How western allies swung behind efforts to tap frozen Russian assets

G7 officials have backed European efforts to tap billions of euros of profits generated from frozen Russian assets, a day after US Treasury secretary Janet Yellen swung behind the idea.

Finance ministers and central bank governors meeting in Marrakech said on Thursday evening they had agreed to explore how “extraordinary revenues” from frozen Russian central bank reserves could aid Ukraine.

The endorsement follows Yellen’s approval of EU proposals on Wednesday, and is aimed at reviving Brussels’ plans to find a way of tapping into the revenues.

Member states have been struggling to make headway due to opposition from some EU countries over legal concerns, and warnings of financial risks from the European Central Bank.

The proposals would see the EU hand a portion of profits booked on more than €200bn-worth of financial assets owned by the Russian state to Ukraine.

What is under consideration?

In the days that followed Russia’s full-scale invasion of Ukraine in February 2022, more than $300bn in central bank reserves were frozen by Kyiv’s western allies. Of those $300bn, more than €200bn worth of assets are held in Europe.

Most of this is caught in the plumbing of the European financial system, run by the world’s largest clearing house: the Brussels-headquartered Euroclear.

Ever since the assets were frozen, ideas have circulated about how they could be used to aid Ukraine. Many are wary of full confiscation, arguing that this would breach international law.

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Rather than seize the assets, some officials have instead advocated imposing a levy on the excess, or windfall, profit made by Euroclear. This levy would be applied on the profits derived from the interest paid on Russia’s assets.

Euroclear declined to comment for this story.

How does it work?

Euroclear fulfils a crucial role in financial markets: ensuring payments get made.

To do its job, Euroclear receives payments, such as a coupon on a bond, and passes these on to the owners of the asset. But, as the assets in question are owned by the Russian central bank — an entity that is under EU sanctions, Euroclear has to hold on to the revenue.

Euroclear usually reinvests large cash balances, earning a fast-increasing amount of interest, owing to the ECB’s rapid succession of rate rises, which have taken benchmark eurozone interest rates from minus 0.5 per cent to 4 per cent.

It is this reinvestment pool that the EU would like to tap, arguing that it constitutes a “windfall profit” that would not exist without its sanctions regime.

In the first half of this year, Euroclear made €1.28bn in profits as a result of Russian sanctions, according to the clearing house’s most recent quarterly results.

EU officials first want to make it mandatory for Euroclear to set these profits aside. Only later will they decide how exactly to make them available to Ukraine.

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Why is it controversial?

The ECB warned the European Commission in June that the plans could shake the confidence of global markets and destabilise the euro.

Their concern centres around a view that, should the EU seize profits made on assets held by a foreign state, other central banks will seek to sell their euro-denominated assets.

Central banks hold more than €2.2tn of their wealth in assets denominated in the single currency, according to IMF data. Many of those central banks represent states that have foreign policies at odds with those of the EU and the US.

EU member states have also been divided on the issue. Some countries like Germany have raised questions as to the legal implications of accessing the funds stocked up at Euroclear.

Why are things moving forward?

To minimise the risks, the ECB, several EU countries and the European Commission want the proposals to get the nod from their G7 partners, the most important of which is the US.

A breakthrough occurred on Wednesday when Yellen made clear that she supported “harnessing windfall proceeds from Russian sovereign assets immobilised in particular clearinghouses and using the funds to support Ukraine”. She said this was part of broader efforts to “ensure Russia pays for the damage it has caused”.

The post-meeting statement from G7 central bank governors and finance ministers on Thursday suggested other administrations would also support the Euroclear plan.

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The statement said that the allies would “explore how any extraordinary revenues held by private entities stemming directly from immobilised Russian sovereign assets, where those extraordinary revenues are not required to meet obligations towards Russia under applicable laws, could be directed to support Ukraine and its recovery and reconstruction in compliance with applicable laws”.

EU officials said that Yellen’s remarks, plus the G7 statement, could help alleviate European critics’ concerns.

“International co-ordination with like-minded partners is fundamental for advancing the work,” an EU diplomat said. “It’s positive that we are getting some support and reassurance from other partners,” an EU official said.

What is already being done?

Belgium on Wednesday said it would use the corporate tax it already collects on Euroclear’s profits to create a €1.7bn fund dedicated to Ukraine.

Prime minister Alexander De Croo said that the money would be used to buy military equipment and for humanitarian support.

Belgium is taxing the revenues at a regular corporate tax rate of 25 per cent, which yielded some €600mn this year. The taxation revenue is estimated to hit €1.7bn next year, according to a person briefed on the matter.

The EU levy to tap into the windfall profits would be set at a “higher percentage” than the Belgian corporate tax, one bloc official said.

Additional reporting by Martin Arnold in Frankfurt and Colby Smith in Marrakech