Europe has found itself facing an unexpected decision. The war in Ukraine is dragging on and the Russian assets frozen by the European authorities remain under the administration of the Club of 27. This large portfolio, which has become the main ‘prisoner of war’ of the West, has obtained powerful profits of 4.4 billion euros thanks to the financial conditions of high interest rates and a market ‘on fire’ in 2023. In this context, the upper echelons of Brussels are debating, to the fury of Moscow, what to do with that remainder that is now in their possession.
Shortly after the Russian invasion of Ukraine in late February 2022, several governments, including the United States, the entire European Union, Japan and others, tied up the Bank of Russia’s reserve assets under their jurisdiction, i.e. the assets remain the property of the Bank of Russia. The point is that the Bank of Russia cannot take them out or use them. In pursuit of greater transparency, the European Union decided to publish what these assets were and what their evolution was using Euroclear, one of the largest clearing and settlement systems for financial securities in the world. Legally, it is a financial services company whose headquarters are in Brussels, but it has branches in many important financial centers such as Paris, Amsterdam, London, Stockholm and Helsinki.
In the silent world of central bank reserve management, information of this kind is not normally disclosed, but the amount available is too large to remain hidden: the balance sheet of Euroclear Bank, the relevant subsidiary of the Euroclear Group, has multiplied by more than five, from early 2022 from its previous stable level. Euroclear does not publish the amount of securities the Bank of Russia holds there, but must account for the cash balance in quarterly statements of its own total assets.
However, some leaks reveal the composition of these assets. Part of it consists of liquid money that the Russian central bank had ‘stored’ between the different EU countries and in different currencies in order to have a diversified portfolio in the face of market variations. However, a large part of them is made up of bonds from different countries whose yields have risen sharply. All of this is specified in the next paragraphs of this article.
Nicolas Verón, a researcher at the Peterson Institute, assures in a note published in January that Euroclear contractual agreements specify that sanctions They prevent the Bank of Russia from moving its assets (both the principal and the interest they generate), so that the cash or returns generated by the Russian assets continue to accumulate in Euroclear without generating any interest for the Bank of Russia.
Since the Bank of Russia’s cash deposit in Euroclear does not earn interest for the Russian monetary institute, there is a strong argument that the interest income that Euroclear earns, which amounts to billions of euros annually at current rates, belongs to Euroclear and not to the Bank of Russia. In this way, the European Union could decide to appropriate these revenues for the benefit of Ukraine, without expropriating the Bank of Russia and thus staying in line with the European Union’s commitment to the international rule of law.
This strange situation has caused the assets under management by this vehicle to multiply by five. In this sense, the group has been forced to report unprecedented profits for the institution of 5.5 billion euros. Of this great result, it should be noted that 4.4 billion euros correspond only to the seized Russian assets and that they continue to generate money that accumulates in their balance sheets.
However, managing these assets to obtain profits has been relatively simple and is largely explained by the movements of the currency markets. Since it began the year the euro has appreciated by 24% against the ruble. This movement has been much greater since the end of 2022, where there has been an increase of more than 70%, taking the exchange between the two above pre-war prices where one euro was exchanged for 87 rubles compared to the current 98.45.
Euroclear explains that this is due to very high interest rates from the ECB which has made the pan-European currency stronger. These assets, to a large extent, They consist of liquid money that the central bank of Russia had distributed between the different EU countries and in different currencies in order to have a diversified portfolio in the face of market variations. However, a large part of them consists of bonds from different countries whose yields have risen sharply.
To a lesser extent there are also other types of investments such as variable income shares. However, the latter have not had a great performance and, in fact, all businesses outside of interest, the financial sector and the like, have resulted in losses of 24 million. Regarding how the group of seized assets is distributed, 63% of the assets seized by the EU are in euros followed by 16% in pounds sterlingwhich has caused fluctuations in currencies to favor a revaluation of these assets.
Belgium has already entered 1,080 million euros into its coffers due to the benefits of Russian assets
In any case, Belgian legislation is causingand there is also a certain degree of management in assets that would have to be ‘frozen’. In fact, Euroclear explains that the second factor that explains the extraordinary profits obtained is Belgian legislation. According to it, a sanctioned actor cannot deliver the benefits produced by his seized assets and a part of the cash accumulation that this generates must be reinvested. Euroclear does not specifically explain what these extraordinary Russian profits have been invested in beyond the movements in the currency market.
