Since Russia’s full-scale invasion of Ukraine, the question of what to do with Russia’s foreign reserves, largely held within the European Union, has become a critical point of international financial and political debate. A significant portion of these assets, approximately 180 billion euros, are located in Euroclear, a Brussels-based central securities depository. This situation presents the EU with a complex decision: how to balance support for Ukraine with upholding international legal norms and financial stability. While continuing financial aid to Ukraine is paramount, outright confiscation of Russia’s assets may not be the most prudent course of action. However, leveraging the extraordinary income generated from these immobilized funds offers a compelling alternative, potentially easing the financial strain on the EU while maintaining a rules-based international financial order.
The sheer scale of Russian reserves immobilized in the EU is substantial. Reports indicate that at least €206 billion is held within the EU, constituting over three-quarters of the estimated $280 billion (approximately €265 billion) immobilized by the G7 nations following the invasion in February 2022. Of this, the 180 billion euro figure specifically pinpoints the assets held at Euroclear, with potentially billions more at Clearstream, a competitor based in Luxembourg. In stark contrast, the Russian reserves immobilized in the United States are likely in the single-digit billions of dollars, and even less in countries like Australia and Canada. This concentration of assets in Europe firmly places the EU at the center of decisions regarding their future.
Europe’s Decisive Role in Handling Russian Assets
The initial decision to immobilize these assets was a collective move, reportedly spurred by then-Italian Prime Minister Mario Draghi. Similarly, any future steps, including the contentious issue of confiscation, will largely be determined by European nations due to the geographical concentration of these funds. While G7 coordination is vital, the EU’s stance will be pivotal.
The discussion surrounding these reserves is unequivocally about supporting Ukraine, not about inflicting immediate financial damage on Russia. The immobilization has been effective, preventing Russia from accessing these funds, and serving as a stark warning to nations considering similar aggressive actions. The G7 declaration reinforces this point, stating that Russia’s sovereign assets will remain immobilized until Russia compensates Ukraine for the devastation caused. Russia itself appears to have acknowledged the situation, even suggesting the funds be used for climate change initiatives, a move seen by many as cynical. Therefore, moving beyond immobilization to outright confiscation wouldn’t drastically alter Russia’s financial situation or have immediate economic repercussions. Maintaining the current state of immobilization holds value, preserving options for the long term.
Ukraine’s financial needs, while significant, have been largely met in 2023, primarily through consistent support from the EU. This is a notable improvement from 2022, where EU aid was delayed. Considering Ukraine’s pre-invasion GDP of around €200 billion, the annual external financial assistance required is likely to remain in the tens of billions, even accounting for infrastructure repair. Given Ukraine’s crucial role in European security, the EU allocating a small fraction of its own substantial GDP (€16 trillion in 2022) to support Ukraine is a logical and necessary policy choice. The expectation is that the EU will solidify a significant support package in early 2024, further underscoring its commitment.
Interestingly, the reported eagerness of the US government to pursue confiscation may stem from domestic challenges in securing congressional approval for further Ukraine aid. Faced with internal political gridlock, the US might be pushing for confiscation, while the EU, with its direct strategic interests at stake, might consider increasing its direct financial contributions to Ukraine instead. However, this doesn’t inherently validate confiscation as the optimal solution.
The Flawed Argument for Confiscation
The fundamental argument against confiscation remains strong. As the EU is not at war with Russia, confiscation would be widely perceived as unlawful seizure outside the G7 sphere, undermining the EU’s standing as a champion of a rules-based international order. Only a universally recognized international court would possess the undisputed authority to legally strip Russia of its asset ownership, and no such mechanism is currently in place. While some legal scholars present dissenting views, international and EU principles on sovereign immunity and proportionate countermeasures strongly suggest that confiscation would be a breach of international law. Legal arguments supporting confiscation under US law are largely irrelevant to EU decision-making.
Confiscation would establish a dangerous precedent, potentially accelerating global financial fragmentation. The trust in international monetary systems would be far more eroded by confiscation than by immobilization, which has historical precedents. This could discourage central banks globally from holding reserves in euros, weakening the euro’s international standing. Furthermore, confiscation would eliminate any potential future leverage the EU might have in future negotiations with Russia, however improbable such scenarios may seem under the current regime. It could also expose EU nations to increased pressure from claimants seeking redress for past wrongdoings. In essence, the EU would risk its global reputation and undermine the international order it seeks to uphold for a financial gain that, while significant, is not indispensable.
The Windfall Advantage: A Pragmatic Alternative
In contrast to confiscation, utilizing the windfall income generated by central securities depositories (CSDs) on the blocked Russian cash balances presents a more legally sound and practically viable approach. This strategy capitalizes on specific contractual agreements between European CSDs like Euroclear and their account holders, including the Bank of Russia. Crucially, these agreements stipulate that CSDs do not remunerate cash balances. Therefore, the interest income generated by CSDs from these balances (for instance, by depositing them with a euro-area central bank) rightfully belongs to the CSDs, not the account holders.
Normally, account holders are incentivized to avoid holding unremunerated cash balances at CSDs. However, due to EU sanctions preventing the Bank of Russia from withdrawing its funds, substantial cash has accumulated as Russia’s securities held at Euroclear matured. This has resulted in significant windfall income for CSDs like Euroclear.
The legal argument that Russia has no rightful claim to this windfall income is robust, paving the way for action that aligns with international and EU law. While legal challenges are anticipated, including from outside the G7, the EU has a strong foundation to proceed. Appropriating this windfall income and directing it to Ukraine would amplify the impact of Belgium’s initiative to allocate corporate tax revenue from Euroclear’s windfall income to support Ukraine. This could generate several billion euros annually (at current interest rates), a significant contribution, although not sufficient to cover all of Ukraine’s needs. The future amount will fluctuate with European Central Bank interest rate decisions, making precise predictions challenging.
Ultimately, the EU must maintain its financial commitment to Ukraine’s defense. Confiscating Russia’s reserves to achieve this would signal weakness in the ongoing geopolitical contest. The EU is in a position to uphold its principles and maintain its moral high ground by pursuing the more judicious path of leveraging windfall income to support Ukraine, rather than resorting to legally and ethically questionable confiscation.
References
Kirschenbaum, J. and N. Véron (2022) ‘Now is not the time to confiscate Russia’s central bank reserves’, Bruegel Blog, 16 May, available at https://www.bruegel.org/blog-post/now-not-time-confiscate-russias-central-bank-reserves
Kyiv School of Economics (2023) Report on damages and losses to infrastructure from the destruction caused by Russia’s military aggression against Ukraine as of June 2023, available at https://kse.ua/wp-content/uploads/2023/09/June_Damages_ENG_-Report.pdf
Moiseienko, A. (2023) ‘Legal: The Freezing of the Russian Central Bank’s Assets’, European Journal of International Law chad050, available at https://doi.org/10.1093/ejil/chad050
Summers, L., P. Zelikow and R. Zoellick (2023) ‘Lawrence Summers, Philip Zelikow and Robert Zoellick on why Russian reserves should be used to help Ukraine’, The Economist, 27 July, available at https://www.economist.com/by-invitation/2023/07/27/lawrence-summers-philip-zelikow-and-robert-zoellick-on-why-russian-reserves-should-be-used-to-help-ukraine
Tribe, L.H., R.P. Tolentino, K.M. Harris, J. Erpenbach and J. Lewin (2023) ‘The Legal, Practical, and Moral Case for Transferring Russian Sovereign Assets to Ukraine’, Renew Democracy Initiative, 17 September, available at https://rdi.org/articles/making-putin-pay/
