Divisions over whether Ukraine can lawfully be handed an extra €30bn (£26bn) loan drawn from €270bn in seized Russian state assets are likely to be aired at a meeting of G7 finance ministers this week in Stresa, northern Italy.
In another test of political will over Ukraine, the US has been canvassing support for the plan, with the money intended to help with Ukraine’s reconstruction or pay for badly needed arms.
The debate on how to make the frozen Russian state assets available to Ukraine has been deadlocked for more than a year, with advocates of complete asset seizure, as opposed to freezing, unable to persuade central bank governors or gain enough support inside the G7 group.
The proposals for using the state assets as collateral for a loan is even a rare moment of disagreement between the US and Germany.
Christine Lagarde, the European Central Bank president, last week raised legal and economic objections to full seizure of the assets but the US, with strong UK backing, is determined to try to circumvent such objections.
Washington wants to circle around her argument by saying that the frozen assets need not be seized, or confiscated, but instead mobilised to give an extensive loan to Ukraine on which the interest would be paid from the annual profits of the frozen Russian assets. Seizing the Russian central bank assets and handing them to Ukraine now as a pre-payment for reparations is effectively ruled out.
“Moving from freezing the assets to confiscating the assets, disposing of them, is something that needs to be looked at very carefully,” Lagarde has said, adding it would “start breaking the international legal order that you want to protect, that you would want Russia and all countries around the world to respect”.
Lagarde argued seizure would threaten the future stability of the financial system, undermine the principle of state immunity, and lead countries with large surpluses such as China and Gulf states to shun western reserve currencies fearing their cash will also be vulnerable to seizure.
But before the gathering of G7 leaders, the US and the UK argue that instead of handing relatively small sums such as €500m from the interest annually, it would be better if a loan or bond worth about €30bn could be handed to Ukraine with the interest paid from the profits generated from the larger frozen assets.
The G7 states could back the bond with a state guarantee as a way of reassuring private investors, officials said at the Lennart Meri security conference in Tallinn at the weekend.
The use of the Russian central bank assets as collateral would be a reversible measure until Russia paid reparations. Critics of the plan argue that using an asset as a collateral means owning the asset, which amounts to confiscation. It has already taken a huge battle for the EU to agree that some of the interest on the Russian assets seized by western powers can be handed to Ukraine.
Holding frozen Russian state assets worth €191bn, Belgium, the home of the Brussels-based securities depository Euroclear, is the largest holder of Russia’s frozen assets inside the G7, estimated at €270bn. The assets in Belgium have already generated €5bn for 2022-23 in investment income from the assets.
Earlier this month, in consultation with the EU, Belgium agreed to pay more than €1bn in taxes on this profit to a joint G7 fund for Ukraine from next year. This year, the Belgian government gave Ukraine €500m from the profit. It kept the remainder for its reserves and some hypothetical financial risks such as Russian litigation.
Speaking at Lennart Meri, Nigel Gould-Davies, a senior fellow at the Institute for Strategic Studies argued: “We have this very strange ordering of risks. Somehow we’ve persuaded ourselves that it’s more risky to take Russia’s state money than it is to send weapons to Ukraine that kill Russian soldiers. That ordering makes no sense.”
Campaigners insist that legal scholarship over the past year has come to the view that the assets can be seized, and state immunity waived, under the doctrine of state countermeasures. It is also argued that if seizure was going to damage confidence in the euro that would have already happened at the point when the assets were frozen in 2022.
Olena Halushka, the head of the International Centre for Ukrainian Victory, also warned that if the assets are withheld from Ukraine, and the country loses the war, the economic and security consequences for Europe will be far worse than the reputational risks of using Russian assets.