The European Union is inching closer to a historic decision to use windfall profits accumulated by frozen assets in the bloc belonging to the Russian Central Bank and sending them to Ukraine.
The assets were frozen shortly after the full-scale invasion of Ukraine in February 2022 and have remained so since. It is estimated that roughly 260 billion euros ($281 million) in securities and cash belonging to Central Bank of Russia have been frozen, out of which 210 billion euros are in the European Union and the rest in other Group of Seven countries and Australia.
On March 20, the European Commission proposed the second and final step, sending the actual cash to Ukraine.
This comes after EU foreign ministers tasked EU foreign policy chief Josep Borrell with coming up with a proposal for this to happen. This means no one was objecting -- so far -- but it also means that its far from a done deal, as the 27 EU member states must study the commission proposal and give a unanimous green light.
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The proposal, seen by RFE/RL, notes that the first step of the process, the setting aside of profits, started as of February 15, when the abovementioned decision entered into force: "the central securities depositories (CSDs) are prohibited from disposing of these profits, or distributing them to shareholders, until the [European] Council decides on the financial contribution to be raised on them to support Ukraine."
The money accumulated after this is estimated to be somewhere between 2.5 billion to 3 billion euros ($2.7 billion to $3.2 billion). The European Commission hopes that this money can be sent to Ukraine by July, provided that member states give a thumbs-up in the coming months. There is also hope that comparable sums can be sent each year after that, depending on annual interest rates, and that those future payments can be sent twice a year to Ukraine.
Now, there are a number of "assurances" in the commission proposal for member states worried that this move could be a seizure of private property -- a fundamental right -- or damage the bloc's common currency, the euro.
The document notes that: "The generation of unexpected and extraordinary revenues that are not the property of the Central Bank of Russia, as there is no legal or contractual provision for interest to be paid to the owners of the principal. Since these revenues only exist as a result of the restrictive measures, there can also be no legitimate expectation that they should remain with the central securities depositories and their shareholders."
It is also added that any retroactive claims by Moscow won't be accepted: "Unexpected and extraordinary revenues do not have to be made available to the Central Bank of Russia under applicable rules, even after the discontinuation of the transaction prohibition. Thus, they do not constitute sovereign assets. Therefore, the rules protecting sovereign assets are not applicable to these revenues."
But there are also other "goodies" to make member states come onboard quicker. Three percent of the profits of the frozen assets will remain with the CSDs "to ensure the efficiency of their work" and they can also in the future provisionally retain 10 percent of the contribution to finance potential legal fees in case Russia would drag them to court -- which is expected.
Several EU officials dismiss the fear that this move will damage the euro and its position as the second reserve currency in the world.
The fact that Brussels has pondered this move for several months already without any impact on the common currency in terms of trading or value is cited as one example. The other is that other G7 countries are mulling similar moves. Then there is the proposal of how the money should be spent, which gives member states even more potential overview -- and even veto opportunities.
Initially, it was thought that the money generated from the profits would go toward the reconstruction of Ukraine. But as the war is far from over and no one really expects that reconstruction efforts can start in earnest anytime soon, the European Commission proposal states that 90 percent of the money should go toward supplying military equipment to Kyiv and the remaining 10 percent on regular financial aid.
Now, the 10 percent is proposed to be channeled via the regular EU budget, so it doesn't need an explicit green light from any member states. But the 90 percent should go via the European Peace Facility (EPF), an EU off-budget vehicle that has allowed Brussels to send cash for arms to Ukraine.
The EU has so far sent 5.6 billion euros in arms and artillery to Kyiv in the last two years via the EPF but has for the last 10 months failed to sign off on another 500 million-euro tranche after a long-standing Hungarian veto. The veto stems from a dispute with Kyiv around a blacklist produced by Ukraine's National Agency on Corruption Prevention. On that list, the Hungarian bank, OTP, is labeled an "international sponsor of war," as it continues to do business in Russia.
While the bank was de-listed in the fall, Budapest has sought assurances that it won't happen again in the future, something that so far has not occurred.
Recently the EPF ceiling was topped up by 5 billion euros specifically ring-fenced for Ukraine, paving the way for even more EU cash for weapons to Ukraine.
But the rules of the game have not changed. This means that national vetoes, like Hungary's, are still possible for future tranches. And it means that the windfall profit from frozen Russian Central Bank assets may not end up in Ukraine anytime soon.