The EU wants to tap frozen Russian assets to help Ukraine

After months of political wrangling, the European Union officially began a lengthy process on Tuesday to fulfill its promise to use money from frozen assets of the Russian central bank to rebuild Ukraine.

The European Commission, the bloc’s executive arm, said it has agreed on a proposal detailing a legal way to transfer interest earned and other profits from these assets, held in European financial institutions, to Ukraine’s benefit to use. But contrary to usual practice, the commission has not publicly disclosed its contents, showing how politically charged the plan is for many member states.

The plan has the potential to provide Ukraine with up to 3 billion euros ($3.25 billion) a year, or as much as 15 billion euros between 2023 and 2027, said an official involved in the process who was not authorized to speak publicly about it. But these figures may vary depending on market conditions.

Tuesday’s proposal still has some way to go before it can be implemented. It must be approved by the European Parliament and all 27 member states, and is expected to meet resistance from some countries. France, Germany and Italy have raised objections, according to the official, and Hungary has blocked a separate financing mechanism for Kiev, which leaders are expected to discuss at a summit later this week.

But the effort to free up money for Ukraine comes amid growing concerns that financial support for the war effort is declining among European countries and the United States.

The commission’s plan would require financial services companies that hold frozen assets from Russia’s central bank to place the profits generated from them, such as interest earned, in segregated accounts, according to the proposal reported by The New York Times. Member states must decide how to then send these profits to Ukraine, the proposal says, opening the door to another protracted negotiation. The plan does not use the assets, the balance of which remains untouched.

The limited scope of the proposal is also an attempt to allay concerns about future legal claims on the money by Russia. The revenue “does not constitute state assets and is not required to be made available to the Central Bank of Russia under applicable rules,” according to the document seen by The Times.

After Russia invaded Ukraine last year, Western countries took an unusual step by freezing more than $330 billion in Russian central bank assets abroad. But because sanctions have blocked payments to Russia, the money generated from these assets has been stuck abroad, with most of the amount, more than $217 billion, frozen in the European Union. Almost everything in Belgium is in the hands of Euroclear, a financial services provider.

Euroclear had to invest the extra money to prevent additional financial risks. According to Euroclear’s latest financial statements, these investments generated around €3 billion in profits in the first nine months of this year.

The discreet tone of Tuesday’s announcement contrasted with loud declarations earlier this year by the bloc’s top officials to “make Russia pay” for the war. But a bill was postponed twice due to disagreements among member states, concerns from the European Central Bank and fears over financial liabilities at Euroclear.

The European Central Bank warned about this assets of another country’s central bank could damage the perception of Europe as a safe place to store money and could lead countries to move away from euro-denominated assets, which could undermine the bloc’s plan to expand international use of the increasing the euro is harmful.

Euroclear was also concerned about Russia’s legal rights to the proceeds from its assets could pose a significant financial risk to the company.

U.S. Treasury Secretary Janet L. Yellen told Congress earlier this year that seizing Russian assets frozen in the United States would likely require a change in U.S. law.

A Treasury Department representative said the Biden administration does not plan to follow Europe’s move with a tax on the proceeds of Russian assets frozen in the US. However, Ms. Yellen has previously voiced her support for the idea.

“Looking ahead to additional sources of aid, I support capturing windfalls from Russian state assets immobilized in certain clearinghouses and using the funds to support Ukraine, something the G7 has now pledged to explore.” Ms. Yellen said this in Octoberreferring to the Group of 7 countries.

The European Commission, which previously expressed concerns about its own development, felt comfortable putting forward the proposal after a meeting of the G7 last week. The group, which includes the United States and Britain, said “decisive progress” was needed to generate extraordinary revenues from the immobilized Russian assets to support Ukraine, “in accordance with applicable contractual obligations and in accordance with applicable laws .”

“We reaffirm that, in accordance with our respective legal systems, Russian sovereign assets will remain immobilized in our jurisdictions until Russia pays for the damage it has caused to Ukraine,” the leaders said at a virtual G7 meeting in December.

Alan Rappeport reporting contributed.