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RFE/RL staff

RFE/RL staff

RFE/RL journalists report the news in 21 countries where a free press is banned by the government or not fully established. We provide what many…

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Ukraine's War Effort May Get Boost from Frozen Russian Assets

  • The EU is considering using the profits from frozen Russian assets to help Ukraine.
  • The European Commission proposed the initiation of the second and final step -- sending the actual cash to Ukraine.
  • If approved, the money could be sent to Ukraine by July, and similar sums could be sent each year after that.

The European Union is inching closer to a historic decision on using profits from Russian assets frozen by the bloc to help Ukraine. The Russian central bank's assets were frozen shortly after the full-scale invasion of Ukraine in February 2022 and have remained so ever since. The securities and cash frozen in the G7, the EU, and Australia are estimated to be worth roughly 260 billion euros ($282 billion). Assets worth an estimated 210 billion euros are in the EU, mostly in Belgium, the home of Euroclear, a user-owned financial services company specializing in securities transactions.

In February, the first step by Brussels was completed by setting aside the profits accumulated from the frozen assets. On March 20, the European Commission proposed the initiation of the second and final step -- sending the actual cash to Ukraine. This comes after EU foreign ministers, two days before, tasked EU foreign policy chief Josep Borrell with coming up with a proposal for making this happen.

None of the 27 member states have objected so far, although it's far from a done deal. Leaders and officials from EU member states still have to study the European Commission's proposal and give it a unanimous green light. Diplomats and officials are expected to start studying the fine print of the text today.

Deep Background: The proposal, seen by RFE/RL, notes that the first step of the process, the setting aside of profits, started on February 15 this year: "the central securities depositories (CSDs) are prohibited from disposing of these profits, or distributing them to shareholders, until the [European] Council decides on the financial contribution to be raised on them to support Ukraine."

CSDs are institutions, such as Euroclear, that hold and administer securities and enable their transactions. The step is thought to have raised something between 2.5 billion and 3 billion euros. The European Commission hopes that this money can be sent to Ukraine by July, provided that member states approve. There are also hopes in Brussels that comparable sums can be sent to Kyiv each year after that, depending on annual interest rates.

There are a number of "assurances" in Borrell's proposal for member states worried that this move could amount to a seizure of private property -- with private ownership being a fundamental EU right -- or could damage the bloc's common currency, the euro. The document notes that "the generation of unexpected and extraordinary revenues...are not the property of the Russian central bank as there is no legal or contractual provision for interest to be paid to the owners of the principal.

Since these revenues only exist as a result of the restrictive measures, there can also be no legitimate expectation that they should remain with the central securities depositories and their shareholders." The proposal also added that any retroactive claims by Moscow won't be accepted: "Unexpected and extraordinary revenues do not have to be made available to the central bank of Russia under applicable rules, even after the discontinuation of the transaction prohibition. Thus, they do not constitute sovereign assets. Therefore, the rules protecting sovereign assets are not applicable to these revenues."

Drilling Down

  • There are other "goodies" to entice member states to quickly come on board with the proposal: an expected 3 percent of the profits from the frozen assets will remain with the CSDs "to ensure the efficiency of their work." In the future, the financial services companies will also be able to provisionally retain 10 percent of the profits to cover potential legal fees, as it's highly likely that Russia will take them to court.
  • Several EU officials I have spoken to on background have played down the possibility of damaging the euro's position as the second reserve currency in the world. The fact that Brussels has pondered this move for several months already without any impact on the common currency in terms of trading or value is being cited in support of that argument. Another argument in support of the move is that other G7 countries are also mulling similar moves, so it might not be just the euro that is potentially exposed.
  • Then there is the European Commission's proposal of how the money should be spent, which gives member states even more potential oversight -- and even veto opportunities. Initially, it was thought that the money generated from the profits would go to the reconstruction of Ukraine. But as the war drags on and no one expects widespread reconstruction to start anytime soon, the EU proposal states that 90 percent of the money should go to the supply of military equipment for Kyiv and the remaining 10 percent to regular financial aid.
  • That proposed 10 percent would be channeled via the regular EU budget, so it doesn't need an explicit green light from any member states. But the 90 percent should go via the European Peace Facility (EPF), an off-EU-budget mechanism that has allowed Brussels to send money to Ukraine for arms purchases. The EU has so far sent 5.6 billion euros ($6.1 billion) for the purchase of arms and artillery to Kyiv over the last two years via EPF but has, for the last 10 months, failed to sign off on a 500 million-euro EPF tranche after a long-standing Hungarian veto. The veto stems from Budapest's dispute with Kyiv over a blacklist produced by Ukraine's National Agency on Corruption Prevention. The Hungarian bank, OTP, is on that blacklist and labeled an "international sponsor of war" as it continues to do business in Russia.
  • While the bank was de-listed in the fall, Budapest has sought assurances that it won't happen again in the future, something that so far has not occurred. Recently, the EPF ceiling was raised by 5 billion euros specifically for Ukraine, paving the way for even more EU cash for weapons for Ukraine.
  • But the rules of the game have not changed. This means that national vetoes, such as the Hungarian one, will be a crucial factor for future tranches. And that means the windfall may not end up in Ukraine by the summer after all.



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Leave a comment
  • Mamdouh Salameh on April 09 2024 said:
    If that happens, then the EU could say bye bye to their huge investments in Russia.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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