After two years of discussions and a series of compromises, the European Union has made an official decision on the fate of the sovereign assets of the Russian Federation that were sanctioned after Russia began its full-scale aggression against Ukraine. The EU's mechanism for utilizing the proceeds of these assets is the first practical solution at the international level for sovereign assets.

This was preceded by active discussions and compromises among EU member states on the most effective and legitimate use of frozen Russian assets. Brussels was not ready to take radical measures, such as asset confiscation, but recognized the need to develop a policy that would allow the proceeds of these assets to be used to help Ukraine financially.

In 2024, key EU institutions were actively working to develop a comprehensive policy on the use of frozen Russian assets. The decision to use the proceeds of these assets to aid Ukraine came after lengthy diplomatic negotiations and legal debates. This decision was made possible by compromise and consensus among EU member states.

This decision opened up new prospects for dealing with Russian assets, in particular, it became the basis for the Group of Seven's initiative to provide Ukraine with a "reparations loan" secured by the proceeds of frozen Russian assets. But most importantly, this mechanism for using the profits from these assets is the first practical decision at the international level regarding Russia's sovereign assets.

Russian assets in the EU

According to the latest available report of the Central Bank of the Russian Federation (hereinafter — the CBR) for 2021, its reserves amounting to about $350 billion were placed in the jurisdictions of countries that imposed sanctions on Moscow over the invasion of Ukraine. The European Union is the largest administrator of Russian sovereign assets, which were blocked in 2022 in the amount of about $220 billion of the Central Bank's assets, most of which are frozen in Belgium. They are held on the accounts of the Euroclear and Clearstream clearing houses, which settle securities within the Union and are referred to as central securities depositories (CSDs) in EU law. 

Investing these assets in securities by a CSD means that the profit from them will be received only after the repayment of liabilities. It should also be borne in mind that Russian reserves are denominated in different currencies: partly in euros, partly in US and Canadian dollars, through subsidiaries or Euroclear correspondent banks. Although Euroclear formally manages these assets, they are in different currencies and held by different legal entities. This means that the real value of assets changes due to exchange rate fluctuations, and this complicates asset management, as it requires coordination with many stakeholders.

The EU also froze $24 billion in private assets belonging to about 1,500 Russian sanctioned persons (both individuals and legal entities) and criminalized sanctions evasion. Nevertheless, the current decisions regarding Russian assets will not affect the interests of private individuals. Currently, the sanctioned Russians and legal entities affiliated with the Russian Federation are fighting for the lifting of sanctions in the Court of Justice of the European Union in Luxembourg. In most cases, the EU Court of Justice rejects claims for lifting sanctions; in at least four positive decisions, the Court lifted restrictive measures against individuals who are relatives of representatives of the Russian establishment.

Finding solutions

The European Union has been building a policy toward Russian assets gradually and cautiously. At the first stage, namely in 2022 — the first half of 2023 — the bloc discussed the legal and political grounds for confiscating Russian assets in general and transferring them to Ukraine. However, opposing voices forced Brussels to back down. 

In particular, Germany and other states feared a violation of international law and the principle of sovereign immunity with respect to state property. The European Central Bank (ECB) said that the confiscation could lead to other countries abandoning the euro as a reserve currency, which would significantly shake the stability of the European currency. In turn, the outflow of clients and investors will increase the cost of services for European consumers, and national economies will suffer. It was extremely difficult to reconcile these concerns and the outright resistance of some countries among the 27 members, so the bloc began to search for alternative solutions.

Two key options were considered. The first was the idea of investing Russian assets and transferring the income from such activities to Ukraine. The dividends accumulated in this way were to be transferred to Ukraine to compensate for losses, and the Russian assets were to be returned to their owners after full payment of reparations. At that time, there was talk of creating a specific body within the EU to manage frozen Russian assets in order to generate income from these assets. 

"In the short term, we could create a structure with our partners to manage and invest these funds. Then we would use the proceeds for Ukraine," said European Commission President Ursula von der Leyen on November 30, 2022.

