EU plays for time on plans to use Russian frozen assets to rebuild Ukraine

The European Commission is set to slow down plans to levy profits from Russian state assets frozen inside the bloc after pushback from countries including Germany and France.

The idea of using those Russian assets for the benefit of rebuilding Ukraine after the Kremlin-led invasion has been circulating since they were frozen under Western sanctions over a year ago. One of the main advantages to the EU would be that it would reduce its costs after pledging to pay for the lion’s share of Kyiv’s reconstruction bill.

However, under ideas to be discussed with national envoys on September 13, the EU executive is now suggesting a staggered approach that would initially require only that the bloc’s financial institutions keep those profits separate in their balance sheets, according to three people who briefed POLITICO on the contents of a Commission discussion paper.

This would buy the EU executive time after numerous announcements in recent months came to no fruition and ran into opposition from governments and the European Central Bank over legal and financial stability concerns.

“We hope that the discussions will be useful for the Commission to prepare a formal proposal,” an EU diplomat said, having been granted anonymity to discuss the confidential plans.

“We are working with the Spanish Presidency [of the Council] in exploring a step-wise approach,” a Commission spokesperson acknowledged, adding that “discussions with member states on the way forward are progressing, but further reflection is still required.”

The Commission paper first suggests an exercise in clarifying the rights and obligations of financial institutions related to the €200 billion worth of Russian state assets frozen in the bloc under its sanctions regime. 

Secondly, it proposes introducing an obligation for financial institutions to keep their cash balances arising from such assets separate — something that Euroclear, the Belgian settlement house that’s sitting on most of them, is already doing voluntarily. Euroclear has already generated €1.7 billion in profits in the first half of this year from reinvesting Russian securities as they reach maturity.

Only as a third and final step does it suggest taxing these revenues and transferring them to the EU budget for the benefit of funding Ukraine’s reconstruction.

This approach would require unanimous backing by EU countries because the matter falls under common security and foreign policy.

In June, Commission President Ursula von der Leyen pledged to make a proposal on how to leverage Russian state assets “before the summer break,” but nothing was forthcoming.

The Commission then sought to marshal a G7 statement on leveraging Russian assets for Ukraine, in order to ensure the EU would not bear legal and financial risks of such an unprecedented move alone. Despite EU attempts to broker one at recent gatherings of G7 justice and finance ministers, that also didn’t happen.

To convince naysayers, the Commission listened to a French suggestion for a multi-step approach. But this is likely to fall short of Ukraine’s own expectations, and those of its more vocal EU supporters including Poland and the Baltics, who have been lobbying to seize Russian assets.