European leaders aim to endorse controversial plans to use Russian frozen assets to support Ukraine at a meeting in Brussels on Thursday. The unprecedented proposal for what the EU has dubbed a reparations loan - would see Kyiv receive €140bn (£121bn) worth of frozen Russian state assets currently held by Euroclear, a Belgium-based financial institution.
The plan has been months in the making, partly due to the legal complexities surrounding it, as well as concerns from member states about upsetting global financial stability. Belgium in particular has been reluctant to back using the frozen assets, as it is nervous about having to shoulder any potential consequences should Russia legally challenge Euroclear.
Russia has reacted angrily to any suggestions that the EU could use its money.
How would a reparations loan work?
For the EU, the problem of continuing to support Kyiv's struggle against Russian aggression has grown more urgent since US support dwindled. As of July, EU member states have provided around €177.5bn (£154bn) in financial support for Ukraine. With Russia's war nearing its fifth year and little progress towards a ceasefire, Ukraine will require further assistance as the estimated cost for reconstruction exceeds $486bn (£365bn; €420bn).
Approximately €210bn (£182bn) in Russian investments were frozen by the EU following Moscow’s invasion in February 2022. Most of these funds, about €185bn, are in Euroclear, a clearing house for financial transactions in Brussels.
Since these investments were frozen, they primarily consisted of sovereign bonds, loans made to the government that are due for repayment, including interest. The EU has utilized interest from Russian frozen assets for Ukraine's defense, estimating up to €3bn per year. The EU is now considering redirecting the frozen funds as a zero-interest reparations loan, providing immediate liquidity with the expectation that Kyiv would repay these funds through reparations from Moscow post-war.
Legal Challenges and Possible Solutions
International law prohibits the outright confiscation of sovereign assets. Therefore, the EU could borrow Russia's frozen money held by Euroclear, substituting it with an IOU supported by all member states. This would address Euroclear's concerns about payment obligations should the conflict end suddenly.
Belgium remains critical of the proposal but is open to negotiations if risks are shared among member states. EU foreign affairs chief Kaja Kallas emphasized that Belgium's concerns were valid and that risks should not fall solely on them. Russia’s ambassador to Italy condemned the approach as theft of the century that would lead to retaliation.
Raising Concerns and Divisions
The success of the reparations loan depends on Ukraine winning the conflict and Russia agreeing to pay damages, which lacks certainty. If Moscow refuses, the EU may forgive Ukraine's debt but would still owe Euroclear, resulting in a burden on European taxpayers.
Concerns also arise regarding the potential establishment of a legal precedent that could impact global financial stability, as well as trust from other countries in placing assets in the West. Poland, Scandinavian, and Baltic countries have broadly supported the plan, while some leaders sympathetic to Moscow oppose it. Differing opinions regarding how Ukraine should utilize the funds further complicate negotiations.
As discussions progress, the EU faces a delicate balance in crafting policies that support Ukraine while maintaining stability in the broader financial system.