The second option was to introduce a special "windfall tax" on unexpected profits received from Russian assets under the EU sanctions regime, in order to obtain funds for Ukraine with as little economic risk to the Eurozone as possible and more predictable legal mechanisms to protect against possible claims by Russia.

In the process of development, this option was transformed into the concept of using the profits received from Russian assets in the interests of Ukraine. Although the concept of using profits is not as effective as asset confiscation, it has gained wider support among member states, and Brussels has not delayed its implementation. 

The Union focused on this idea in the fall of 2023, when the European Commission and the Council of the EU began consultations on the introduction of a tax on profits earned from the frozen assets of the Central Bank of Russia. Brussels took a very cautious approach to this issue and initially determined that the process should be divided into three stages with separate legal regulation of each, namely:

Given the significance of this step, it can be assumed that the bloc first sought to gain time to develop a proper justification for the requirement for the CSDs to transfer asset income to the EU budget and ensure a proper procedure while gaining international support for such a decision. The latter was confirmed in a statement by the Group of Seven leaders on December 6, 2023:

"Decisive progress is needed to channel the extraordinary proceeds of private institutions and those derived directly from Russia's immobilized sovereign assets to support Ukraine in accordance with existing treaty obligations and in accordance with applicable law," the statement said.

After that, on December 12, 2023, the first step was the European Commission's proposal to allocate all profits earned from sanctioned Russian sovereign assets in the EU to separate accounts as a first step toward using them in Ukraine's interests. It was formally endorsed by the member states on January 23, 2023, which paved the way for the start of the decision-making procedure within the bloc.

On January 19, 2024, Vice President of the European Commission Valdis Dombrovskis confirmed the EU's determination in this direction during the Davos Economic Forum. There he announced further steps in this direction:

"There are no plans to return this money to Russia. The European Commission's proposal to member states establishes that the proceeds of frozen assets do not belong to Russia and instructs the relevant financial institutions to direct these proceeds to a separate account. Potentially, these funds could be transferred to the European Union's (EU) budget and used to support Ukraine," the European official said at the time.

Practical implementation

The practical creation of a mechanism for using Russian assets to help Ukraine began with European Union Council Decision No. 2024/577 of February 12, 2024.

The decision provides clarifications on the prohibition of any operations related to the management of reserves and assets of the CBR, as well as the introduction of further measures. Permitted transactions for the management of the balance sheet of Russian assets relate, in particular, to the reinvestment of accumulated cash balances or dividend payments, redemption of bonds, and repayment of maturing deposits in accordance with applicable European Union regulations.

However, all other transactions, including any direct or indirect transfers to the CBR or to third parties in its interests, remain prohibited. 

Since this regime leads to an extraordinary and unexpected accumulation of funds on the balance sheets of CSDs, these institutions are in a specific situation that differs from that of other financial institutions within the bloc. Accordingly, the EU has decided to regulate in more detail their powers with respect to the funds received in this way on their accounts. 

The EU's position is quite clear: unexpected and extraordinary proceeds from Russian assets should not be transferred to the CBR even after the sanctions are lifted, as they are not sovereign assets, and therefore sovereign immunities do not apply to these proceeds. 

The decision also provided for a certain procedure for implementing the new procedure for the use of income received from Russian assets.

In the first stage, CSDs that hold and control sovereign Russian assets worth more than EUR 1 million must account for and keep separately income earned from their use starting from February 15, 2024. Depositories are also required to report annually to the Commission and their national competent authorities on the relevant transactions and accumulations. 

In the opinion of Brussels, the introduction of such additional measures for depositories that hold smaller amounts of assets and reserves of the CBR would be unjustified, as it could create a disproportionate administrative burden on these institutions, given the very small amounts that can be collected.

At the second stage, the EU Council had to decide how this profit should be used to support Ukraine and in what amount, and how much of the CSD should be held to cover administrative costs and possible legal risks. 

