The Russia-Ukraine war has proven to be costly in many senses of the word, reflected in casualties, widespread destruction, and the financial burden of prolonged fighting. In February of 2022, nearly €200 billion of Russian assets were frozen, orchestrated by the international community in response to the violation of Ukraine’s state sovereignty. Two-thirds of these frozen assets are being held by Euroclear, a Belgium-based financial institution, of which approximately €170 billion out of the total €194 billion have obtained the status of cash balances. The central question concerning these frozen assets is whether the European Union can legally utilize them to support Ukraine. The initial loan of $50 billion from the G7 to Ukraine is soon to be entirely paid out, thus leaving EU countries scrambling to locate finance options amidst domestic limitations, depleted EU lending capacity, and inconsistent support from external contributors such as the United States. The matter is urgent if Ukraine is to sustain its defense against the ongoing Russian onslaught, that of which may persist for an indefinite period given the unsuccessful mediation efforts thus far. Entering next year, Ukraine will be facing an estimated budget deficit of $19 billion. Compounding this dilemma, Ukraine’s defense minister, Denys Chmygal recently stated that the continuation of war efforts against Russia will necessitate more than $100 billion in 2026. Previously, the EU has utilized the interest generated from the frozen Russian assets to repay its portion of the G7 loan. Officials in Brussels are now considering alternative and ‘legally creative’ methods of accessing the larger sums without generating legal and political chaos.
A new solution has been offered which promises to enable the transfer of billions of euros to Ukraine while bypassing the legal difficulties associated with the use of frozen Russian assets. The proposal was presented to finance ministers in Brussels on September 11th and received fairly well. In essence, any maturing assets held by Euroclear must be transferred into a deposit account within the ECB (European Central Bank), which results in the production of interest on the cash held. The new proposal from the Commission recommends that those cash deposits within the ECB can be used to fund a ‘reparations loan’ which will assist Ukraine in war efforts along with the reconstruction and reestablishment of destroyed infrastructures. Given the risk associated, the Commission has suggested trading the cash deposits with bonds of zero interest that are collectively guaranteed by countries of the EU. However, this presents an additional set of challenges, as a national guarantee necessitates unanimous consensus, which may be difficult to achieve as this is a highly contentious issue among member states. The Belgian government has been particularly vocal in dissent, warning of the potential legal and financial ramifications.
Such an overt exhibition of strength from the EU prompts the question of what conditions have led to the newfound interest in utilizing the frozen Russian assets, a matter which has endured much debate since their initial seizure. One apparent difference is that since the inauguration of President Trump in January of this year, support from the United States – both in financial and symbolic terms–has been inconsistent. President Trump’s attempts at mediation have been an outright failure, compacted by his unwillingness to either threaten the increase of economic sanctions against Russia or provide further assistance to enhance Ukraine’s military capacity. This change of course from the previous Biden administration has now placed the overwhelming responsibility of guaranteeing Ukraine’s security and future onto the shoulders of the EU. Arguably, this should have been the responsibility of the EU from the onset of the war. Regardless, it is now, due to the newfound desire of the American government to minimize its involvement in international conflicts.
Due to the current economic condition of the EU, specifically the strain on national budgets, this new proposal appears to be the only viable pathway for Ukraine to receive necessary financial resources. German Chancellor Friedrich Merz, initially opposed to the prospect, has warmed to the idea in recent weeks. Gunther Sautter, diplomatic advisor to Chancellor Merz, recently stated that the discussion of utilizing the frozen Russian assets is helpful in itself, “because it creates insecurity on the Russian side”. It is essential that the EU remains at the forefront of discussions surrounding the Russia-Ukraine war, as it relates to concerns of state sovereignty and collective security for the entire continent. In the case of Ukrainian defeat or inability to sustain military action, the EU will be overextended in attempting to provide security for Ukraine and other Eastern European states which have also expressed concerns of vulnerability in regard to persistent Russian expansion.
Despite the urgent need for these additional financial resources, the Commission’s new proposal presents a variety of risks.
The countries of Belgium, France, and Germany specifically have expressed their apprehensions. In Belgium – home of Euroclear, the financial institution which is in possession of these funds – foreign minister Maxime Prevot has expressed concern that this plan will set a negative precedent for foreign nations which are potentially or currently investing their money in Western government bonds. He is concerned with conveying the message that foreign capital held in European financial markets can be potentially seized for political reasons, thus deterring future investors and causing panic in the market. The legal windfall and financial consequences could lead to the collapse of Euroclear, a detrimental outcome. Prevot recommends that despite budgetary pressure on member states, the Russian assets should be used exclusively for their negotiation leverage rather than their monetary value. Prevot recently stated, “confiscating them for political reasons, without a court ruling, without a secure legal environment, with the systemic consequence of weakening European financial markets, which would collapse, is not an option”. These comments are in opposition to those of Ursula von der Leyen, President of the European Commission, who recently expressed her support for this new financial plan in a State of the Union address to the European Parliament. Von der Leyen acknowledged that “the risk will have to be carried collectively”, given that the loans will have to be guaranteed unanimously by the EU member states. However, von der Leyen asserts that the funds would be invaluable to Ukraine, allowing for reconstruction and rehabilitation to commence immediately, regardless of progress in the resolution of the conflict.
Despite optimistic sentiments from the Commission, many concerns remain regarding the advancement of this proposal. If the plan is realized, it is necessary for the assets to stay frozen for the entire duration of the loan, which von der Leyen states will only be paid back by Ukraine once Russia has provided reparations. This points to an indeterminate and potentially extensive duration of time for which the Russian assets must stay frozen. In order for the sanctions to remain in place, unanimous support from the EU member states must be extended every six months. This potentially leads to a range of legal issues which could materialize if the assets do not remain frozen, reparations remain unpaid, or the conflict remains unresolved. Another important consideration for the EU is potential retaliation from the Russian government for utilizing their frozen assets to fund Ukraine. In response to the new proposal from the Commission, Dmitry Peskov, a Kremlin spokesperson warned that, “the use of Russia’s assets will not go unanswered”. This proposal is perceived by the Russian state as an irrefutable act of provocation, that of which could have numerous repercussions, ranging from legal proceedings and financial liability to strained diplomatic relations and political consequences.
The final decision will be discussed in the upcoming EU leaders’ summit from October 23th-24th. If the EU moves forward with the proposal, it would be an extraordinary demonstration of institutional power and conviction in the face of prolonged Russian aggression. Although a variety of obstacles and potential consequences remain, it may be the only option to keep Ukraine afloat in this relentless conflict.
