The Russian assets are back on the table. And with them, the same old problems.
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Sweden, the Netherlands, Spain and Poland, backed by the Baltics, are leading a new push to channel the Russian Central Bank’s immobilised assets into additional financial support to Ukraine as the war-weary country faces ballooning costs.
It did not take long for the campaign to collide with a familiar opponent: Belgium.
The country holds the bulk of the €210 billion in Euroclear, a depository based in central Brussels, and fears any move to channel the funds to Ukraine would leave it exposed to unpredictable dangers and ruinous litigation. Euroclear is currently battling a lawsuit in Russia.
Belgium led the charge last year to dismantle an audacious plan that would have turned the €210 billion into a zero-interest credit line for Ukraine. It now vows to do the same.
“The reasons behind our opposition have not magically disappeared,” Belgian Foreign Minister Maxime Prévot said this week. “Using these assets through a process amounting to confiscation would entail very significant risks.”
But what if Belgium were no longer in the eye of the hurricane?
An idea gaining traction across capitals envisions moving the sovereign assets held at Euroclear into a new custodian owned and controlled by the EU itself. This, the thinking goes, would remove the liability and exposure of Euroclear and consequently Belgium.
Sergii Marchenko, Ukraine’s finance minister, is keen on the concept.
“The proposal which we would like to discuss is a possibility to transfer the custodian of frozen assets from Belgium to the European Union,” Marchenko told Euronews.
“It will help settle everything and mitigate the risk.”
Marchenko argued the custodian would avoid the complex structure of national guarantees and offset mechanisms that the European Commission had designed to protect Belgium against Moscow’s scorched-earth tactics.
“It will be the joint responsibility of the European Union. All 27 countries will be signing one accord in this discussion,” he said. “It’s a totally different scenario.”
The Commission knows the custodian is being informally floated as a solution, but remains reluctant to reopen the debate on financing for Ukraine without a guarantee of success. The executive insists it has never given up on the sovereign assets.
A custodian for all
The idea, as such, is not necessarily brand new.
For the past few months, three personalities – Hugo Dixon, a commentator-at-large at Reuters; Lee Buchheit, an honorary professor at the University of Edinburgh Law School; and Daleep Singh, vice chairman at PGIM who served the Biden administration – have led a project called The Russian Transfer that advocates the switch.
They recommend using the emergency powers under Article 122 of the EU treaties to move the Russian assets held by Euroclear and private banks into an EU-owned custodian, citing reasons of public security and financial stability. (Article 122, which requires a qualified majority, was previously used to immobilise the assets indefinitely.)
The custodian, they say, would not represent a corporate entity and therefore would not need to be domiciled in an individual member state that Moscow could target. Belgium would receive an indemnity for the “slim risk” of incurring damages from moving the assets, which the EU regulation would mandate.
The Russian Central Bank would stay the nominal owner of the funds and be entitled to recover them after paying war reparations to Ukraine.
Dixon, Buchheit and Singh argue history already offers a precedent: in March 2003, right after the US invaded Iraq, the White House ordered the move of $1.7 billion in Iraqi sovereign assets to a special account at the Federal Reserve Bank of New York.
“If the EU deploys the €210 billion in assets to help Kyiv, Putin will know he cannot win just because Ukraine runs out of cash. He may then conclude that it is best to make peace,” they say.
Karel Lannoo, chief executive at the Centre for European Policy Studies, has pitched an alternative scenario: a Special Purpose Vehicle (SPV) that would hold the entire bulk of the Russian assets but use exclusively their extraordinary revenues (about €4 billion per year) to back the issuance of bonds. This would help the EU mobilise larger upfront amounts to assist Ukraine.
Notably, the principal (€210 billion) would remain untouched at all times.
Under Lannoo’s template, the European Stability Mechanism (ESM), created in 2012 as a permanent firewall for the eurozone, would provide the necessary guarantees for the bonds. The ESM has a maximum lending capacity of €500 billion.
“It takes too long for member states to sign off on national guarantees,” Lannoo said, referring to the Commission’s failed proposal. “It’s better to use what you have to make sure there’s as little friction as possible.”
“We need to have a structure in place and the solidarity around it.”
Interestingly, the SPV was mentioned by the Commission itself in an options paper sent to member states last year. The document, however, warned that the funding costs of an SPV would be “higher” than traditional common borrowing.
Reputational crisis
Proponents of the idea are convinced that changing custodianship would mitigate Belgium’s entrenched concerns, break the political deadlock and bestow on the EU massive financial firepower to support Ukraine.
Belgian officials have taken note of the informal pitch and admit it could remove some of their long-standing objections, as Euroclear, a systematically important institution, would no longer be at the centre of the dispute.
But the custodian could face challenges beyond its control.
One of the reasons last year’s bold plan fell apart at the eleventh hour was the fear that foreign states and investors would perceive the move as confiscation of sovereign assets, which is strictly forbidden under international law, and relocate their own assets to other jurisdictions, triggering a reputational crisis for the entire eurozone.
This cascading effect weighed heavily in the mind of the European Central Bank (ECB) during last year’s fraught negotiations.
Its president, Christine Lagarde, privately advised EU leaders to tap the Russian assets in conjunction with other Western allies to avoid singling out the eurozone.
The bank later declined to provide emergency liquidity for the guarantees.
The ECB, Euroclear and some member states are still wary of any high-risk proposal that could set off an investor exodus, unleash financial instability and undermine the euro as the world’s second-most important currency at a time when global turbulence already hits hard.
It remains to be seen to what extent a change of custodianship could convince them otherwise.
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