This decision was a compromise, as it takes into account the concerns of neutral EU member states such as Austria, Ireland, and Malta and those that express reservations for political reasons, such as Cyprus, Slovakia, and Hungary. Given that only a solution that member states agree to implement at the national level will be effective, the mechanism should take into account the position of different states. To this end, the EU agreed that neutral countries could abandon the plan to use the proceeds of frozen assets to buy weapons for Ukraine in proportion to their share.

The EU Council's decision stipulates that profits accumulated before the decision came into force — about $5 billion — cannot be transferred to Ukraine. Instead, Euroclear said it would keep these funds separate from the rest of the amount until further notice. They are likely to become a "buffer" to pay for current and potential lawsuits from the Russian Federation because, as of February 2024, Russian organizations have filed 94 lawsuits in Russia demanding that Euroclear compensate for the consequences of the freezing of assets in the EU.

This approach led to discussions with the Ukrainian side. According to the Minister of Justice of Ukraine, Denys Maliuska, $5 billion is too much money for such purposes, and the CSD may suffer significantly less losses. 

Subsequently, the EU worked to implement this proposal. Thus, on March 21, the leaders agreed to continue developing the plan presented by the European Commission at the beginning of the year.

"There is strong support for the use of windfall profits or income from immobilized assets for Ukraine's military purposes. If we quickly prepare a proposal now, we could disburse the first billion on July 1. So it's up to us. It's in our hands," said Ursula von der Leyen.

On May 8, EU ambassadors agreed on the text of a proposal to use the proceeds from Russian sovereign assets immobilized within the bloc. It was announced that 90% of the funds would go to the EU-managed military assistance fund for Ukraine, and the remaining 10% would be used for other direct needs of Ukraine.

The decision was finally formalized on May 21, 2024, when the EU Council adopted EU Regulation No. 2024/1469, which approved the procedure for using income from the frozen reserves of the Central Bank of Russia (hereinafter referred to as the CBR) in the interests of Ukraine.

Contents of the EU Decision

According to the Regulations, this procedure applies only to assets received after February 15, 2024. Those received before this date will remain immobilized, and their fate will remain uncertain.

In this regard, depositories of the CBR reserves in excess of €1 million are required to keep the income received from them in a separate account separate from the principal. Of this amount, they can retain 0.3% "to ensure the efficiency of their work," in fact, to cover overhead costs associated with asset management.

Also, depositories will be able to temporarily retain 10% of the principal amount of income for "risk management in view of the impact of the war in Ukraine," but if they are not used within 5 years, a decision may be made on the further need to retain these amounts or transfer them to the EU in whole or in part. The amount of this percentage may be changed if the European Commission considers it too high, or if depositories request an upward revision.

In fact, these funds will be used to finance potential lawsuits in which Russia may challenge actions regarding the profits from the CBR assets. Although international experts doubt that Russia will go to court, Kremlin officials have already stated that this is a possibility. 

"The prospects for a court appeal (against the confiscation of Russian assets) will be wide open. Russia will take advantage of this and will endlessly defend its interests," Putin's spokesman Dmitry Peskov recently said.

As for the scheme of use of these assets, it provides that 100% of the amounts to be used in the interests of Ukraine should be transferred to the Ukraine Facility program. At the same time, in order to "respond to unforeseen situations or to new developments and needs," it is allowed that up to 10% annually may be allocated for other needs: it is expected that this will be financing Ukraine's direct needs.

Despite the decisive steps taken by the European Commission and the EU Council, there is no unanimous approval within the bloc for the use of Russian assets and open opposition to their confiscation. Some countries are worried that the bloc's currently moderate policy toward Russian funds could lead to more serious measures and confrontation with Russia.

Some experts say that any plan to use these assets will test the legal principle of sovereign immunity, despite the position set out in the May 21 EU Council Decision.

Also, some European officials are concerned that such a move would unleash a flurry of reparations claims related to decades-old disputes, such as those against Germany after the two world wars, as well as claims by former colonies against former imperialist powers.

