How will the West use Russia's frozen assets?

The European Union is searching for a way to finance Ukraine's defence and reconstruction in 2026 and 2027 with Russian central bank assets immobilised in the West after Moscow's invasion.

Under international law, sovereign assets cannot be confiscated, so the European Commission has put forward a plan to allow EU governments to use up to 185 billion euros ($217 billion) - most of the 210 billion euros worth of Russian sovereign assets currently frozen in Europe - without confiscating them.

HOW WOULD IT WORK?

At the outset of Russia's war in Ukraine, Euroclear was holding bonds for the Russian central bank. As these bonds have matured, the resulting cash has become stuck in Euroclear because of EU sanctions against Moscow.

Euroclear now invests the cash in the European Central Bank.

The idea is for Euroclear to instead invest in zero-coupon bonds issued by the European Commission.

The EU would then use the cash to issue a "Reparations Loan" to Ukraine, in tranches, according to needs. The loan would only be repaid by Ukraine once it receives war reparations from Russia in a peace agreement, effectively allowing Ukraine to spend the money now, rather than wait until Moscow pays up.

HOW MUCH MONEY IS AVAILABLE?

Some $300 billion (257 billion euros) of Russian sovereign assets are frozen globally, according to various institutions, including the European Commission. This number does not include any frozen assets of Russian oligarchs.

Of that, 210 billion euros are held in Europe, of which 185 billion euros are with Euroclear. About 176 billion euros of the Russian assets in Euroclear have by now turned into cash and the remaining nine billion worth of securities are set to mature in 2026 and 2027.

The EU will therefore have roughly 185 billion euros to work with if it builds the reparations loan on Euroclear-held assets alone. Since the EU might have to first repay a 45 billion-euro Group of Seven loan to Ukraine agreed last year, the effective amount for now is closer to 140 billion euros. So far 25.3 billion euros of the total 45 billion loan have been disbursed to Ukraine.

The Commission has pointed out that on top of the Euroclear money, there is 25 billion euros of Russian assets remaining in EU jurisdictions, mainly France and Luxembourg, which could also be used in the scheme, but the idea needs more research.

The Commission has said it would wait for an International Monetary Fund assessment of Ukraine's financing needs in 2026 and 2027 before deciding on the loan's size.

Finland and Sweden estimate the size of Ukraine's unmet financing needs during those two years at 130 billion euros.

HOW WOULD THIS BE DONE WITHOUT CONFISCATING THE CASH?

Russia would retain the claim on its 185 billion euros in Euroclear, and the Belgian securities depository would have the asset of the same amount of EU bonds to cover that liability.

The only difference from the current situation for Euroclear would be that it invests the Russian cash in triple-A Commission bonds, rather than triple-A ECB deposits.

WHO CARRIES THE FINANCIAL RISK?

European Commission President Ursula von der Leyen has said the risk would be shared collectively. Belgium's Prime Minister Bart de Wever said his country would not agree to the scheme unless the Commission presented a sound legal basis for it, other EU governments would fully share risks and other countries holding Russian assets also joined.

The operation would need to be 100% guaranteed by the bloc's member states. The Commission's preference would be to have all of the EU's 27 member states and non-European G7 countries signing up, proportionate to the size of their economies.

Canada and Britain have expressed interest, but the United States and Japan have not.

The Commission is aware that Moscow-friendly Hungary might not want to guarantee the Reparations Loan and is ready to move ahead with just 26 other EU governments, as the economic size of Hungary, and so its share in the guarantees, is small.

The risk to EU governments is very small because their guarantees would only be called upon if EU governments themselves decide to unfreeze the Russian assets before Russia pays war damages to Ukraine.

To further remove the risk of an accidental unfreezing of the Russian assets if there is no required unanimity every six months to roll over sanctions, the Commission said it has found a way to roll over the sanctions by qualified majority only.

This would remove the risk that Hungary could cause an unexpected release of the assets by voting against a rollover.

WHAT HAS RUSSIA SAID?

The Kremlin has described the proposal as an illegal seizure of Russian property and cautioned there would be retaliation for the theft of Russian assets.