In that sense, from Brussels, headquarters of this pan-European vehicle, they are already taking a good part of this benefit thanks to the corporate tax, obtaining by law a part of the profits of this company, regardless of the origin of the assets that are generating the Profits. According to Euroclear, the coffers of the Belgian state in 2023 nearly 1,080 million euros were received thanks to these extraordinary profits from Euroclear on the seized Russian assets
What is Europe going to do with the money?
At the moment the agreement on the part of Europe is that all the extraordinary benefits obtained from the seized Russian assets will be used for the reconstruction of Ukraine after the war. This was announced by the Belgian presidency of the Council of the EU last week on X, formerly known as Twitter. “The ambassadors of the EU countries have agreed in principle on a proposal to use the extraordinary benefits of frozen assets to support Ukraine reconstruction“, commented the publication.
The European Union plans to provide 50,000 euros of financial assistance to Ukraine during the period 2024-2027, an amount that may have to be even larger depending on developments on the Ukrainian front and in the US Congress. Income from immobilized assets will not cover the entire aid package, but they would still help finance a part. Thus, European politicians have begun to give free rein to their imagination to look for possible solutions and proposals to use this ‘involuntary investment’ by Putin. If it is finally carried out, Moscow’s money will be financing Ukraine.
Belgian Prime Minister Alexander de Croo assured Reuters in January that one of the alternatives could be to use the assets tied up as collateral to issue bonds through which the West could raise money for Ukraine. Although the Belgian idea has reached the G7 finance ministries as one of the options under discussion, European countries show little enthusiasm for it.
“What we know is that using assets as collateral suffers from the same legal, economic and financial concerns as a confiscation and is considered by most G7 legal departments,” says a European official close to the issue. “Using an asset as collateral means owning it and, In this case, confiscate it“says the official, who asked not to be identified. Four other European officials close to the issue agreed with this opinion. It is also not clear which entity would issue the bonds and what investors would think of a plan that would clearly imply a default when the bonds mature and investors have to recover their principal with Russian guarantees.
This is a debate that has been taking place in the EU since the end of December, when the European Commission unanimously presented a proposal to, precisely, use those “exceptional benefits“However, it is a debate that goes back a long time and has been present throughout 2023. For now, one of the most moderate options has been chosen as some members requested more aggressive measures such as, apart from using these resources, tax profits with a special tax.
However, both the ECB and France and Germany expressed doubts about such an aggressive approach because they feared that this would affect both European markets and the euro as a reserve currency. Especially since other countries that may have geopolitical conflicts with the Old Continent, such as China, India, the United States, Middle Eastern countries…, may see this as a dangerous precedent and limit its holding of assets in the pan-European currency as much as possible.
“They are openly debating about stealing frozen Russian funds to militarize kyiv”
In any case, experts like those at the Petterson Institute point out that there are good arguments in favor of the benefits really belonging to Russia given that “the deposit they had there it doesn’t really generate interest and these incomes come from movements in the EU markets due to the rise in interest rates.” In that sense, “if the EU appropriates these benefits, it would not be expropriating the Bank of Russia.”
In any case, all the Baltic countries, Denmark, Sweden, Finland and Poland, were actively in favor of taking the strongest possible measures on windfall profits. According to a study by the European Commission, an extra ‘tax’ on Russian extraordinary profits It would mean close to 15,000 million euros for the coffers of kyiv. Money that could be key for the economy of the Slavic republic to roar again after a destruction of 35% of its entire GDP due to the war. This is not only the most powerful recession in its history, but also a very important burden for a country that wants to enter the EU when it finally reaches peace with Russia.
In any case, Euroclear indicated that the extraordinary profits in 2023 derived from the seized Russian assets of up to 4.4 billion euros were due to solid business performance and an environment of high interest rates,” according to Llueve Mostrey, director of Euroclear. “Unlike 2022, which was characterized by market volatility Following the invasion of Ukraine, market activity declined slightly in 2023 while stock valuations recovered. Fixed-income issues performed well,” the board insists.
Russia has repeatedly expressed outrage at the very debate over what to do with frozen Russian assets. Vyacheslav Volodin, president of the Duma (the Russian Parliament), recently stated that “they are openly debating stealing Russian funds frozen to militarize Kiev.” The senior official warned that “a decision of that caliber would require a symmetrical response on our part and we would confiscate many more assets of these countries.”