For example, Germany has long been opposed to any use of Russian assets. Germany is convinced that every step toward confiscation, especially when it comes to the assets of the Central Bank, should be very carefully studied in terms of the law and the consequences it will create for the German and global economies.

The German Ministry of Finance explained that Berlin's priority is to ensure legal certainty in the process of managing or confiscating the assets of the Central Bank of the Russian Federation to guarantee the stability of financial markets. Regarding confiscation, the head of the department, Christian Lindner, believes that although the motive for confiscating assets is fair, it is necessary to respect the rules-based international order, international law and take into account the financial stability of the Eurozone.

Later, however, Germany said it was ready to agree to use the profits from Russian assets to help Ukraine, primarily for military purposes. Chancellor Olaf Scholz supported the idea of using up to 90% of these revenues to buy weapons for Ukraine, which was later formalized in a May EU decision. 

France also expressed skepticism. French Minister of Economy and Finance Bruno Le Maire noted that both asset management and confiscation require proper legal justification and respect for the rule of law. He also called the justification of actions against Russian assets through the doctrine of countermeasures insufficient[1]. Le Maire also believes that measures against Russian assets should have the support of the G20, which is unrealistic, since Russia and a number of states that favor it are members of this group.

Opponents of practical decisions on the future of Russia's assets pay most attention to the consequences of both the use and confiscation of the Central Bank's reserves on the economic stability and investment attractiveness of the Union, in particular, undermining confidence in the European currency. 

The financial sector of the European Union also reacts negatively to both the idea of asset confiscation and various forms of asset management. For example, the President of the European Central Bank, Christine Lagarde, called the confiscation of Russian assets a violation of international law and international order. 

"I think there is no doubt anywhere in Europe that Russia should pay for the reconstruction of the damage it has done and is doing to Ukraine. But moving from freezing assets to confiscating assets, disposing of them, is something that you have to look at very carefully, because you start to violate the international legal order that you want to protect, that you want Russia to respect, like all countries around the world."

The head of the EU Central Bank also drew attention to the asymmetry in the distribution of assets between the allies, in particular between the bloc and the United States. Six billion dollars in the US and 220 billion in the EU will create different economic consequences in the case of confiscation. Lagarde emphasized the need for concerted action on both sides of the Atlantic. In particular, she mentioned that the European Union managed to provide financial assistance to Ukraine at the beginning of the year, while the United States was overcoming internal conflicts over this issue. 

A number of European banks also opposed the EU's proposals to use the proceeds of frozen Russian assets, fearing that this could lead to numerous lawsuits from Russia. Some banks are discussing with governments the prospects of guaranteeing the reimbursement they may require to participate in the EU plans, fearing that the EU plan for income from Russian sovereign assets may be extended to assets held in the accounts of individuals and companies under sanctions. 

Future prospects

Under international law, states have considerable discretion to impose economic sanctions. The ECtHR case law states that states usually enjoy a "wide margin of appreciation" in matters of economic policy (Azienda Agricola Silverfunghi S.A.S. and Others v. Italy). The legality of such measures depends on their ability to ensure a "fair balance" between the requirements of the public interest and the protection of property rights (National & Provincial Building Society, Leeds Permanent Building Society And Yorkshire Building Society v. The United Kingdom, Maggio And Others v. Italy). Such wording can serve as a justification for at least the management of Russian assets in the EU, and quite possibly confiscation, given the broad interest in helping Ukraine not only at the expense of European taxpayers. 

On the other hand, moderation is again crucial. An example is the case of Burlington Resources Inc. v. Republic of Ecuador (2017), which was considered under the auspices of the International Center for Settlement of Investment Disputes (ICSID). The subject of the dispute was the expropriation and unfair treatment of Burlington's investments in the oil sector of Ecuador by the state authorities through excessive taxation. In 2006, Ecuador introduced a windfall profits tax (Law No. 42-2006), which imposed a 50% tax on extraordinary oil revenues that exceeded the then-current price threshold. Later, in 2007, this tax rate was increased to 99%. 

