doubts of partners and prospects of use for Ukraine

The European Council finally opened the way for the use of frozen assets of the Russian Federation for the benefit of Ukraine. According to the decision of February 12, 2024, all depositories owning sovereign assets of the Russian Federation of more than 1 million euros must separately account for extraordinary cash balances. This is only the first step, which in the future will allow us to use the entire amount of frozen assets of the Russian Federation to pay compensation to the victims and support Ukraine.

The main amount of frozen assets, in particular, should become the basis for filling the International Compensation Fund, which will allow us to provide fair compensation to all victims, restore Ukraine, and reduce the burden on the economies of the partner countries that help us. However, for now, it is more difficult to use the assets of the Russian Federation than to allocate funds from the EU budget. Why does this happen and what are the possible ways to solve this issue?

Prospects in Brussels

Currently, around 300 billion euros are frozen worldwide, which somehow are related to the Russian Federation. The largest share is the sovereign assets of the Russian Federation in the European Union and the G7 countries, 260 billion euros have already been identified. In Belgium and Luxembourg there are €210 billion in Euroclear and Clear Street financial institutions. Another €50 billion is located in the USA (from $5 to $8 billion), Japan, Great Britain, Canada, Australia and Switzerland.

The vast majority of sovereign assets of the Russian Federation in the EU are blocked in the form of bonds and other financial instruments in which the aggressor country invested earlier. Almost all of them are kept in the accounts of large depository institutions, and one of the leaders in this matter is Euroclear (Belgium). Around 200 billion euros are stored there, and experts of the organization and state institutions of Belgium are looking for legitimate ways to use the extra income from the circulation of these funds for Ukraine.

One of the options currently being considered by the Belgian side is reinvestment from the redemption of securities on deposit with the central bank. These funds are located in Belgium, in 2022 a 25% tax was imposed on them (about €1.7 billion). The Belgian government uses these funds to pay Ukrainian refugees, provide humanitarian aid, etc. Funds for 2023 have not yet been taxed. Negotiations are now underway to impose a 100% tax on these funds and transfer part of these funds to Ukraine. This is around €4 billion, which have been accumulated for 2023. These funds could be transferred only after the decision of the Belgian government.

In fact, two ways of using surplus profits from the frozen funds to help Ukraine are currently being discussed:

  1. Taxation of profits from the frozen assets of Euroclear and the further transfer of these funds to Ukraine. This format is easier to implement, because it requires only the decision of Belgium itself, and not of all EU countries. However, Ukraine will receive less in this option – if the tax rate remains at the level of 25%, it would be estimated as maximum of 1.7 billion euros per year.

  2. Allocation of surplus profits directly in favor of Ukraine. The amount increases to 4-5 billion euros per year, but for its implementation, it is necessary to change the EU legislation, which may prove to be a difficult process.

The recent decision of the European Council opened the way for the implementation of the second, more beneficial format for Ukraine. However, risks and doubts remain at the national level for countries where Russian assets are stored.

There is still a third option – the use of the assets themselves as collateral for the issuance of securities with the allocation of the funds raised for the urgent needs of Ukraine. Currently, the G7 countries are actively discussing this option.

Risks for Europe

The attitude towards frozen assets is changing quite quickly, as for conservative Europe. However, for Ukraine, which needs a solution now, the process seems too slow. Even in order to direct the already mentioned excess profits, it is necessary to achieve the approval of the draft decision by the countries of the “Big Seven”, then get the support of the European Central Bank, and then get the unanimous decision of the 27 EU members. And, of course, there are doubts and careful risk assessments at every stage.

Currently, all possible risks for European depositories, and primarily for Euroclear, can be grouped into four main groups: legal and financial, operational, regulatory and cyber security.

Legal and financial risks are related to the countermeasures of the aggressor country, which increases the threats to Euroclear clients. Currently, the Russian Federation is already creating court precedents — there are already two decisions in favor of the sanctioned participants of Euroclear in the Russian Federation itself. In the future, this may lead to the fact that Euroclear will not only lose funds in Russia, but also the sanctioned clients will try to get these funds for a second time – already in the EU.

Among the frozen funds of the Russian Federation, there is a part that belongs to the persons who are not subject to sanctions, and therefore they can also claim compensation. An additional problem is that lawsuits may arise not only for assets, but also for interest, and this already affects the potential provision of funds to Ukraine. In addition, strangely enough, the European authorities, due to a complex system of financial tools, do not know for sure whether all seized and immobilized assets belong to the Russian Federation and want to avoid a situation where confiscated assets may suddenly turn out not to be Russian.

Regulatory risk concerns EU banking supervision rules, which will be significantly updated from 2025. The frozen assets of the Russian Federation and the lack of income from them, as well as the above-mentioned negative factors regarding potential lawsuits — all this may lead to the fact that Euroclear may not meet the established new standards.

Operational risks are related to the manual management of sanctions-related assets, while other processes at Euroclear are automated. This creates inconveniences for the operation of the system, which, together with the courts and countersanctions, lead to a decrease in the interest in Euroclear on the part of global investors.

Cyber security risks have not yet manifested themselves, but the situation may change if decisions are made regarding the use of frozen assets or profits obtained from them.

War of finances

We understand a cautious attitude of our European partners to financial matters. However, they need to consider that when they try to maintain the stability of the system and act according to the rules, the aggressor country tends to attack them and violates the rules. The war in Ukraine is already having a negative impact on the world economy and the financial sector, and the Russian Federation is ready to destroy the world. That is why Europeans and the countries of the “Big Seven” should look at the financial system as a sphere that needs defense and protection. The Russian authorities will act more and more aggressively, and attempts to avoid and ignore the problems will only lead to the opposite effect for the EU.

As of 2024, Europeans are still not ready to talk about the confiscation of all immobilized assets of the Russian Federation. Paradoxically, it is easier for the authorities in the EU to take funds from European taxpayers than to confiscate the assets of the aggressor country. Even the use of profits still raises questions. At the same time, even with a positive decision, Ukraine will receive 15 billion euros during 2024-2027, but will not be able to receive funds for 2022-2023.

All this demonstrates that Europe still does not fully understand all levels of the Russian threat. The quick transfer of extraordinary profits from frozen assets to Ukraine allows to reduce the burden on European economies in matters of aid, and also additionally weakens the Russian Federation in the long term. Instead, any delays in the decision only work in favor of the aggressor and encourage the Russian Federation to continue destroying the world order.

Iryna Mudra, Deputy Minister of Justice of Ukraine

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