European Union policymakers are discussing whether and how to use €170bn of reserves belonging to the Bank of Russia, which has been frozen at Euroclear, to help Ukraine. Yuriy Butsa, the head of Ukraine’s debt management office, told GlobalMarkets he was anticipating “a solution that is robust and scalable”.
Amid wider discussion about the G7 taking coordinated action, one of the critical questions is whether Ukraine’s allies will start to channel the principal of Russian assets to Ukraine.
At the start of Russia’s full invasion of Ukraine in 2022, the US and its allies froze Russian foreign exchange reserves in their jurisdictions.
The Russian Elites, Proxies and Oligarchs (Repo) Task Force estimated Russia’s FX reserves at $280bn in 2023. The Bank of Russia and others said $300bn-$330bn.
Most are euro and dollar debt securities. Euroclear is reported to manage about $200bn (€170bn) of them for the Bank of Russia, about 90% of what is frozen in the EU, while France holds much of the rest. The US holds around $5bn.
During last year’s IMF Annual Meeting, the US agreed to lend $20bn to Ukraine as part of a $50bn G7 loan, to be repaid from the interest earned on frozen Russian sovereign assets.
Now European politicians are discussing using the principal. Russia would get repaid if it compensated Ukraine for inflicted damages. This could unlock a further €140bn for Ukraine.
Butsa (pictured) hopes that if European agreement is reached, others will follow.
“The proposed mechanism should ultimately serve as a replicable blueprint for other countries where Russian sovereign assets remain frozen,” he said.
Valdis Dombrovskis, EU commissioner for economy and productivity, told delegates at the Institute of International Finance Annual Members’ Meeting this week that there had been progress on that front: “It is positive that we were able to agree at the G7 level — at finance ministers’ level on October 1 — that we would work in a coordinated way to use those cash balances from Russian assets for Ukraine’s support, because there are also Russian immobilised assets in other G7 jurisdictions, including the United States.”
A coordinated action by the EU and US would help allay European Central Bank concerns that confiscating Russian assets on its own could undermine the euro’s global credibility.
US president Donald Trump is due to meet President Volodymyr Zelensky of Ukraine on Friday, reportedly to talk about weapons systems.
William Jackson, chief emerging markets economist at Capital Economics, said Zelensky might also use the meeting to raise the question of US-held Russian reserves. “It has a reasonable chance of success,” he said. “The Ukrainian government is obviously keen to push the idea of using frozen foreign exchange reserves to pay for defence and reconstruction. Trump on the other hand seems to want to be in a position to sell weapons to Ukraine without the US funding it — earlier this year the cost of the war was moved more on to Europe.”
‘Not there yet’
When the $50bn G7 loan was agreed, Ukrainians raised hopes of the principal being used, but there was still strong objection that it would set a precedent for other countries’ foreign-held assets to be used in a similar way. Those concerns linger.
“There’s huge political reluctance in Europe to touch those frozen assets, because it would undermine the rule of law [and] create a historical precedent, which would open the door to seizing assets of other countries,” said Anna Rosenberg, head of geopolitics at the Amundi Investment Institute at the IIF on Monday. “It would undermine trust in what the EU stands for. So right now we are not there yet. But in a war scenario, I think it becomes possible.”
Others give those concerns less weight as the discussion intensifies.
“I think that view is overplayed,” said Jackson. “I cannot see most other countries seeing themselves in the same position. There has been a very obvious, very significant trigger for this and even Russia knew this could be a consequence of the invasion — that’s why prior to the war it was trying to de-dollarise and move more into euros to shield the country from the US financial system. That hasn’t worked, though, because the US and Europe have been in step with each other.”
He argued that while there might be concern from China, “Perhaps the US and Europe want them [China] to be concerned.”
“There are a relatively limited number of safe, highly liquid assets foreign nations can invest in,” he said. “There are a lot of central banks buying gold right now, but what else is there?”
The plan has an appeal for EU countries by easing the burden of supporting Ukraine on their own finances.
War of attrition
Butsa said the war had become one of attrition. Preparing its draft budget for 2026, Ukraine has assumed the pressure on public finances will not diminish. The country’s funding gap is substantial — it expects to need more than $23bn on top of existing commitments.
He described proposals to use the Russian principal as “the most efficient and morally sound way to mobilise the necessary resources for both Ukraine’s budgetary stability and our military sustainment”.
Butsa said he hoped that during the Annual Meetings there would be greater clarity and commitment on multi-year budget and off-budget financing mechanisms for Ukraine.
“Crucially, these must be both sufficiently sizeable and structured to be neutral with respect to our debt sustainability,” he said.
Dombrovskis said the EU and member states together had provided about €177bn in support and stood ready to provide more, but the IMF was “rightly concerned” about debt sustainability.
“So we cannot just continue our approach of providing more loans,” said Dombrovskis. “What we are doing here, with this reparation loan, is based on the idea that we have cash balances which have accumulated in European financial institutions because Russian assets are immobilised. We’re not confiscating the assets — the EU is not doing so — but we are following through on a European Council decision, which has also been a G7 decision, that Russian assets should stay immobilised for as long as Russia has not paid reparations.”
He described the move to take the accumulated cash balances and provide a non-recourse loan to Ukraine, which Ukraine only needs to repay once Russia pays reparations, as “operationalising this decision”.
“This approach ticks some important boxes,” said Dombrovskis. “It addresses debt sustainability, because the loan does not create an additional burden — Ukraine only repays once Russia pays reparations. It also falls short of confiscation, as not all EU member states agree to confiscation, and it can still provide a very sizeable amount of support.”