As much as $300 billion in Russian assets, frozen in the West since the invasion of Ukraine, is piling up profits and interest income by the day. Now, Europe and the United States are considering how to use those gains to aid the Ukrainian military as it wages a grueling battle against Russian forces.
There has been a debate for months about whether it would be legal or even wise to confiscate the frozen assets altogether. While the United States and Britain have favored confiscations, significant objections have come from countries like France, Germany, Indonesia, Italy, Japan and Saudi Arabia, as well as from officials like Christine Lagarde, the head of the European Central Bank.
They argue that confiscation would be a bad precedent, a violation of sovereignty and could lead to legal challenges, financial instability and retaliatory seizures of Western assets abroad.
So the idea of confiscation appears dead for now. But proposals to seize and use the profits earned on those Russian assets — the interest on accumulated cash stemming from the sanctions, said Euroclear, a financial services company — are gaining considerable ground. Both the Europeans and Americans believe that those profits could be used without raising the same legal challenges or risks to the global financial system.
But they have competing ideas on how to use the funds. The Europeans would like to transfer them to Ukraine yearly or biannually. The Americans want to find a way to get more money to Ukraine more quickly.
The debate over which approach to use is intensifying in the run-up to the Group of 7 summit meeting in Italy next month, when it is hoped an agreement will be reached. Here’s a closer look at the plans.
The European Plan
On Tuesday, European Union finance ministers are expected to approve a contentious and long-hatched plan to use most of the interest gained on the Russian assets frozen in Europe to help arm Ukraine and make Russia pay for the country’s reconstruction.
After months of talks, E.U. nations approved the policy in March, and last week agreed in principle that they would be willing to use 90 percent of the profits to buy arms for Ukraine through the European Peace Facility, an E.U. structure to finance military aid and its own military missions.
The remaining 10 percent would go to reconstruction and nonlethal purchases, to satisfy countries like Ireland, Austria, Cyprus and Malta, which are militarily neutral.
The European proposal only targets profits made by Belgium’s central securities depository Euroclear, where about €190 billion of Russian central bank assets are held.
The European Commission expects Euroclear to hand over about €3 billion a year that would be transferred to the bloc’s funds biannually, with a first payout expected in July. That is something roughly equivalent to what Britain promises to provide Ukraine next year, but it is small compared with the $61 billion the United States recently authorized.
Euroclear has made about €5 billion in net profits from the Russian assets since the invasion. Profits made until February of this year will be retained by Euroclear in case of legal claims, but the European Commission has judged that Moscow has no legal right to the profits.
The American Plan
With Ukraine losing ground to Russia and in need of funds to buy more ammunition and pay salaries, the Americans argue that it is preferable to get more money to Ukraine as soon as possible.
The United States holds only a small amount of Russian assets, estimated at around $5 billion. But the Americans propose giving Ukraine some $60 billion up front, and then using the profits from the Russian assets being held in Europe to pay back the debt over time.
Such a step, they argue, would send an important signal of Western commitment to both Ukraine and Russia. Their plan does not preclude the European one, but would follow it and then potentially replace it. And it could be arranged before the November election.
Daleep Singh, a U.S. security adviser and a key architect of the Western sanctions on Russia, described the idea last month in Kyiv.
The Biden administration wanted to make use of interest income on frozen Russian assets in order to “maximize the impact of these revenues, both current and future, for the benefit of Ukraine today,” he said.
“Instead of just transferring the yearly profits from the reserves,” he said, “it’s conceptually possible to transfer the 10 years of profits or 30 years of profits,” he said. “The present value of those profits adds up to a very large number.”
Mujtaba Rahman, managing director for Europe for the Eurasia Group, who has explored the issue extensively, said that the advantage of the American plan was that it is a form of “future proofing.”
That should avoid the kind of recent, deeply politicized delay to approve aid to Ukraine from the Congress. It would, Mr. Rahman said, get “ahead of a possible Trump presidency and around Congress as well.”
The Argument
The American plan has raised objections from Brussels that it undermines European control over the assets and entails greater risks.
If interests rates drop, Europeans argue, the money earned from the Russian assets may not be enough to pay back the debt. So who would be responsible for covering the shortfall, the United States or the European Union?
Second, if the war ends in a negotiation before the bond matures, what happens if the sanctions on Russia are lifted and Russian assets are returned? Or what if they are finally confiscated to pay for Ukrainian reconstruction? In either scenario, who would be responsible?
European officials suggest that the United States should be the guarantor, while the Americans want the Europeans to take responsibility, Mr. Rahman said. Some officials suggest that the Group of 7 take responsibility and even issue the bond, but some countries may have legal objections to that plan.
Some Europeans suggest that the European Commission should issue the bond, since the assets are in Europe, and thereby have more say over how the money is spent — predominantly on European arms manufacturers or companies, for instance, rather than American ones. And Europe would not have to worry about a reluctant Donald J. Trump or Congress.
Confiscation?
The argument about outright confiscation continues, even if it remains unlikely. Seizing the money would be a way to force Russia to pay for the expensive reconstruction of Ukraine, estimated to cost at least $500 billion if not twice that, since it is unlikely to volunteer to do so.
Nigel Gould-Davies, a former British diplomat now at the International Institute for Strategic Studies, a research institution, says that Western fears of financial instability are unrealistic.
“Freezing the assets was a far more decisive step than confiscating them and caused no market turbulence,” he said. “If the countries that issue the major currencies — dollar, euro, sterling and yen — move together, there is nowhere else for large funds of money to be safely held.”
In a recent essay, Mr. Gould-Davies said that as with weapons supplies to Ukraine, “an exaggerated fear of adverse consequences is the latest form of chronic self-deterrence in economic affairs.”
Such hesitation is especially foolish, he argues, because economics are “the West’s greatest area of natural strength, one against which Russia cannot effectively retaliate.”
Matina Stevis-Gridneff contributed reporting from Brussels.
