SUMMARY
It is estimated that more than 300 billion euros of official Russian assets are frozen around the world. Their ‘confiscation’ has many supporters, but such a formula is not without legal risks (public funds have immunity derived from state sovereignty). But it is possible to seize the annual interest on these public funds, which could amount to 3 billion euros.
Enrique Viguera
One of the first measures imposed by Western countries against Russia after its military invasion of Ukraine in February 2022 was the freezing of its financial assets. The effect was immediate: the Russian Central Bank’s inability to use these funds to support the rouble led to higher interest rates in Russia and the imposition of new capital controls. The asset freeze formally materialised as a sanction at the end of 2023.
Although there is no hard data, it is estimated that more than 300 billion euros of official Russian assets are frozen around the world (US, UK, Japan, Switzerland, Singapore, Canada, Australia, etc.). But most are concentrated in Belgium (Euroclear) and to a lesser extent in Luxembourg (Clearstream), which could amount to just over €200 billion.
But Russian assets encompass a wide range of financial instruments and holdings not only of the Russian state, but also bank accounts, real estate, stocks, bonds, luxury assets and various investments of Russian entities and oligarchs that, together with the Central Bank’s assets, could exceed 400 billion euros.
These frozen funds could be a bargaining chip in any peace negotiations.
The raison d’être of the sanction was to prevent these funds from being used by the aggressor state to sustain its illegal occupation of Ukraine. But this is no longer the only reason, but also the need to finance Ukraine’s reconstruction, or even to support its military reaction to the invasion. It is thought that Russia, as the main party responsible for its destruction, should contribute more than anyone else to reconstruction – and not, as is now the case, the taxpayers of Western countries – and this would be nothing more than an advance on the reparations that Russia will have to pay at the end of the war.
Thus, the reconstruction of Ukraine – the cost of which is currently estimated at around 500 billion euros – or even the financing of military support (arms, but also training, non-lethal material, etc.) are also considered as possible objectives for the investment of these funds. As High Representative Josep Borrell himself has pointed out: ‘….. Until now there has been talk of using this money for the reconstruction of Ukraine; perhaps it is time to think about using it to prevent its destruction’.
The means of using these frozen funds has also evolved significantly given the panoply of solutions available: from mere ‘confiscation’, to using the returns generated by these assets or issuing bonds based on the frozen capital etc.. There are advocates of any of the solutions.
The ‘confiscation’ of frozen assets, the most expeditious method to obtain funds, has many supporters in the US, especially in view of the difficulties of approving the $60 billion support package for Ukraine in Congress. But this means is not exempt from legal risks (public funds have immunity derived from state sovereignty and, therefore, in principle they are not confiscated), geopolitical or financial risks (third States would look for other safer places, so the precedent could be very negative for the international financial system itself). In fact, third countries, perhaps influenced by Russia, would be pressuring EU member states not to be impressed by the arguments of the most pro-confiscation countries. But all arguments are legally debatable and therefore confiscation could lead to lengthy legal proceedings.
A less politically, legally and financially risky option is to seize the annual interest on Russian public funds frozen in central securities depositories, mainly Euroclear. In accordance with the provisions of this type of institution, which do not remunerate cash balances, any interest on matured securities no longer belongs to the depositor but to the financial institution, which could be subject to a tax of nearly 100%. The seizure of the interest that frozen funds with matured securities could generate between 2.5 and 3 billion euros per year, depending on the fluctuation of interest rates.
This is the option that the EU is considering, and it seems that a proposal from the Commission and the EEAS has already been presented for discussion in the Council, which, if approved within the normal timeframe —June European Council— could be operational this summer. It would consist of using the yields generated by these frozen Russian official assets, but from 24 February 2024 until 2026, as the Commission has authorised the immobilisation of the interest for the first two years (2022-2024) in order to cover possible risks.
These funds could be transferred, in a small part (10% in the current proposal but this percentage may change), to the EU budget, from which projects for the reconstruction of Ukraine would be financed through different instruments of the budget, such as the Ukraine Facility, and, for the most part (90%, a percentage also subject to change), to the Special Peace Support Fund, which, being extra-budgetary in nature, can finance possible military support. Of course, the amounts obtained are not comparable to confiscation, but that is something, and the formula seems legally impeccable. Delaying a decision beyond June runs the risk of reaching the period of the Hungarian EU Council Presidency, which should not be too keen to move this ‘dossier’ forward. Given that most of the frozen official Russian funds are in Europe, the EU’s position on this issue will be crucial.
The G7 is considering a solution that would go somewhat further than the EU proposal and could provide up to 30 times more funds for Ukraine: these liquid interests would not be seized from the maturing securities, but would be used to purchase top-rated securities (e.g. German treasury bonds) that could serve as the basis for the constitution of a G7-guaranteed fund that would issue bonds for Ukraine. But there are doubts about its legality and negotiations are still ongoing. More variables are possible and all have advocates and detractors.
Probably in June the solutions adopted by the G7 and the EU, which until now seem to follow different paths, could converge. Although anxiety about obtaining funds seems to subside once the Congressional veto of the aid package to Ukraine has been overcome, the US seems less concerned by the question of precedent, taking into account the asset confiscations it carried out in Iraq and, above all, Afghanistan. and more concerned about an eventual future Trump presidency. Instead, Germany, France and others in the EU are more sensitive to the legal aspects and the possible financial effect on the Euro.
ENRIQUE VIGUERA
Ambassador of Spain
Born on 6 April 1953, Enrique Viguera holds a degree in Law from the University of Seville and entered the diplomatic service in 1982. He was posted to Ethiopia and Canada and was Deputy Director General for Sub-Saharan Africa, but much of his career has been spent in posts related to the European Union. He was posted as Counsellor in the Permanent Representation of Spain in Brussels, was Deputy Director General of General Affairs for the EU and, later, between 2004 and 2006, Director General of Coordination of General and Technical Affairs of the EU and Director General of Integration and Coordination of General and Economic Affairs of the EU.
He has also been Spanish Ambassador to Sweden (2006-2010), to Australia (2011-2015) and to Greece (2017-2021), as well as Ambassador-at-Large for Energy Affairs. Between 2015 and 2017 he was Director of the Diplomatic School and, in February 2023, he was promoted to the professional category of Ambassador.
