European Union countries formally adopted a plan on Tuesday to use windfall profits from Russian central bank assets frozen in the EU for Ukraine’s defense.
It is the first in what could be a series of moves by the G7 group of large Western nations to utilize the near $300 billion worth of Moscow’s assets that have been immobilized, but it remains a highly complex and controversial precedent.
Here is what has been done and some of the other ideas being looked at:
Tuesday’s EU move exploits the fact that the lion’s share of the Russian reserves – essentially bonds and other types of securities in which the Russian central bank had invested – are held in a Brussels-based depository called Euroclear.
Under the agreement, 90% of the proceeds that the bonds generate will go into an EU-run fund for military aid for Ukraine, with the other 10% going to support Kyiv in other ways.
The EU expects the assets to yield about 15-20 billion euros ($16.30-$21.70 billion) in so-called windfall profits, due to exceptional interest, by 2027.
Ukraine is expected to receive the first tranche of around 3.5 billion euros in July. This will be on top of a 50 billion euro support program that the EU set up on Feb. 1.
Some are still wary, though, including the European Central Bank, which has said that any seizure of the Russian assets should only be done in concert with other G7 powers.
They want to ensure it is not only the euro that is affected if other countries such as China start repatriating their reserves as a precaution against their being frozen.
Some lawyers also say that, legally, there is little difference between siphoning off the bonds’ revenues and seizing the full $300 billion or so.
There is a risk that Russia could, through court action, try to seize Euroclear cash in securities depositories in Hong Kong, Dubai and elsewhere. This could potentially drain Euroclear’s capital and require a huge bailout.
There are plans, therefore, to set aside some of the siphoned-off money as a safety net.
U.S. Treasury Secretary Janet Yellen will next week push fellow G7 finance officials – from Japan, Germany, France, Britain, Italy and Canada – to get the interest earnings on the frozen Russian assets to Ukraine far more quickly.
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The U.S. wants to pull forward the interest on the assets to back a bond or a loan that would provide Ukraine with perhaps $50 billion as it battles increasing Russian military pressure in its east and north.
‘Collateralising’ the Russian assets for loans instead of seizing them outright could be more palatable to some European countries and others elsewhere in the world.
Daleep Singh, the U.S. deputy national security adviser who is one of the architects of the plan, has said it is conceptually possible to transfer 10 or even 30 years of future profits.
Sources briefed on the plans say the goal is to reach a decision at the G7 leaders’ annual summit in Italy in June.
Washington continues to back the idea of seizing the immobilized Russian reserves in their entirety and handing them to Ukraine, though it acknowledges that other countries would need to be on board, something that is not the case at the moment.
Some top lawyers argue it can be done under a doctrine of international law known as “countermeasures.” The assets would then be sold or collateralised and the proceeds handed to Ukraine, or to its dedicated reconstruction fund.
European officials raise concerns, however, that it could violate international law and open a Pandora’s box as Russia challenges the move in the courts.
Previous examples of such seizures, such as of Iraqi assets after Iraq’s 1990 invasion of Kuwait, and of German assets after World War Two, happened after those wars had ended, not while they were still raging – as with Russia’s invasion of Ukraine.
Even in the United States, leading sovereign debt experts have highlighted that the International Emergency Economic Powers Act (IEEPA) does not authorize an outright confiscation of frozen Russian property in the absence of actual armed conflict between the U.S. and Russia.
The IMF is wary too. Its managing director, Kristalina Georgieva, urged G7 nations on May 21 to think “very carefully” about how they use the Russian assets.
“Reparation bonds” have also been suggested as a way of circumventing some of the legal problems. Ukraine would sell securities that pay out if – and only if – it receives reparations for the devastation inflicted by the war.
Interest payments could also roll up and only become payable if Kyiv gets compensation.
The bondholders would not have a contractual claim on the Kremlin’s frozen reserves. But given that Russia is unlikely to pay up willingly, these assets would be the most likely source of reparation money.
Since the reserves are accruing interest, they could be used to pay both the bonds’ principal and more regular coupon payments. This would be different from confiscation, because the assets would only be transferred if a legitimate compensation mechanism first ruled that damages were due to Ukraine.
Ukraine would have a way to collect on any damages awarded up to the value of the reserves. It could therefore issue reparation bonds up to $300-350 billion. But it would only get anything like this sum if the United States, EU governments and other allies were willing to buy the securities.
The bond idea has been fleshed out further by Singh, Lee Buchheit, a veteran legal expert in sovereign debt, and Reuters Commentator-at-Large Hugo Dixon.
Their view is that Ukraine could pledge its claim against Russia to a syndicate of its allies in return for a loan. If Moscow refused to pay the damages, the allies could then use Russia’s frozen assets to pay off the loan. The justification for doing this is the widely recognized legal principle that if a creditor controls a debtor’s assets, it can set off those assets against an unpaid debt.
