By Galina Korol | 2024-02-22

KYIV -- The European Union (EU) has adopted a law that sets aside windfall profits made on frozen Russian central bank assets, raising hopes that the funds could be used to help Ukraine.

The EU and G7 partners and Australia have frozen about €260 billion ($282 billion) in Central Bank of Russia assets since Russia's invasion of Ukraine in February 2022, the Council of the EU said in a statement February 12.

More than two-thirds of that amount is being held in the EU, with the majority of that held by Euroclear, a Belgian clearinghouse.

Under the new law, EU central securities depositories such as Euroclear that are holding more than €1 million ($1.08 million) in Russian central bank assets are prohibited from using net profits and must keep revenues from the Russian assets separate.

"This decision paves the way for the Council to decide on a possible establishment of a financial contribution to the EU budget raised on these net profits to support Ukraine and its recovery and reconstruction at a later stage," the statement said.

The permanent representatives of the EU countries at a meeting in Brussels earlier on January 29 agreed to create a separate account to which interest from the taxable income of frozen Russian assets will be transferred, European Pravda reported.

The Ukrainian Foreign Ministry welcomed the news.

"Going forward, Ukraine is prepared to continue working with partners to achieve our ultimate goal: to make Russian assets available to Ukraine," Ukrainian Foreign Minister Dmytro Kuleba said on Ukrainian television.

"The aggressor must pay."

Ukraine is sustaining monumental losses every day from the war Russia unleashed.

According to the KSE Institute, the think-tank of the Kyiv School of Economics, as of January, the total amount of damage done to Ukraine's infrastructure alone amounted to almost $155 billion.

At the same time, the total amount needed to rebuild Ukraine is now $486 billion.

Ukrainian Prime Minister Denys Shmyhal shared these figures during a presentation of the third assessment of losses and needs that the government held jointly with the World Bank, My-Ukraina reported on its Telegram channel on February 15.

Kyiv has not changed its position: Moscow must pay, and Russia's frozen assets need to be the main resource for rebuilding Ukraine, Shymhal stressed.

"We need to set this process in motion this year. We think it is possible to use the revenues from Russia's assets by way of an interim decision that doesn't eliminate the need for total confiscation," said Shmyhal.

Misgivings in the West

Ukraine has long eyed frozen Russian assets for its own use, though the EU is wary of legal risks.

"There are many legal conflicts here," Taras Zagorodniy, a political and economic analyst and managing partner of the National Anti-Crisis Group, an independent Ukrainian think-tank, told Kontur.

"So for now the mechanism isn't clear. It will be very hard to get these funds. Even if Ukraine theoretically goes to the [International Court of Justice (ICJ)], many legal factors come into play there too," he said.

"First of all, Russia has clout in the UN [United Nations, the ICJ's parent organization], and many legal stages will start. For example, Russia didn't officially declare war on Ukraine, and that needs to be proven now too."

"It's one thing to know something and another to prove it and win a case," Zagorodniy said.

Although the EU has the right to freeze assets under European law, as of now it may transfer them to another party only if there is a criminal conviction tied to these assets, according to Zagorodniy.

"This means that we need to show that we're taking action, and we need to attract serious, sharp-toothed law firms -- preferably one from Europe and another from the United States -- that will stand up for Ukrainian interests," Zagorodniy said.

Upholding world order

Amid the legal risks and threats from Russia, the question of how to force the aggressor to pay for its invasion of Ukraine has become even more acute.

Ivan Us, an economist and chief consultant at the Center for Foreign Policy Studies of the Ukrainian National Institute for Strategic Studies, pointed to an article in January co-authored by Nobel Economics Prize laureate Joseph E. Stiglitz, "Seizing Russia's frozen assets is the right move."

"When [Russia's assets] were frozen, there was talk about how they needed to be transferred to Ukraine. Then the European Central Bank said, 'That can't be done because that will undercut trust in our assets and countries will be afraid to deposit their assets with us,'" Us said.

"This article is relevant because it offers responses to these fears the world has about providing these assets to Ukraine. [Stiglitz] writes that assets were first frozen as far back as 2022."

Other countries did not lose trust in Europe and the United States then, Stiglitz pointed out in his article.

"They still trust the United States and Europe just as they always did," said Us.

The European Central Bank's hand-wringing over capital flight signals that bad actors can violate the world order with no consequences to their assets, Us said, citing Stiglitz.

That attitude "encourages other countries to undermine the world order or commit unlawful acts because they're going to be confident that nothing will happen to their assets," said Us.

"[The] frozen Russian assets can be viewed as a down payment on the reparations that the Kremlin should eventually be compelled to pay," Stiglitz concluded in his article.