How the EU decided to use immobilised Russian assets to the benefit of Ukraine

The European Union finally decided on its actions regarding frozen Russian assets. At the moment, the decision applies only to the use of profits from frozen assets, although it could open a path to their forfeiture. At the same time, it could serve as a precedent for other countries that froze Russian assets, but still have not decided what to do with them.

Find out more in an article by Sofiia Kosarevych, an analyst at the Dnistrianskyi Center, titled “Slow melting: consequences of the EU’s decision on seized Russian assets”. Below is a short summary of the article.

On February 12, the EU announced that the Council has approved a decision under which central securities depositories, such as Belgium’s Euroclear, which hold more than €1 million of Russian central bank assets, which are being accumulated and not used due to restrictions, must set aside any profits generated by them and hold them separately.

It is important to acknowledge that the decision only applies to profits generated as interest on a deposit, not the principal. It also applies only to future profits and will not have a retrospective nature. This means that the profits accumulated before the decision took force – $4 billion – cannot be used.

The positive news is that according to Euroclear, the profits earned from percentage yield from Russian assets quadrupled starting from 2022 due to an increase in interest rates.

While the taxation concept is not as effective as asset forfeiture, it was the one that was approved by the European Union, and Brussels did not hesitate to implement it.

Notably, these funds, if transferred to Ukraine, will not be considered compensation for damages caused by the aggression, but financial assistance.

Their transfer is planned through the Ukraine Facility set up by the European Commission on February 1 – the Ukraine Facility for promoting the recovery, reconstruction, and modernization of Ukraine with the aim of integrating into the EU for the period 2024-2027.

According to a report by Fitch Ratings, a credit rating agency, the EU’s decision did not affect the investment attractiveness of Euroclear and did not undermine the trust of its clients in the company.

The agency noted in its conclusion that the decision of Western jurisdictions to use tax revenues, interest income, or, ultimately, directly frozen assets should not affect the credit profile of Euroclear Bank as long as all participants pursue the same policy regarding these funds.

Consistency of actions will minimize risks for Euroclear Bank.

However, the issue of coordination of actions is currently the biggest stumbling block for allies on the way to ensuring that Russian assets are actually used to compensate for the consequences of the war.

At least two countries can influence the situation – the USA and Estonia.

In January 2024, the Financial Times wrote that the USA, through G7, is trying to convince other participants to forfeit sovereign assets of the Russian Federation, having initiated a study of such a prospect by three working groups. Last week, U.S. Secretary of the Treasury Janel Yellen personally discussed the prospects of confiscation of assets with the European Central Bank and the German Chancellor, although she received a diplomatic refusal from both.

Meanwhile, back in early 2023, Estonia took a decisive step to develop a legal plan for the confiscation of Russian assets by the end of January of that year.

Adoption of the law by Estonia before the EU introduces a general policy on the use of Russian assets could pose a problem.

For any actions or policies regarding Russian assets to have a real effect and practical implementation, the key actors in the process – the U.S. and the EU countries – must clearly define the goals of such measures and understand that in such matters “one is not a warrior on the battlefield.”

eurointegration.com.ua