As a result, the tribunal ruled that the country's increase in the windfall profits tax to 99% was a violation of fair and equitable treatment standards, as such measures changed the economic nature of the company's investment. The tribunal awarded the company approximately $380 million in damages, which was calculated based on the value of the expropriated investments and tax-related lost profits. 

The outcome of the Burlington v. Ecuador case emphasized the importance of having a stable and predictable legal framework for attracting and retaining foreign investment. This case highlighted the tension between the institutions of state sovereignty and investor protection in international law, illustrating how the ICSID mechanism can be used by investors to defend their interests. 

Thus, it is legally possible to withdraw at least part of the profit of a CSD. However, its yield will be limited and likely insufficient to meet Ukraine's recovery needs. For this reason, some question the wisdom of "interfering with the foundations of international central banking" for relatively little gain. 

Nevertheless, the measures that the EU has now decided to take are fully in line with the fundamental rights and freedoms recognized in the Charter of Fundamental Rights, in particular Articles 17 and 52, as they are reasonable and proportionate to pursue a legitimate aim.

The expert community largely does not share the skepticism of some EU countries about the confiscation of Russian assets. In late February of this year, ten experts and practitioners of international law from Belgium, France, Germany, Japan, the Netherlands, the United Kingdom, and the United States wrote an open letter in which they justified the legality of the confiscation of the Russian Central Bank's assets. The authors of the letter concluded that under international law, it would be legitimate for states that have frozen Russian state assets to take additional countermeasures against Russia in the form of transferring Russian state assets as compensation for damage arising directly from Russia's unlawful conduct, given its ongoing violation of international law. 

The meaning of countermeasures is that they would be illegal if they were used against an innocent state that has not violated its international obligations. However, such measures are permissible and legitimate if they are directed against a state that violates international order and are intended to persuade it to cease its unlawful behavior and fulfill its obligations to compensate victims.

In the letter, the legal experts recommend that compensation be provided through an international mechanism to which the respective states would transfer Russian state assets currently under their jurisdiction. 

However, some researchers believe that there are no legal grounds to distinguish between ownership of state assets and the revenues they generate. Without knowing the details of the contracts under which the CBR placed its assets in Euroclear, it is difficult to determine whether the Russian Federation is claiming income from these assets. 

With regard to the idea of taxation, even if this interest is considered windfall income, its taxation may be difficult. The practice of taxing state property varies significantly from country to country. While some countries, such as Germany, do not exempt governments from taxation of passive income, others exempt foreign governments from all tax obligations, although this is not irreversible. Experts emphasize that the reserves of a country's central bank are not like any other state property. As they serve sovereign purposes, they are generally considered to be protected from restrictive measures. 

While the freezing of assets by the CBR can be justified as a countermeasure against a "third party" or "collective," confiscation is more difficult to justify, as countermeasures must be temporary and reversible. 

Conclusions

The EU has allies of Ukraine who are ready to use Russian assets to compensate our country in one form or another. However, on the other hand, the voices of opponents who fear economic or political consequences are also quite powerful. Many experts believe that it is now much more appropriate for the EU, including from a legal point of view, to simply move on to the issue of countermeasures, which the EU has already taken when it imposed sanctions on Russia in 2022. 

The situation with the EU's policy toward Russia's sovereign assets is quite dynamic, which demonstrates the relevance of the topic in general and the considerable political weight of any decision on this issue. Currently, Brussels is trying to use Russian funds in the safest way possible from a legal and therefore political point of view, balancing the interests of states opposed to the idea. 

EU Regulation No. 2024/1469 is currently the biggest success and a clear indicator of the EU's readiness to develop tools for using Russian assets to help and compensate Ukraine. However, Ukraine still needs to make many more diplomatic and political efforts to implement asset confiscation in practice.