is why Commission President Ursula von der Leyen told a conference on the reconstruction of Ukraine in London on Wednesday that the proceeds of the more than 200 billion euros belonging to the Russian central bank frozen in the EU will « eventually » be used to pay the reconstruction of Ukraine. You said a proposal would be made before the summer break.
The idea of using Russian assets was floated over a year ago, but it seemed like a legal impossibility at the time. As the conflict has passed its one-year anniversary, however, signs of momentum have emerged.
Within days of the invasion in February 2022, the EU, US, UK, Japan, Canada and others froze about $300 billion in the foreign reserves of the Central Bank of Russia.
Over €200 billion is held in Europe, mainly in central securities depositories – settlement houses that are part of the plumbing of the financial system – with Belgium’s Euroclear and Luxembourg’s Clearstream holding the largest shares.
These assets generate cash that CSDs reinvest. While the assets themselves are protected by state immunity under international law, the EU has been looking into how to use the profits.
Other jurisdictions are moving in a similar direction. UK Monday announced it would make the sanctions permanent until Russia pays war reparations to Ukraine. In the US, despite Treasury Secretary Janet Yellen’s skepticism, House representatives sponsored a bipartisan bill to transfer Russian assets to Ukraine. Canada and Estonia have also taken legal steps to confiscate assets belonging to persons listed in the sanctions regime.
Uncertainties and reservations
There are two options on the table for the EU, both of which would generate returns of around 3% per year, according to an EU Council assessment obtained by POLITICO.
One option suggested by the Commission would be to require holders of assets, most of which have been turned into cash or will do so within two or three years, to invest them, with the EU using dividends. To go down this path would require « important legal considerations… in the light of the principle of state immunity », according to a document released by the EU Council.
The problem is that the EU would be required to reimburse Russia in case of losses related to the investment of its state assets. The likelihood of this happening is low but « a concern remains ».
A second option is to tax the windfall profits made by current asset holders, largely CSDs and, to a lesser extent, commercial and central banks.
The EU argues that while Russia retains a right to the contractually agreed amounts, the extra profits belong to the CSDs and banks and therefore could be taxed. The advantage of this option is that the EU would not be liable for losses and as such « carry less risk of negative market perceptions ».
The European Central Bank has warned that both options « could increase the risk of undermining the legal and economic foundations on which the international role of the euro depends ». The fear is that it could discourage other countries from keeping their foreign reserves in euros, as well as put European financial intermediaries at a disadvantage if the EU were to go it alone.
That is why « coordinated decisions with international partners, in particular the G7, would be needed to mitigate the risks », wrote the Council.
The windfall tax appears to have garnered more support with « a sufficient degree of willingness to work on that option, » Anders Ahnlid, a Swedish diplomat chairing EU country talks on the issue, told POLITICO. There was no consensus, he said.
Ukraine’s most outspoken supporters within the bloc are adamant that Russia should pay for the damages and see its foreign reserves as a rich reward. Poland, the Baltic countries and Slovakia have long supported this solution. The Nordic countries are also in favor.
« We need to find a way to mobilize these resources to offset the cost of reconstruction, » Latvian Prime Minister Krišjānis Kariņš told the London conference on Wednesday.
In a sign that the issue is gaining credibility, it was discussed by EU ambassadors in Brussels on Wednesday.
Envoys from France, Germany, Italy, Luxembourg, Portugal and others have expressed doubts and asked for further work, two EU diplomats said, having declined anonymity to speak of confidential talks.
The issue is likely to be discussed by EU leaders at their meeting in Brussels next week.
Second draft summit conclusions, they are ready to say that « they took stock of the work done on Russia’s fixed assets and call on the Council to take the work forward ».
French Foreign Minister Catherine Colonna said the interception of Russian assets « raises legal questions that need to be resolved ». But she added, « However, there is a rationale that those responsible for the damage are also responsible in some way for paying for the reconstruction. We keep looking for what we should do. »
Suzanne Lynch contributed to the reporting