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According to European Central Bank President Christine Lagarde and other top eurozone financiers, the seizure of Russian assets could create "legal risks" for euro investments.
As the international dialogue on Russia's full-scale invasion of Ukraine enters a new chapter, so too is the discussion of how to support Ukraine in its courageous defense of its territorial integrity, as well as that of Europe.
There are many thorny issues to address - some of them real, some of them imagined and fabricated in a way that only the EU and its bureaucracy can manage. And chief among them is what to do with the frozen assets of the Russian Central Bank, most of which are denominated in euros and thus held in EU banks.
To date, Europe's political and financial leaders have found endless excuses to delay cutting this Gordian Knot. But as we move towards talks and negotiations, anxiety has persisted and delayed the risk of disaster.
To summarize: Immediately after the Kremlin’s illegal invasion of Ukraine, the G7 took the bold decision to freeze Russia’s foreign exchange reserves, estimated at over €300 billion. This meant that these funds were placed beyond Russia’s reach, as it became illegal for the banks holding them – or anyone else in the EU – to do anything with them.
After much debate, in 2024, the G7 agreed that the proceeds from these assets – though not the assets themselves – could be made available to Ukraine in the form of Extraordinary Revenue Acceleration (ERA) loans, totaling around €45 billion. And these loans are secured against the extraordinary profits earned on the assets of the Russian Central Bank, which remain locked up in Western banks.
Over the past few years, a number of legal, financial, and municipal arguments, with varying degrees of justification, have been presented in this regard.
First, the legal arguments: central bank assets benefit from sovereign immunity – something that many point to when arguing against outright confiscation. However, this argument has been firmly rejected by lawyers, who have reached a consensus that the international law concept of “countermeasures” can be applied in this case. This concept allows for measures that would otherwise be illegal, if they are proportionate and taken in response to the wrongful act of another state, in order to encourage the latter to comply with its international obligations.
In this case, Russia’s central bank assets could be used to pressure the Kremlin to reverse its belligerent actions and respect Ukraine’s territorial integrity. Crucially, however, countermeasures must be reversible—a central point to consider in any proposed solution.
Second, the market argument: According to European Central Bank President Christine Lagarde and other senior eurozone financiers, the seizure of Russian assets could create “legal risks” for euro investments. These concerns are undoubtedly rooted in memories of the euro sovereign debt crisis of 15 years ago, which has left this group of financiers with a form of PTSD, only to be further fueled by countries like Saudi Arabia suggesting they would sell government debt in euros if the seizure continues.
Given the markets’ indifference to the initial asset freeze – perhaps the point of greatest risk for the euro – and the limited availability of high-quality alternative assets, these fears are misplaced. Moreover, it is also not necessary to permanently seize these assets to increase Ukraine’s ability to benefit from them. It would be sufficient to simply follow the concept of countermeasures mentioned above.
Finally, the vague arguments: Belgian Prime Minister Bart De Wever recently said that seizing Russia’s assets would be “an act of war,” would carry “systemic risks for the entire financial system of the world,” and would lead to Russian retaliation. But De Wever’s remarks seem to overlook the fact that Russia is already engaged in an illegal war, that many Western companies have already experienced retaliation from Moscow, and that Belgium—as home to the vast majority of Russia’s assets—reaps huge tax benefits from their presence in his country.
Overall, there seems to be no credible argument for Europe's failure to be more assertive in the way Russia's Central Bank assets are used to benefit Ukraine.
While last year’s G7 decision might have worked in a time of more stable transatlantic relations, the facts have now changed, and so has Europe’s response. And the risk posed by Hungary or Slovakia vetoing the continued immobilization of Russia’s assets at the next two-year renewal in July only adds to the urgency.
There is a simple solution that addresses all of these concerns.
To avoid the risk of Russia’s central bank assets melting down and returning to the Kremlin in July, Europe should use the countermeasures argument and place the assets beyond Moscow’s reach. This could be done by transferring them to Belgium, with EU governance oversight, and establishing legal title to the assets for the benefit of Ukraine. Importantly, the assets would not be transferred to Ukraine, but would be used to generate a steady stream of pension income to support its defense procurement and ongoing financing needs.
Ukraine does not have the capacity to absorb such a large sum of money in one go, but it needs reliable and stable income. This means that the reversibility requirement of the countermeasures argument would be met, as the potential for the return of ownership of assets to Russia would remain.
And as the hoped-for ceasefire and peace agreement slowly emerge, these assets could form the basis for the creation of a Ukrainian Reconstruction Bank – based on the lines of Germany’s Kreditanstalt für Wiederaufbau, which was created to finance the country’s reconstruction after World War II.
As debates in Brussels and member states continue, the bloc’s inertia and lack of vision increasingly mean it risks being crushed in the jaws of victory. And with the looming deadline for a renewed lockdown in July, the clock is ticking. However, there is a clear solution to every excuse – what is really missing is the political will to act.
And that must change before EU anxiety leads to disaster. /Adapted from Politico Pamphlet/
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