Most EU member states want to involve Russia in the reconstruction of Ukraine. However, it is not easy to use the money from confiscated Russian assets. Brussels is working on a solution.

EU Commission President Urges Use of Frozen Russian Assets in Aid Package

During a conference in London last week, EU Commission President Ursula von der Leyen announced that she wants to finance aid for Ukraine with proceeds from frozen Russian assets. Brussels is expected to present a proposal before the summer break. She added that “the perpetrator must be held accountable.” Many EU member states agree that Russia should be involved in the reconstruction efforts in Ukraine.

Challenges in Using Confiscated Russian Assets

The EU has approximately €300 billion in Russian central bank reserves frozen, with about two-thirds of this wealth located within the EU. However, legally, the money still belongs to Moscow. Therefore, the EU cannot simply confiscate the assets and transfer them to Ukraine. Such an action would violate international law and jeopardize trust in the financial market. The money is currently with so-called central depositories – companies that act as huge vaults that manage securities and other assets on behalf of banks. The EU could invest the assets and earn a profit, but the union would also be responsible for any potential losses.

Working Group Proposes Taxing Excess Returns from Asset Management Firms

Since February, a working group of the Swedish EU Council presidency has been exploring alternatives. The group has proposed a tax on excess returns that asset management firms earn by earning interest on these frozen assets. Examples of such companies are Euroclear in Belgium and Clearstream in Luxembourg. In the first quarter, Euroclear made €734 million from such interest income. The Swedish group is optimistic that there is enough interest among EU member states to work further on using these funds to assist in the reconstruction of Ukraine.

Concerns and Small Profit Margins

Economist Nicolas Vergon of the Brussels-based think tank Bruegel offered a note of caution, saying that discussions about this issue are complex and involve strategic, political and legal considerations. However, he sees no harm in trying to use the enormous amounts of money under EU control for Ukraine’s benefit. One potential solution is to tax excess returns from asset management firms, although the issue is not without problems.

Several EU member states, particularly　Germany, have raised concerns about the matter. According to media reports, the European Central Bank has warned that international investors may withdraw from Europe if the EU uses excess returns from Russian asset management firms.

While the profits from taxing excess returns may be limited, estimated at €3 billion annually beginning in the initial stages, it could rise if more assets are made available. However, this is less than 1% of the World Bank’s minimum estimated cost of €380 billion for rebuilding Ukraine.

The EU Summit will discuss this proposal at the end of the week. However, the small margin of profit and legal and political risks make it unclear if there will be concrete action. The Swedish working group will hand over to the Spanish EU Council presidency in July.