EU Mulls Open-Ended Immobilization Of Russian Assets

Authored by RFE/RL via OilPrice.com,

The EU and G7 are exploring ways to use frozen Russian assets to financially support Ukraine, potentially through a $50 billion loan backed by these assets.

The EU is considering either open-ended immobilization of Russian assets or extending sanctions by up to 36 months to provide legal certainty for the plan.

The EU has officially launched a visa liberalization dialogue with Armenia, which could eventually allow Armenians visa-free travel to most EU countries.

The European Union and the Group of Seven (G7) leading industrialized nations are slowly gearing up new legislation that will allow a $50 billion loan to go to Ukraine by the end of the year.

The political decision for that loan was already agreed when the G7 met in Italy for its annual summit on June 13-15. In the communique from the meeting, it was stated that “we decided to make available approximately $50 billion leveraging the extraordinary revenues of the immobilized Russian sovereign assets, sending an unmistakable signal to President Putin.”

There are roughly $282 billion worth of Russian frozen assets in G7 countries after these resources were targeted by sanctions in early 2022, mostly in the EU. And while no one is keen yet to face the legal consequences of actually confiscating the money — as fears persist it could dissuade other countries from investing in the eurozone and thus undermine the euro — there is momentum now to get creative in using the funds to financially support Kyiv.

The G7 declaration stated as much by noting that “Russia must end its illegal war of aggression and pay for the damage it has caused to Ukraine. These damages now exceed $486 billion, according to the World Bank. It is not right for Russia to decide if or when it will pay for the damage it has caused in Ukraine. Russia’s obligations under international law to pay for the damage it is causing are clear, and so we are continuing to consider all possible lawful avenues by which Russia is made to meet those obligations.”

Deep Background: 

Most Russian money located in the EU, the onus is on Brussels. EU leaders, including more Ukraine-skeptic nations such as Hungary and Slovakia, endorsed the G7 outcome at a summit in Brussels just a week after. They unanimously agreed on conclusions that urged the European Commission to take the work forward on this and added, “Subject to EU law, Russia’s assets should remain immobilized until Russia ceases its war of aggression against Ukraine and compensates it for the damage caused by this war.”

It should be recalled that the bloc already has a mechanism in place to send the annual windfall profits from the frozen Russian assets to Ukraine. This is estimated to generate some 3 billion euros a year ($3.2 billion), with 90 percent of it going to military equipment and the rest for reconstruction.

The first tranche of this money was disbursed over the summer.

This new G7 initiative, however, goes a step further, bringing the interest proceeds from frozen assets via a loan that is guaranteed by the G7 countries.

The preliminary division is that the EU and the United States will back this up with $20 billion each, and Japan and the United Kingdom will guarantee the remaining $10 billion between them. But a lot of nitty-gritty legal groundwork is still needed.

Drilling Down

The item was discussed for the first time by EU ambassadors at the end of July with the European Commission providing a one-page outline, seen by RFE/RL, of what the options are. The idea is that the commission will present a fully fleshed-out legal proposal at the end of August with EU ambassadors discussing the text on September 4. But from the one-pager it is already clear that there are essentially just two avenues available to take.

The main issues to ensure are legal certainty and predictability. And that means that Russian assets remain frozen for a longer period. Brussels is looking to either agree on an open-ended immobilization of Russian assets or prolong this sanction by a longer period of up to 36 months. It’s worth noting that all types of economic sanctions against Russia that Brussels has imposed currently are rolled over via consensus by the 27 member states every six months, with the latest prolongation confirmed on July 22.

According to diplomats familiar with the initial discussion, the overwhelming majority favor an open-ended immobilization. The option paper says this option will still be “reviewed by the Council at regular intervals (e.g. 12 months), on the basis of clear predefined criteria (i.e. the end of the war of aggression and assurances of nonrepetition, the payment of compensation by Russia, etc. as set out by the EUCO – European Council).”

It also adds that “ending the immobilization of the CBR (Central Bank of Russia) assets would require a new Council act, based on a report by the High Representative (EU foreign policy chief)/Commission assessing that the criteria for lifting are fulfilled.”

The question is, however, whether Hungary has the appetite to agree on this. So far, EU leaders have never threatened not to roll over the sanctions but at the same time they haven’t been militantly against moving away from an extension beyond the six months mark. Budapest might go against both options outlined in the paper, and that would mean there isn’t much of the legal certainty and predictability that the EU seeks.

If the EU can ensure this, the question is whether the United States, in the middle of its election period, is ready to give a green light. The U.S. Congress needs to approve this loan, and if there are any fears that Hungary (or any other EU member states, for that matter) might threaten to block the renewal a couple of times a year, the whole scheme risks unraveling.

That’s why the United States initially wanted the EU to guarantee most, if not all, of the $50 billion and why most member states would prefer an open-ended immobilization. The diplomatic wrangling on this is likely to continue throughout the autumn.

Looking Ahead

The EU and NATO are still on the beach this week, but look out for two interesting visits on August 21. First German Chancellor Olaf Scholz is due in Chisinau in what is a symbolic show of solidarity from the EU’s most powerful member state to Moldova, which will hold a crucial presidential vote later this autumn and a referendum on whether the country should aim to join the EU.

That same day Indian Prime Minister Narendra Modi is due in Warsaw and will travel to Kyiv from there. The West has attempted to woo India for a long time and is hoping the country will be more vocal and practical in its support for Ukraine and opposition to Russia’s invasion.