HS Analysis | EU countries want Russia to be responsible for compensation – one way is to use frozen funds

Brussels

To Brussels the gathered EU leaders are unanimous that Russia must pay for the destruction caused to Ukraine sooner or later.

“It is completely wrong that the European taxpayers, who have not caused the destruction, have to pay,” said the Prime Minister of Estonia Kaja Kallas coming to the EU summit in Brussels.

After Russia attacked Ukraine, EU countries have frozen both private and public Russian funds, from which war reparations can begin.

The most significant pot is the assets of the Russian central bank, which the EU has frozen to the value of around 200 billion euros. About 30 billion euros of private funds of Russian oligarchs are frozen.

A plan has slowly been developed, how these funds could be used for the benefit of Ukraine, but many member states are still hesitating. The problem is that even though it is the attacker’s funds, the EU wants to follow the rule of law and do everything legally and watertight.

Also the new prime minister of Finland Petteri Orpo (kok) said when he came to the summit that he hoped that the EU would find a lasting legal solution to the matter.

Commission chairman Ursula von der Leyen has promised that the Commission will present a proposal on the matter before the summer vacation break, which in Brussels means the beginning of August.

Straightforward confiscation seems to be off the bills already.

At the moment, it seems that the EU will not initially touch the frozen oligarch assets, but the main target will be the central bank’s assets, the proceeds of which are to be used for the benefit of Ukraine. The 200 billion euros in question are deposited in Euroclear, located in Belgium, which specializes in the settlement of securities transactions and the safekeeping of securities.

The EU’s idea is to tax the income that Euroclear receives on the central bank’s funds. This is not a small amount: according to the Financial Times, Euroclear’s income from the central bank’s cash was more than 700 million euros in the first quarter of this year.

As interest rates rise, incomes only increase, so Ukraine could receive support of several billion annually. It won’t rebuild the country yet, but that’s better than nothing.

Another option would be for the EU to invest the frozen 200 billion euros and transfer the proceeds directly to Ukraine. The problem with that is that the money would still be the property of the Russian central bank and the EU would be held responsible if, for example, it wasted it on investment losses.

That’s why the balance seems to be tipping towards the “windfall tax” of Euroclear’s profits – EU leaders talk about the same term used to describe the excessive profits of electricity companies when the price of electricity rises.

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The ECB has reportedly sent a letter.

Like this has not been done anywhere before, so the EU has proceeded cautiously – a bit like the long-drawn-out plan to establish a special court to hold Russia accountable for the crime of aggression. The impatient ones would act already, but the lawyers investigate every corner before giving the green light.

The biggest obstacle to the income tax plan seems to be sitting in Frankfurt. The European Central Bank (ECB) has reportedly sent a letter to those responsible in the EU and warned that using the assets of the Russian central bank could undermine confidence in the euro and send the wrong signal to international financial markets.

The logic of the central bank is that it fears that other central banks of the world will panic and start avoiding the euro area as a place to store their funds, which could weaken the euro’s position as a reserve currency. It could have ripple effects on, for example, the EU’s foreign trade.

The central bank’s words carry a lot of weight. It can be seen in the caution of some member states, for example Germany. Although the use of Russian funds for the benefit of Ukraine makes sense, there are no shortcuts to a solution.