How the European Commission wants to seize Russian assets in Euroclear

It is not at all easy to obtain Russian reserve assets stored on EU territory, primarily in the Belgian company Euroclear, and send them as financial aid to Ukraine. Not even from the point of view of the European Commission. The latter has long emphasised the inviolability of property rights as one of the fundamental values of the European Union.

These property rights also apply to the Russian Central Bank, which legally holds the Russian assets in Euroclear. Such assets can be frozen, which is what is happening, even under EU law, but they cannot simply be confiscated. In order for it to be confiscated, there would have to be a declaration of war against Russia from the European side.

The Russian central bank is already acting

And because the best defence is offence, the Russian central bank is already acting. It has been demanding in a Moscow arbitration court since last week that Euroclear reimburse it nearly $230 billion. While Euroclear does not fall under the jurisdiction of that Moscow court, the case may end up before European arbitration courts, which are already governed by EU law. And there are legal precedents.

In 2023, for example, Ukraine's state-owned gas utility Naftogaz won an arbitration in a court in The Hague, the Netherlands. The verdict awarded it five billion dollars in compensation for the seizure of its assets by Russia during its annexation of Crimea in 2014.

In 2018, Naftogaz in turn won a total of $2.1 billion in a Stockholm arbitration with Russia's Kremlin-controlled gas colossus Gazprom.

So now it may, in turn, be the Russian side, namely the Russian Central Bank, that walks away from one of the EU arbitration tribunals as the winner. And Belgium, as the home of Euroclear, would have to be the primary payer.

Russia now has roughly $206 billion worth of assets in Euroclear in cash form and some just under $11 billion in securities, mainly bonds. These will mature over the next two years. The interest on these Russian assets - about three billion dollars a year - is already being confiscated as an interest tax. They are helping to finance Ukraine.

What the Commission proposes

But confiscating the principal itself is something different. Interest payments can no longer be subject to interest tax.

In Brussels, therefore, EU member states will discuss on Thursday, Friday and perhaps even over the weekend how to seize Russian assets so that "the wolf eats and the goat stays whole", i.e. remains intact on paper.

In this context, the Commission proposes the following course of action. The European Union will issue zero-coupon bonds, effectively interest-free bonds. The EU Member States will guarantee these bonds, making the bonds effectively the equivalent of cash in accounting terms. In doing so, Euroclear is entitled to substitute high quality bonds for cash on its books. Their high quality is guaranteed by the aforementioned guarantee by the EU Member States.

From an accounting point of view, it makes no difference whether Euroclear has Russian assets in the form of cash or high-quality bonds. Russia would therefore continue to have its assets in Euroclear, albeit no longer in the form of cash but in the form of bonds issued by the EU.

Thus there is a release of cash without Russian assets being effectively confiscated. On paper, Russia will still hold its assets in Euroclear. Just not in the form of cash, but in the form of its accounting equivalent - high quality bonds.

The released cash can thus go into Ukraine's accounts as a so-called reparation loan. This loan does not, in terms of Ukraine and its public finances, create a new debt, because the money in question is still being held by Russia in the form of EU bonds, which, again in accounting terms, did not provide it to Ukraine. So there is no debt on Kiev's side either.

Such EU bonds not only have a zero coupon, so they are interest-free, but at the same time they are never due to mature. They represent a kind of perpetual paper promise to Russia that its debts will be repaid.

These bonds can only be cashed in, converted into cash, if Russia pays Ukraine war reparations, which will most likely never happen, unless Russia loses the war militarily. That is, after all, where the whole name of this historically unprecedented operation comes from - the reparations loan.

The idea is that this loan can only be repaid from Russia's war reparations to Ukraine, but since these will never be forthcoming in the first place, the loan to Ukraine effectively becomes an irreversible transfer. In effect, a gift.

The problem with this operation will arise if the arbitration court rules in Russia's favour or if the sanctions freezing Russian assets in Euroclear expire. Russia, as we know, remains the holder of the Euroclear assets, they have not been confiscated, and would immediately demand to be paid - and in cash.

Text originally published on lukaskovanda.cz.