Seizing Russian cash to rebuild Ukraine won’t be so easy

The European Union’s aim to use billions of dollars in frozen Russian assets to rebuild Ukraine is running into trouble.

Last month EU leaders backed unprecedented moves to use profits generated from Moscow’s state assets for reconstruction — and European Commission President Ursula von der Leyen promised over the weekend to deliver firm plans by the end of this year.

But some European governments are privately worried about the risks to financial markets from such a move. Those fears now threaten to complicate von der Leyen’s initiative.

Belgium sits on the majority of Russian state assets frozen in the EU at the onset of Vladimir Putin’s full-scale invasion of Ukraine last year. The Belgian government is reluctant to agree to raiding the funds for Ukrainian reconstruction without the rest of the G7 moving with the EU at the same time.

“We are looking with the G7 countries and the European Commission to have a structural solution for the frozen assets which doesn’t destabilize the international financial system," Belgian Prime Minister Alexander De Croo said in a speech to diplomats on Monday. “You need a legal basis and it’s clear that Belgium can not provide this legal basis on its own.”

The majority of Russian foreign reserves frozen by countries participating in sanctions at the onset of Moscow’s war on Ukraine sit in the EU. Of those, €180 billion are with Belgium’s Euroclear, a clearing house acting as a custodian for Russian reserves.

As Russian securities reach maturity and are reinvested by financial intermediaries, they generate a profit. Euroclear generated €3 billion in profits from the frozen assets in the first nine months of this year.

Euroclear has voluntarily kept profits arising from Russian assets separate, but claims to have incurred €34 million in management costs and legal expenses, as well as an estimated €18 million in missed income opportunities. Asked about the EU’s intention to make use of those profits, Euroclear declined to comment.

The EU has long floated the idea of taxing those profits for Ukraine’s benefit — but the European Central Bank and some EU capitals, including Paris, Berlin and Brussels, have expressed doubts. They are afraid the move would roil financial markets and weaken the euro’s standing as a reserve currency.

Last week, EU leaders called on the European Commission to make a legal proposal and said that “decisive progress is needed, in coordination with partners.”

But Belgium and Luxembourg in particular want reassurance that they will not be forced to bear all the legal and financial risks of such an unprecedented move. Luxembourg is home to another clearinghouse currently holding frozen Russian assets, Clearstream.

“You need a legal foundation and a way of doing it without destabilizing international financial flows. The macroeconomic impact is quite big,” De Croo told reporters just before the European leaders’ summit at the end of last month. “We are ready to help, but we need to be consulted. The money is in Belgium. If you do something, it will have to be in cooperation with us.”

For De Croo, it’s key to work on a solution not just within a European framework but jointly with other G7 countries.

In Kyiv, von der Leyen acknowledged those demands for international cooperation. “On the windfall profits, I can confirm that we will have a proposal before the end of the year. It will be well aligned with our partners, the G7 partners,” she said at a press conference with Zelenskyy.

U.S. Treasury secretary Janet Yellen has recently shown more support for the European plans to access the frozen assets. The G7 has politically backed the idea.

Still, a G7 initiative also risks leading to even more delays. The agreed language in the G7 statement so far does not go beyond “exploring” how the money could be directed to support Ukraine.

Kyiv, meanwhile, is running out of patience. “It’s a rightful priority for Ukraine to get these Russian frozen assets for reconstruction of Ukraine," Ukranian Finance Minister Serhiy Marchenko told POLITICO.

Camille Gijs contributed reporting.