From Frozen Funds to Frontline Aid: Channeling Russia's Frozen Wealth to Aid Ukraine

 

In the face of congressional denial, a beacon of hope emerges as €260bn in Russian assets offer a financial lifeline to support Ukraine’s pressing defense needs.

In the wake of America’s House of Representatives denying further aid to Ukraine, a new focus has emerged on alternative sources of funding to support the embattled nation. The spotlight has turned to assets worth €260bn ($282bn) belonging to Russia, frozen since its full-scale invasion of Ukraine two years ago. Janet Yellen, America’s Treasury Secretary, joined a growing chorus on February 27th, advocating for the unlocking of these assets' value. However, a significant portion of these funds are tied up in Belgium, leading to divided opinions within the European Union on the wisdom and legality of deploying these funds for Ukraine's benefit.

There is a compelling moral and practical case for utilizing this money to aid Ukraine’s defense. The injustice Ukraine has suffered is clear, and its need for financial support is urgent. At the same time, Western governments find their finances stretched thin. Yet, seizing these assets outright could be a critical mistake. Historically, sanctions imply that if an aggressor, like Russia, changes its behavior, it can reclaim its funds. Reparations are typically a post-conflict matter, not a tool used during ongoing hostilities. Preemptively taking these funds might feed into the narrative, particularly prevalent in the global south, that Western powers selectively adhere to international law.

Legal experts around the globe are racing against time to find effective ways to utilize Russia’s frozen financial assets for reparations. A particularly complex yet innovative approach being considered is the transfer of Ukraine's claims for reparations to Western entities. This method would theoretically allow for the Russian assets to be used directly to offset Ukraine's reparations claims. Such a transfer, however, is mired in a web of legal and political intricacies. The process is unprecedented and involves navigating through international laws and regulations, raising questions about jurisdiction, enforceability, and the potential diplomatic fallout from such a move. Moreover, the political implications of this approach are significant, as it requires a high level of international cooperation and could lead to tensions between different nations with varying stances on the Russian-Ukrainian conflict.

Amidst these complexities, a more straightforward solution has emerged, centered around the vast amount of Russian assets frozen in Europe. Specifically, Euroclear, a Belgium-based financial services company, holds approximately €190 billion of these assets. A unique aspect of this situation is the accruing investment returns and principal repayments on these assets, which are gradually amassing a substantial cash balance, currently estimated to be around €132 billion. This fund, originally destined for Russia, is growing due to the suspended financial transactions, and there is a growing consensus that Russia should forfeit its rights to these returns, especially considering that Euroclear typically does not pay interest on such cash holdings. This stance offers a simpler, more direct avenue for tapping into Russia's frozen assets without the legal entanglements of transferring reparations claims.

The situation at Euroclear has also led to an unexpected financial benefit for the company. The handling of these frozen assets has resulted in significant profits, catching the attention of the European Union. In a decisive move, the EU has mandated that these profits be isolated and not distributed among Euroclear's shareholders. This development culminated on February 28th, when Ursula von der Leyen, the President of the European Commission, made a groundbreaking proposal: to redirect these funds to Ukraine. If realized, this strategy could provide a sustained and substantial financial aid stream to Ukraine, evidenced by Euroclear's notable earning of €4.4 billion from these assets in 2023. This initiative not only offers a pragmatic solution to the complex problem of utilizing frozen assets for reparations but also symbolizes a strong gesture of support for Ukraine from the European community.

The EU can enhance this initiative. By launching a financial vehicle backed by the income from Russia's assets and issuing bonds, a substantial upfront amount could be raised and sent directly to Ukraine. Investing the €132bn cash balance in German debt could yield about €3.2bn per year, enough to service almost €114bn of joint EU debt. This mechanism would not only provide immediate aid but also demonstrate Ukraine’s economic stamina in the conflict.

Should Russia fail to reach a satisfactory peace agreement, the EU would not have to use its own funds for debt servicing. If peace is achieved, the EU might bear some financial responsibility, but this would likely be offset by the economic benefits of ending the war. Most importantly, this approach meets Ukraine's urgent need for financial support without undermining the principles it is fighting for.

This situation underscores the need for a balanced approach that respects legal and ethical boundaries while addressing the critical needs of Ukraine. The strategy of leveraging investment returns from Russia's frozen assets offers a viable path forward. It adheres to international legal norms, provides essential support to Ukraine, and upholds the integrity of the Western stance against Russian aggression. Mobilizing these assets could play a pivotal role in ensuring Ukraine’s resilience and eventual recovery.