EU can gain by moving Russia’s frozen funds

LONDON, Feb 9 (Reuters Breakingviews) - Frozen Russian assets are a trump card for the European Union. But the bloc has so far failed to play it boldly because most of the 210 billion euros ($250 billion) of sovereign funds are stuck in Brussels-based custodian Euroclear. Shifting the cash will open lots of strategic options.

Belgium was so terrified of Russian bullying that it torpedoed a plan to use the immobilised assets to back a “reparations loan” to Ukraine in December. The idea was to tie the use of Moscow’s funds to its obligation under international law to pay reparations for its illegal invasion four years ago.

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The obvious solution to this impasse is to move the entire Russian account to a new EU-controlled custodian. That would take Belgium out of the line of fire. Frozen Russian accounts elsewhere in the bloc could also be moved to the new custodian. The EU would then be free to use the assets to help Ukraine defend itself - in accordance, of course, with international law.

EU leaders, who meet later this week for an informal retreat, may think they can forget about the Russian assets. The bloc froze them indefinitely in December. Moreover, when it could not agree on using Moscow’s funds, it decided to borrow 90 billion euros itself to support Ukraine. The European Parliament is expected soon to approve the transaction. So Kyiv has avoided an immediate cash crunch.

But the EU should have learned by now that it needs to take bolder actions to protect its vital interests. Russia continues to edge forward on the battlefield. If it wins the war, Europe’s own security will be under threat.

Meanwhile, no European leader can trust Donald Trump following his threat last month to invade Greenland, which is part of Denmark, an EU member. The U.S. president, who has a strange liking for his Russian counterpart Vladimir Putin, could pull the rug from under Ukraine at any moment. The United States has also proposed using some of the assets as part of a peace plan where it would keep half the profits.

While the EU’s new 90 billion euros loan has good parts, it is unlikely to be a game-changer. Since it will cover only two-thirds, opens new tab of Kyiv’s financial needs for two years, it is unlikely to disabuse Putin of his notion that he can win a war of attrition. It may not change Trump’s view that Europe is full of weak, opens new tab leaders. It probably will not boost Ukrainian morale much either.

By contrast, moving the 210 billion euros of frozen assets to a new EU-controlled custodian would be a powerful signal that the bloc was able to act. That would open up a range of options. The EU could revive the reparations loan - an idea I helped devise. Other ideas include using some of the cash to repay the new 90 billion euros loan or reconstruct Ukraine after a peace deal.

But the EU would not need to use the funds immediately. The mere knowledge that it was able to move quickly could change the dynamics of the war. Putin, for example, would know he could not just wait for Ukraine to run out of cash. With the Russian government’s finances finally suffering from a sharp squeeze on its oil revenues due to lower global crude prices and tighter western sanctions, he might eventually agree a decent peace deal.

BULLY FOR BELGIUM

It will be necessary to get Belgium comfortable with moving the account away from Euroclear. The government should be delighted. After all, Prime Minister Bart De Wever has said, opens new tab it would be a “happy day” if somebody else was willing to take away the entire account with its liabilities as well as its assets. That is precisely what would happen.

Belgium might still worry that Russia could sue under the investment treaty between the two countries. But it would be able to argue that it had no choice in the matter. To give Belgium extra comfort, the EU could agree to indemnify it and Euroclear against the remote risk that Moscow wins a lawsuit against either of them.

The EU itself would be running few legal risks. After all, Russia would remain the owner of its account. There would be no confiscation of the assets. All that would have happened is that its account would have been moved to a new custodian. That is a fair and proportionate response given Moscow’s bullying of Belgium.

Key EU leaders should also be happy with such an arrangement. For example, Friedrich Merz was keen that the Russian assets were used to fund Ukraine. When the German chancellor could not get his way at December’s summit, he was promised that the European Commission, the EU’s executive, would keep working, opens new tab on the idea. Moving the account from Belgium would be the first step to making good on that promise.

Meanwhile, Emmanuel Macron should be pleased that member states would not need to provide their own guarantees to Belgium. One reason the French president turned against the reparations loan in December was because he did not want to have to ask for approval from the French parliament, where his party does not have a majority, according to an EU official.

The Commission’s scheme needed national guarantees because the EU would have borrowed cash from Euroclear - and the latter wanted to be sure it would be repaid within 24 hours if necessary. But if the account is moved to a new custodian, Euroclear will not need such a liquidity guarantee.

Of course, if the new custodian uses the Russian funds in a bold way, there will need to be further discussions on how to do this in accordance with EU and international law - and how to protect the bloc from legal risks. There are already some ideas, opens new tab. But that is a story for another day.

For now, the priority is to move the account out of Belgium. At a time when the EU faces bullies to its east and west, that will show it means business.

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Editing by Peter Thal Larsen; Production by Maya Nandhini

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Hugo Dixon

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Hugo Dixon is Commentator-at-Large for Reuters. He was the founding chair and editor-in-chief of Breakingviews. Before he set up Breakingviews, he was editor of the Financial Times’ Lex Column. After Thomson Reuters acquired Breakingviews, Hugo founded InFacts, a journalistic enterprise making the fact-based case against Brexit. He was also one of the founders of the People’s Vote which campaigned for a new referendum on whether Britain should leave the EU. He was one of the initiators of the G7’s “partnership for global growth and infrastructure”, a $600 billion plan to help the Global South accelerate its transition to net zero. He is now advocating a $300 billion “reparation loan” for Ukraine, under which Moscow’s assets would be lent to Kyiv and Russia would only get them back if it paid war damages. He is also a philosopher, with a research focus on meaningful lives.

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