Tom Keatinge is director for the Centre for Finance & Security at RUSI. Kinga Redlowska is head of the Centre for Finance & Security at RUSI Europe.
As the international dialogue on Russia’s full-scale invasion of Ukraine enters a new chapter, so too must our thinking on how to support Ukraine in its valiant defense of its territorial integrity, and of Europe too.
There are many thorny issues to address here — 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 immobilized Russian Central Bank assets, the lion’s share of which are denominated in euros and thus held in EU-domiciled banks.
To date, Europe’s political and financial leaders have found endless excuses to postpone cutting this Gordian Knot. But as we head into talks and negotiations, continued dithering and delay risk disaster.
To recap: Shortly after the Kremlin’s illegal invasion of Ukraine, the G7 made the bold decision to immobilize Russia’s foreign exchange reserves, estimated to be in excess of €300 billion. This meant these funds were put beyond Russia’s reach, as it became illegal for the banks that held them — or anyone else in the EU — to do anything with them.
After much debate, in 2024 the G7 then agreed the profit on these assets — though not the assets themselves — could be made available to Ukraine in the form of Extraordinary Revenue Acceleration (ERA) Loans, totaling approximately €45 billion. And these loans are secured against the extraordinary profits earned by the Russian Central Bank assets, which remain immobilized in Western banks.
So far, so uncontroversial. But why can’t these assets be confiscated and given to Ukraine?
Over the last few years, a number of legal, financial and parochial arguments, with varying degrees of reason, have been put forth in this regard.
Firstly, the legal arguments: Central bank assets benefit from sovereign immunity — something many point to when arguing against full confiscation. Yet, this argument has been firmly rebutted by lawyers, who have reached a consensus that the international law concept of “countermeasures” could apply in this case. This concept allows for measures that would otherwise be unlawful, if they’re proportionate and taken in response to another state’s wrongful act, so as to encourage the latter to comply with international obligations.
In this case, Russia’s central bank assets could be used to pressure the Kremlin to reverse its belligerent acts and respect Ukraine’s territorial integrity. Crucially, though, countermeasures must be reversible — a central point to consider in any proposed solution.
Second, the markets arguments: According to European Central Bank President Christine Lagarde and other senior financiers in the eurozone, confiscating Russia’s assets could create “legal risks” to euro investments. These concerns are undoubtedly rooted in the memories of the euro sovereign debt crisis of 15 years ago, which has left this cohort of financiers with a form of PTSD, only to be further fueled by countries like Saudi Arabia suggesting they’d sell euro government debt if confiscation went ahead.
Given the markets’ indifference toward the original asset freeze — arguably the point of greatest jeopardy for the euro — and the limited availability of high-quality alternative assets, these fears are misplaced. Moreover, it also isn’t actually necessary to permanently confiscate these assets to increase Ukraine’s ability to benefit from them. It would simply be enough to follow the concept of countermeasures noted above.
Lastly, the parochial arguments: Belgian Prime Minister Bart De Wever recently said that confiscating Russia’s assets would be “an act of war,” carry “systemic risks to the entire financial world system” and lead to Russian retaliation. But De Wever’s remarks seem to overlook the fact that Russia is already engaging in an illegal war, that many Western companies have already experienced retaliation from Moscow, as well as the fact that Belgium — as home to the vast majority of Russia’s assets — reaps enormous tax benefit from their presence in his country.
Overall, there seem to be no credible arguments for Europe’s failure to be more assertive in how Russia’s Central Bank assets are used to benefit Ukraine.
While last year’s G7 decision might have worked at a time of more stable transatlantic relations, the facts have now changed, and so too must Europe’s response. And the risk posed by Hungary or Slovakia possibly vetoing the continued immobilization of Russia’s assets at the next biannual renewal in July only adds to the urgency.
A simple solution that addresses all of these concerns is available.
To avoid the risk of Russia’s central bank assets unfreezing and returning to the hands of the Kremlin in July, Europe needs to use the countermeasures argument and put the assets beyond Moscow’s reach. This can be done by transferring them to a new vehicle set up in Belgium, with EU governance oversight, and placing the assets’ legal title in a trust for Ukraine’s benefit. Importantly, the assets wouldn’t be transferred to Ukraine but would be used to generate a steady stream of annuity income to support its defense procurement and ongoing funding needs.
As it stands, Ukraine doesn’t have the capacity to absorb such a vast sum of money in one go, but it needs reliable and sustainable income. This means the reversibility requirement of the countermeasures argument would be met, as the potential for asset ownership to return to Russia would remain. And, as an aside, if the vehicle were based in Brussels, Belgium’s tax revenue would be protected too.
The vast majority of the Russian central bank assets that existed in February 2022 were bonds that have since matured and amount to an enormous pile of cash earning very low interest. Once transferred into the new vehicle, these assets could be actively managed, earn a significantly higher income and provide an annuity of cash flow to support Ukraine, reducing the need for Western allies to dig into dwindling taxpayer funds in order to keep Ukraine afloat.
And as the hoped-for ceasefire and peace deal slowly emerge, these assets could form the basis for the creation of a Ukraine Reconstruction Bank — one based along the lines of Germany’s Kreditanstalt für Wiederaufbau, which was set up to finance the country’s reconstruction after World War II.
As the debates in Brussels and member countries continue, the block’s inertia and lack of vision increasingly mean it risks defeat from the jaws of victory. And with the risk posed by the looming immobilization renewal deadline in July, the clock is ticking. However, there is a clear solution to every excuse — what’s really lacking is the political will to act.
And this must change before the EU’s dithering leads to disaster.
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