A European-style loan

The European Union wants to grant Ukraine a large loan, but not pay for it out of its budget. It has therefore decided to “secure” the loan with funds it already has in its possession – frozen Russian assets.

These are funds and financial reserves belonging to the Russian central bank that were frozen in European banks (mainly in Belgium at Euroclear, a global financial services company) after the war began in 2022. You may be interested in: EU considers trick to finance Ukraine from frozen assets

So, the idea behind this loan is that Euroclear invests this money in a special-purpose debt contract for the Union, which then lends it to Ukraine without interest. Kiev would only repay the loan after the war ends and from the money received from Russia in reparations payments.

The essence of such a “loan” is that Ukraine would only repay it after Russia has paid war reparations for the damage it has caused since invading the country in 2022. However, Ukraine could use the money now and would not have to wait for Moscow to pay. The plan is therefore to “accelerate” Russia's payment of reparations by granting them to Ukraine now.

Put simply, the EU wants to lend money to Ukraine, but instead of paying for it out of its own pocket, it will use frozen Russian funds as collateral – to make it look as if Russia will ultimately repay the loan and not European taxpayers.

However, the loan will be granted without the consent of the creditor (Russia) – from the freezing to the “lending” of the seized assets.

The problem with international rules

This plan is visionary not only in that European representatives have somehow “predicted” Russia's military defeat, even though the objective reality on the battlefield suggests the exact opposite, but also in the idea that international law would allow such a thing.

The first and fundamental legal problem is that, under international law, state assets cannot be seized. Federico Luco Pasini, a law professor specializing in international finance, pointed out that “a court order requiring the government to seize Russian assets would be illegal under both international law and national law, which must respect international norms.”

National courts cannot therefore rule on the seizure of assets, but a European Commission regulation can. However, even the Commission cannot issue such a regulation “just like that” – it needs a legal basis for doing so. The only legitimate course of action under international law would be for the EU to take “countermeasures” against Russia.

Countermeasures are mechanisms that states introduce in response to violations of international law by other states. However, these must be temporary and reversible – legal experts disagree on whether the seizure of Russian assets would meet these conditions.

This is because there is no official decision by an international court that Russia has violated international law.

In this regard, there is a decision by the European Court of Human Rights, which found that Russia had violated international law, but Russia does not recognize its authority. Furthermore, the countermeasure in question must take the form of enforcement of the rules and not retaliation for Russia's actions.

It is precisely the controversial issue of the legality of the seizure of Russian assets under international law that has so far prevented the Union from doing anything other than seizing Russian assets.

Both the ECB and member states have reservations

Not only the European Central Bank, through its president Christine Lagarde, but also other European states are calling for particular caution in dealing with seized Russian assets.

Belgium, where most of the frozen assets are located (up to €185 billion is held by Euroclear), insists that before agreeing to the “credit” plan, it needs strong guarantees from the EU that it will not be left alone to resolve issues with Moscow in the event of a sudden return of Russian assets. France and Luxembourg support this view.

The EU plans to use the Russian funds to repay the G7 loan, which granted Ukraine a loan of €45 billion last year, leaving about €140 billion of the total Russian funds to continue financing Ukraine.

European Commission President Ursula von der Leyen has stated that the financial risk from potential lost litigation will be shared collectively among EU member states. This means that if Russia wins and the EU has to repay the “borrowed” funds, all European citizens will have to foot the bill for this financial and legal adventure.

Apart from the problems under international law, such a move by the EU would also cause considerable turmoil on international markets. Countries and investors could be deterred from using European financial institutions in the future for fear that their own assets could be seized if the Union finds a sufficient pretext.

This move would undermine the strength of the euro as an international currency for government reserves, and countries such as China or Saudi Arabia could sell their European bonds.

The Russian Federation has already described the European proposal as an unlawful seizure of Russian assets and warned of retaliatory measures for the theft of Russian assets. In this context, it is interesting to note that the EU only wants to sanction Russia, even though similar violations of international law have also been found in Israel and in the conflict in Palestine. However, no Israeli assets have been frozen.

European representatives do not know how to implement the process

The word “theft” is an extremely apt term in this sense, as something that is not only controversial from a legal point of view, but where the person “lending” the money openly disagrees with it, cannot be called a loan.

The European game with the loan therefore has an extremely shaky foundation, not only legally but also economically.

The real paradox here is that even the EU representatives who presented this extremely complicated and controversial plan for a “loan” do not know how to actually implement it. When asked specific questions in this regard, the answer was: “We don't yet have a final idea of how to solve this.”

This attitude has characterized the entire plan from the outset and also underscores the level of competence of those at the EU level.

European leaders know that Russia should pay Ukraine, but they don't know how. Their proposals have no legal basis, and even if they found the necessary leverage, they would jeopardize the economic stability of the entire European financial system in an extreme way. Foreign investors would lose confidence in it.

The classic grandiose declarations about a bright future and the fight against the “dark forces” are once again failing in the face of reality and the obvious incompetence of European officials.

Russia should pay for the damage it has caused in Ukraine, but not in a way that destroys the entire European market. The shockingly ineffective sanctions packages may be enough to destroy Europe's competitiveness in global markets.

The resolution of the reparations issue should be legally sound and based on decisions by the competent courts. On the contrary, it should not be based from the outset on a dubious legal basis that is questioned by senior lawyers and bankers.

The current ideological stance that Russia is “pure evil” may be tolerated at lower levels, where expertise, precision, or other qualities are not required and emotions suffice. However, in the field of international law, where such actions also have consequences, this attitude is by no means acceptable.

The icing on the cake of this adventure is that, as usual, the excesses of officials are paid for by taxpayers. This is because responsibility for the decisions of individuals at the top of the European pyramid is borne collectively.