How the EU can act fast on Russia’s frozen assets
LONDON, Nov 24 (Reuters Breakingviews) - Donald Trump’s new peace plan for Ukraine could harm European security. It is therefore vital that Europe does something big to make sure the U.S. President takes account of its rival plan. The best option would be for the European Union to use the 210 billion euros ($242 billion) of sovereign Russian assets it has frozen to help Ukraine. That would show Trump it is a player.
To be fair, this is what the European Commission wants to do. But the EU’s executive body has so far failed to persuade Belgium to support its version of a “reparations loan” backed by the frozen assets. Euroclear, the Brussels-based depositary, is sitting on 185 billion euros of them. Belgium’s government is worried that Moscow could sue it and Euroclear if the cash associated with the funds is channelled to Kyiv.
The EU therefore needs to look at alternative ways of structuring a reparations loan. One option
I have helped devise involves moving the entire Russian account, with all the risks, away from Belgium to a new special purpose vehicle. This SPV would then make the reparations loan. Belgium might well go along with the scheme. After all, Bart De Wever, its prime minister, has said
: “If there is somebody who wants to take the entire Euroclear balance…. and will sign for all the risks, he can have it… I want to get rid of it.”
CASH CRUNCH
The EU urgently needs to ride to Kyiv’s financial rescue. Ukraine is facing a cash crunch, which the Commission puts at 136 billion euros over the next two years. If Kyiv runs out of money, it may have no other option but to accept the miserable peace terms Washington has proposed. That would involve giving up territory and cutting the size of its armed forces, making it vulnerable to future Russian aggression. Some EU countries might then be at risk too.
The bloc has two main options to get Ukraine a lot of cash. One is to put its hand in its own pocket. That is hard to do given fiscal constraints. The other is to use Russia’s frozen assets. A reparations loan is a legally solid way of doing this. It stops short of confiscating the cash. But from Ukraine’s perspective, it would have the same effect. Kyiv would only need to repay the loan if Russia paid war reparations for its illegal invasion, as it is required to do under international law
.
The Commission is trying to reassure Belgium by getting EU member states to share the costs if Russia mounts a successful legal challenge against the plan. But the Commission failed to get this deal over the line when leaders of the 27 states met in October. Its latest paper on the topic, published last week, does not seem to have broken the deadlock either.
It would therefore be wise to try an alternative tack with Belgium. After all, the costs of failure could be huge. Ukrainian morale would plummet, and Russian President Vladimir Putin would think he is on the brink of victory. Trump would also conclude that the EU was incapable of getting its act together.
The EU needs to disabuse him of this notion fast – probably well before the next scheduled meeting of European leaders on December 18. Although U.S. and Ukrainian officials had a productive meeting on the peace plan on Sunday, Trump himself piled on the pressure, accusing Ukraine of ingratitude.
DOUBLE HURDLE
Shifting the Russian account from Euroclear to an SPV would not just take Belgium out of the firing line. It would also make it harder for Moscow to get its cash back. The Commission’s plan involves the EU borrowing cash from Euroclear and lending it onto Ukraine. In the event that Russia was able to get its assets unfrozen without paying reparations, Kyiv would be unable to repay the loan. But the EU would still have to repay Euroclear.
This is not a hypothetical risk. Trump’s peace plan calls for $100 billion of the frozen assets to be invested in U.S.-led efforts to rebuild and invest in Ukraine. Washington would get half the profits. Europe would add $100 billion from its own funds. The rest of the frozen Russian assets – roughly another $200 billion when taking account of sums immobilised outside the EU – would be invested in a separate U.S.-Russian investment vehicle.
While the bloc could say “no”, the U.S. president might then refuse to supply weapons and intelligence to Ukraine, as he did in March. The U.S. has already threatened to do that if Kyiv does not accept his plan, two sources told Reuters. The EU’s resistance might then crumble.
So the more obstacles the bloc can put in the way of Russia getting its cash back, the better. Moving the assets to an SPV, which would then invest them in a reparations loan, would help. In this situation, successfully unfreezing the assets would achieve little for the Kremlin. All it would get was an IOU from Ukraine saying it would repay the loan if Russia paid reparations.
Moscow could then try to convince a European court that the EU had used its assets illegally and should pay compensation. But this would be tough. After all, moving the account to an SPV would not amount to confiscation. Russia would remain the beneficial owner of the assets. There is also a precedent for shifting sovereign funds. After the fall of Saddam Hussein, Iraqi assets outside the country were transferred
to an account at the Federal Reserve Bank of New York.
Lending Russia’s funds to Ukraine is not confiscation either, as they would effectively be invested in Moscow’s own obligation to pay damages. From the Kremlin’s perspective, it could not lose out on a reparations loan: if Russia pays damages, it gets its money back. If it defaults on this obligation, it saves the same amount of money that it loses on its investment.
In this scenario, Russia would have to jump two hurdles before it got its cash back. It wouldn’t just have to get the funds unfrozen but would also have to win a legal battle. This would give the EU much stronger protection from any bullying by Trump. But it needs to act fast.
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