Russian assets frozen in European accounts could generate billions of dollars a year for rebuilding Ukraine. But can that money be used without breaching international law or damaging the euro's international standing?
European Union leaders grappled with that question in Brussels Thursday.
"The European Council took stock of the work done regarding Russia's immobilized assets," the leaders said in a statement after the meeting, adding that they would continue to work on the issue "in accordance with EU and international law, and in coordination with partners."
The World Bank estimates Ukraine will need at least $411 billion to repair the damage caused by the war. And the EU and its allies are determined to make Russia foot part of the bill.
One idea put forward in the EU is to draw off the interest on income generated by Russian assets while leaving the assets themselves untouched.
This approach would probably deliver about €3 billion ($3.3 billion) a year, according to Anders Ahnlid, the director general of the Swedish National Board of Trade and head of the EU working group looking into frozen Russian assets.
"It's the best way of using these assets in accordance with EU and international law," Ahnlid told CNN, noting that was also the view of lawyers at the European Commission, which has promised to propose a way to tap frozen Russian assets within weeks.
But some EU member states, and the European Central Bank (ECB), have concerns that it could shake confidence in the euro as the world's second biggest reserve currency. The EU has been at pains to contrast the illegality of Russia's invasion with its own strict adherence to the rule of law.
"We have to respect the principles of international law," said a senior EU diplomat, who requested anonymity because he is not authorized to discuss closed-door meetings. "It's a matter of reputation, of financial stability and trust."
The ECB declined to comment.
How it would work
After the full-scale invasion of Ukraine in February last year, EU and Group of Seven countries imposed unprecedented sanctions on Russia, freezing nearly half of its foreign reserves — some €300 billion ($327 billion) — among other measures.
Around two-thirds of that, or €200 billion ($218 billion), sits in the EU, mostly in accounts at Belgium-based Euroclear, one of the world's largest financial clearing houses.
Euroclear plays a crucial role in global markets, settling cross-border trades and safekeeping more than $40 trillion in assets.
The group said in April that cash on its balance sheet had more than doubled over the year to March to stand at €140 billion ($153 billion), boosted by payments associated with frozen Russian assets, including bonds.
Ordinarily, these payments would have been made to Russian bank accounts, but they have been blocked as a result of sanctions and are now themselves generating vast amounts of interest.
Euroclear routinely invests such long-term cash balances and, in the first quarter, it recorded €734 million ($802 million) in interest earned on cash balances from sanctioned Russian assets.
The plan proposed by the EU working group would involve using a special levy to collect the windfall interest income made by Euroclear from frozen Russian assets, which would then be paid into the EU budget for the reconstruction of Ukraine.
Speaking on the sidelines of Thursday's EU meeting, Latvia's Prime Minister Arturs Krišjānis Kariņš said frozen Russian assets were "low-hanging fruit."
"We need to find a legal basis to utilize, mobilize these assets to help... pay for the damage Russia is causing in Ukraine," he said.
But one senior EU official warned of unintended consequences, such as causing other countries or investors to worry about the safety of their assets in Europe.
"Those who have money might think ....'what if one day, I'm on the list,'" the official, who also requested anonymity because the discussions are private, said Wednesday.
One way to reduce risks to the EU would be to coordinate action with the G7. "I think discussion at the G7 is quite key," the official added.
Ahnlid echoed this, noting that many EU member states had stressed the importance of the bloc taking steps "in tandem with G7 partners."
— James Frater contributed reporting.
