The European Central Bank has warned Brussels against swooping to claim money from custodians of trapped Russian assets, claiming it could dent confidence in the euro as a global currency and hurt financial stability.
The Frankfurt-based institution has privately told the European Commission that plans to divert payments on bonds owned by the Russian central bank to fund Ukraine would send a bad signal to global markets, according to people familiar with the discussions.
The warnings come as EU officials examine ways of deploying some of the proceeds of frozen Russian assets that are stuck in Europe’s financial plumbing. Ukraine faces a reconstruction bill amounting to hundreds of billions of euros as a result of President Vladimir Putin’s invasion.
The ECB has warned that using interest rate proceeds from immobilised Russian assets could encourage other central banks that hold large reserves of money to “turn their back” on the euro, especially if the EU acts unilaterally without other G7 countries, according to a draft internal EU note seen by the Financial Times.
“The implications could be substantial: it may lead to a diversification of reserves away from euro-denominated assets, increase financing costs for European sovereigns and lead to trade diversification,” the note added, describing the ECB position. An ECB spokesperson declined to comment.
Brussels has considered a range of options, including actively managing the Russian assets to generate returns for Ukraine, or alternatively harvesting some of the interest payments stemming from them, as it seeks to raise funding. All of the routes being examined carry legal as well as financial stability risks and no decisions have been taken.
One of the key areas of focus are central securities depositories, including Belgium-based Euroclear, where sanctions have immobilised €196.6bn in Russian assets for a year. The asset pile is rising as coupons pile up and more bonds mature, but Euroclear is unable to pass money on to its legal owner.
The assets are temporarily reinvested by Euroclear to help lubricate markets, also generating a further profit. EU officials are looking at whether profits generated by the reinvestment can be diverted to Ukraine. Euroclear has generated large profits as a result of the stockpile, reporting €734mn of interest on cash balances from Russia-sanctioned assets in the first quarter alone.
One idea being examined by commission officials is requiring asset custodians in the EU to make a windfall contribution from those profits, according to the people familiar with the discussions. These could be used to support Ukraine. Euroclear and Clearstream, a Luxembourg securities depository, declined to comment.
However the idea has created nervousness among member states and also in Frankfurt, which promotes the euro as a global currency and is anxious not to shake confidence in EU financial structures. The European Commission declined to comment.
“There is no disagreement that this is morally the right thing to do, but the ‘how’ is very difficult,” said one EU diplomat. “You can’t skirt the rule of law. And if you find something that is legally tenable what are the implications for the euro’s standing as a global currency?”
The commission, the diplomat added, was eager to do something in the area of tapping into the frozen Russian assets, with proposals expected as soon as this month.
The Belgian government has already said it intends to use corporate tax income from the profits generated by the immobilised assets at Euroclear to help Ukraine, devoting the money to military and humanitarian assistance as well as to help refugees.
Belgium expects to earn at least €625mn from the interest this year under its normal tax regime. A spokesperson for Belgian prime minister Alexander de Croo declined to comment.
The discussions come amid a wider debate on ways of raising funding for the rebuilding of Ukraine, and how to ensure Russia makes a contribution. This week a bipartisan bill was introduced in the US senate that would authorise President Joe Biden to seize Russian sovereign assets and transfer them to Kyiv for the long-term reconstruction of Ukraine.