BRUSSELS — The European Union is searching for a way to finance Ukraine’s defence and budget needs in 2026 and 2027 with Russian central bank assets immobilised in the West after Moscow’s invasion.
Under international law, sovereign assets cannot be confiscated, so the European Commission has put forward a plan to allow EU governments to use up to 165 billion euros (S$249 billion) — most of the 210 billion euros worth of Russian sovereign assets currently frozen in Europe — without confiscating them.
How would it work?
At the outset of Russia’s war in Ukraine, Euroclear — the Belgian Central Securities Depository — was holding bonds for the Russian central bank. As these bonds have matured, the resulting cash has become stuck in Euroclear because of EU sanctions against Moscow.
Euroclear now invests the cash at the European Central Bank in overnight deposits.
The EU’s idea is for Euroclear to instead invest in zero-coupon bonds issued by the European Commission. The bond coupon can be zero because under the legal arrangement Euroclear has with the Russian central bank, Moscow retains ownership of the capital, but does not have the right to the interest generated by the assets.
The EU would then use the cash to issue a “Reparations Loan” to Ukraine, in tranches, according to needs. The loan would only be repaid by Ukraine once it receives war reparations from Russia in a peace agreement, effectively allowing Ukraine to spend the money now, rather than wait until Moscow pays.
How much money is available?
Some US$300 billion (S$387 billion) of Russian sovereign assets are frozen globally, according to various institutions, including the European Commission. This number does not include any frozen assets of Russian oligarchs.
Of that, 210 billion euros are held in Europe, of which 185 billion euros are with Euroclear. About 176 billion euros of the Russian assets in Euroclear have by now turned into cash and the remaining nine billion euros’ worth of securities are set to mature in 2026 and 2027.
The EU initially wanted to base the Reparations Loan only on the money in Euroclear, but Belgium insists that the remaining 25 billion euros in Russian sovereign assets frozen elsewhere in the EU should also be included. Most of that 25 billion — around 18 billion euros — is held in French banks, EU officials said. This complicates the project because, unlike the money in Euroclear, the assets generate interest that belongs to Russia.
The EU might also have to first repay a 45 billion euro Group of Seven loan to Ukraine agreed last year, so the effective amount for the Reparations Loan now is closer to 165 billion euros.
So far 25.3 billion euros of the total 45 billion G7 loan have been disbursed to Ukraine, but more will be paid out in the first quarter of 2026 to keep Kyiv liquid before the potential Reparations Loan kicks in from the second quarter of 2026.
Under the Commission plan, the EU would use 90 billion euros of the frozen assets to disburse to Ukraine in tranches over 2026 and 2027. This amount could be increased, if needed, since there would be money left. The Commission estimates Ukraine’s financing needs over the two years at 135.7 billion and expects countries outside the EU to contribute the remaining money.
How would this be done without confiscating the cash?
Russia would retain the claim on its cash in Euroclear and elsewhere. The Russian cash would simply be replaced with EU AAA bonds of the same value on the balance sheet of the institutions holding it through a compulsory transaction with the EU.
The only difference from the current situation for Euroclear would be that it invests the Russian cash in triple-A Commission bonds, rather than triple-A ECB deposits.
Who carries the financial risk?
EU countries have to share the risk of the whole project. The main risk is a scenario under which the EU has to return the cash to Russia but Russia has not yet paid the war reparations to Ukraine, therefore leaving the EU liable for the amount that has been transferred to Ukraine.
EU governments agreed on Dec 12 that the immobilised Russian assets will stay frozen indefinitely, removing a serious risk that during one of the votes that take place every six months to keep the money frozen, which requires unanimity, one country could break ranks with others and force the EU to release the money to Moscow.
With the risk of an “accidental” lifting of the sanctions removed, the risk to EU governments is very small because their guarantees would only be called upon if EU governments themselves decide to unfreeze the Russian assets before Russia pays war damages to Ukraine.
What has Russia said?
The Kremlin has described the proposal as an illegal seizure of Russian property and cautioned there would be retaliation for the theft of Russian assets.
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