BRUSSELS ― The more governments look into confiscating frozen Russian assets to help fund Ukraine’s reconstruction, the more complicated it gets.
For months, European Union officials have been looking for ways to use assets worth around €200 billion that the bloc immobilized after Vladimir Putin’s invasion of Ukraine in February 2022 but it keeps throwing up new problems. Now, some governments are hatching a plan to try and achieve the same outcome without sealing the fate of the assets just yet.
The G7 group of industrialized nations are considering a proposal to use these assets as collateral for bank loans that can finance Ukraine’s reconstruction, according to officials involved in the proceedings.
These funds would be seized if Russia refuses to pay reparations after the end of the war.
The Belgian Conservative member of the European Parliament Johan Van Overtveldt, who put forward this idea in an interview with POLITICO last week, said it would put pressure on Putin to end the war and come to the negotiating table.
“If you take those €200 billion as a total [by confiscating them], where is his [Putin’s] incentive to come to the peace negotiations?” he said.
These proposals come amid mounting concerns about Moscow’s retaliation ― including potential cyberattacks targeting Western countries ― against a full-scale confiscation of its frozen assets.
Several European officials involved in the discussions warned that it could trigger a backlash against European assets in Russia. This comes on top of warnings that it could tarnish the reputation of the eurozone, making it less attractive to investors.
“We’re entering uncharted waters,” said an EU diplomat, speaking under condition of anonymity to discuss sensitive talks. “Anyone would be worried about the potential consequences of asset confiscation.”
The EU’s unrelated effort to funnel cash to Ukraine from its central budget faced serious political resistance, prompting governments to look at alternative sources of money. It took weeks of diplomatic backchanneling before leaders convinced Hungary on Feb. 1 to lift its veto over the EU’s €50 billion cash pot for Ukraine.
Financial stability
The assets confiscation plan could generate over €200 billion to support Ukraine’s postwar reconstruction, according to backers of the proposal. G7 countries are aiming to come up with a coordinated roadmap amid growing pressure from the United States, which, along with the United Kingdom and Canada, has fewer qualms than EU countries such as Germany, France and Italy.
In Europe, there are fears Moscow might retaliate by lodging a flurry of appeals against Euroclear, a Belgium-based financial depository that holds the vast majority of Russian reserves in Europe.
“An institution like Euroclear is a very systemic financial institution,” Belgian Finance Minister Vincent Van Peteghem told reporters at the end of January. “We should … try to avoid an impact [of Russian asset confiscation] on financial stability.”
In a sign of the sort of retaliation countries fear might come, Russian entities have already filed 94 lawsuits in Russia demanding payback to Euroclear, which operates under Belgian law, after their investments and their profits in Europe were frozen, according to a Belgian official with knowledge of the proceedings.
Top Russian lenders, including Rosbank, Sinara Bank and Rosselkhozbank, filed legal claims against Euroclear worth hundreds of millions of rubles.
“Claimants have initiated legal proceedings aiming mainly to access the assets blocked in Euroclear’s books,” the Belgian clearinghouse wrote in a statement on Thursday.
Euroclear added that it will probably lose the court cases in Russia as the country “does not recognize the international sanctions.” This reinforced concerns that a full-on confiscation might expose Western assets in Russia to retaliation.
Online attacks
The Kremlin’s spokesperson Dmitry Peskov said in December that Russia will hit back against the confiscation of its immobilized assets. Without going into details he suggested that it could do the same to Western assets in Russia.
A Belgian official, also speaking on condition of anonymity, warned that the Kremlin could respond by targeting frozen assets in Russia for which Euroclear bears responsibility.
The EU diplomat cautioned that Russia might also escalate its cyberattacks against Western financial institutions in a bid to get its money back. They pointed to recent spikes in Russian online campaigns like Moscow’s activity in Finland after the expulsion of Russian diplomats from Helsinki.
An executive from a cybersecurity company raised concerns that the asset confiscation might lead to Moscow developing capabilities to divert major financial transactions to a Russian account.
A second EU diplomat dismissed these warnings, pointing out that Russia already seized the local branches of European companies — including the Danish brewer Carlsberg and French food manufacturer Danone — long before asset confiscation was on the political agenda at the G7.
The diplomat made the point that the Kremlin will continue to undermine European financial interests in Russia regardless of whether the confiscation plan takes off.
Putin’s incentive
The European Commission has stayed clear from the debate on asset confiscation amid warnings from the European Central Bank that this might undermine the reputation of the euro.
The EU’s initial proposal only targets the proceeds of Russia’s invested assets, which amount to over €4 billion per year, according to Euroclear’s statement. EU envoys agreed late January that these earnings should be deposited in a separate account of the clearinghouse where they are held.
The European Commission will have to put forward a second proposal to trigger the transfer of cash to the EU budget and then to Ukraine.
Izabella Kaminska and Bjarke Smith-Meyer contributed reporting