Ukraine needs money to fight. Can seized Russian assets help?

Some $300 billion in Russian assets, frozen in the West after the invasion of Ukraine, are racking up profits and interest earnings by the day. Now, Europe and the United States are considering how to use these gains to help the Ukrainian military as it wages a grueling battle against Russian forces.

For months, there was debate about whether it was legal or even wise to confiscate the frozen assets altogether. While the United States and Britain favor the confiscations, significant objections have come from countries such as France, Germany, Indonesia, Italy, Japan and Saudi Arabia, as well as officials such as Christine Lagarde, head of the European Central Bank.

They argue that confiscation would set a bad precedent, a violation of sovereignty, and could lead to legal challenges, financial instability and retaliatory seizures of Western assets abroad.

So the idea of ​​confiscation seems dead for now. But proposals to seize and use profits earned on such Russian assets – interest on the accumulated money from sanctions, said Euroclear, a financial services firm – are gaining considerable traction. Both Europeans and Americans believe such profits could be used without raising the same legal challenges or risks to the global financial system.

But they have conflicting ideas about how to use the funds. The Europeans would like to move them to Ukraine every year or every two years. Americans want to find a way to get more money to Ukraine faster.

The debate over which approach to use is intensifying ahead of the Group of 7 summit in Italy next month, when it is hoped an agreement will be reached. Here's a closer look at the plans.

The European Union is expected to formally adopt a controversial and long-simmering plan next week to use most of the interest earned on Russian assets frozen in Europe to help arm Ukraine and make Russia pay for the country's reconstruction.

After months of talks, EU nations approved the policy in March. Last week they agreed in principle that they would be willing to use 90% of the profits to buy weapons for Ukraine through the European Peace Fund, an EU facility to finance military aid and its own military missions.

The remaining 10% would go to reconstruction and non-lethal acquisitions, to satisfy countries such as Ireland, Austria, Cyprus and Malta, which are militarily neutral.

The European proposal targets only profits made by the Belgian central securities depository Euroclear, where around 190 billion euros of Russian central bank assets are held.

The European Commission expects Euroclear to pay around 3 billion euros a year which would be transferred to the bloc's funds every two years, with a first payment expected in July. That's roughly equivalent to what Britain promises to provide to Ukraine next year, but it's a small amount compared to the $61 billion recently authorized by the United States.

Euroclear has made around €5 billion in net profits from Russian assets since the invasion. Profits made up to February this year will be retained by Euroclear in the event of legal action, but the European Commission has found that Moscow has no legal right to the profits.

With Ukraine losing ground to Russia and needing funds to buy more ammunition and pay salaries, the Americans argue that it is preferable to get more money to Ukraine as soon as possible.

The United States holds only a small amount of Russian assets, estimated at around $5 billion. But the Americans propose giving Ukraine about $60 billion up front, and then using profits from Russian assets held in Europe to repay the debt over time.

Such a step, they argue, would send an important signal of Western commitment to both Ukraine and Russia. Their plan does not preclude the European one, but would follow it and then potentially replace it. And it could be organized before the November elections.

Daleep Singh, a US security adviser and one of the main architects of Western sanctions against Russia, described the idea last month in Kiev.

The Biden administration wanted to use interest income on frozen Russian assets in order to “maximize the impact of these revenues, both current and future, to benefit Ukraine today,” he said.

“Instead of simply transferring annual profits from reserves,” he said, “it is conceptually possible to transfer 10 years of profits or 30 years of profits,” he said. “The present value of those profits amounts to a very large number.”

Mujtaba Rahman, managing director for Europe of the Eurasia Group, who has explored the issue extensively, said the advantage of the American plan is that it is a form of “future proofing”.

This should avoid the kind of recent and deeply politicized delay in Congress approving aid to Ukraine. That, Rahman said, would “go ahead of a possible Trump presidency and also around Congress.”

The American plan has raised objections from Brussels because it undermines European control over assets and entails greater risks.

If interest rates fall, Europeans argue, the money earned from Russian assets may not be enough to repay the debt. So who would be responsible for covering the deficit, the United States or the European Union?

Second, if the war ended in negotiation before the bond expired, what would happen if sanctions against Russia were lifted and Russian assets were returned? What if they were eventually confiscated to finance the reconstruction of Ukraine? In both scenarios, who would be responsible?

European officials suggest the United States should be the guarantor, while Americans want Europeans to take responsibility, Rahman said. Some officials suggest that the Group of 7 take responsibility and even issue the bond, but some countries may have legal objections to such a plan.

Some Europeans suggest that the European Commission should issue the bonds, since the assets are in Europe, and therefore have more say in how the money is spent – ​​predominantly on European arms manufacturers or companies, for example, rather than on the American ones. And Europe shouldn't worry about a reluctant Donald J. Trump or Congress.

The discussion on permanent confiscation continues, although it remains unlikely. Seizing the money would be a way to force Russia to pay for Ukraine's expensive reconstruction, which is estimated to cost at least $500 billion if not double that, since it is unlikely to volunteer to do so.

Nigel Gould-Davies, a former British diplomat now at the International Institute for Strategic Studies, a research institute, says Western fears of financial instability are unrealistic.

“The freezing of assets was a much more decisive step than their confiscation and did not cause market turbulence,” he said. “If the countries that issue the major currencies – dollar, euro, pound and yen – move together, there is nowhere else where large pools of money can be safely stored.”

In a recent essay, Gould-Davies argued that, as with arms supplies to Ukraine, “an exaggerated fear of negative consequences is the ultimate form of chronic self-deterrence in economic affairs.”

Such hesitation is especially senseless, he argues, because the economy is “the West's greatest area of ​​natural strength, against which Russia cannot react effectively.”

Matina Stevis-Gridneff contributed a report from Brussels.

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