INTELBRIEF

May 17, 2024

IntelBrief: The EU Seeks to Fund Ukraine’s Military Through Profits of Russian Frozen Assets

AP Photo/Efrem Lukatsky

Bottom Line Up Front

  • Last Wednesday, European Union (EU) member states agreed to use the profits from frozen assets of the Central Bank of Russia to aid Ukraine’s military efforts.
  • The agreement stipulates that 90 percent of the proceeds will go into an EU-operated fund for military aid for Ukraine, a promising step forward against a backdrop of plummeting equipment, ammunition, manpower, and defensive fortifications on the battlefield.
  • Countries like Hungary and Austria have been reluctant to send military aid, even in light of Russia’s significant interference efforts, and have opted out of providing military assistance through this new funding mechanism.
  • The United States has set a legal precedent through executive orders, previously seizing assets from Iraqi and Afghan central banks and while Europe lacks such a precedent, the EU’s redirection of profits from Russian frozen assets to Ukraine’s defense is a notable advancement and should help the Ukrainian military.

Last Wednesday, the EU countries agreed to use the vast profits generated from frozen assets from the Central Bank of Russia to aid Ukraine’s military efforts. This decision comes after Russia's full-scale invasion of Ukraine in 2022, which led to the freezing of around $300 billion worth of Russian financial assets by the G7, including the EU. The new move to seize and use the profits earned from interest on accumulated cash generated by sanctions on Russian assets to bolster Ukraine’s military defense is related to Russian Central Bank assets that the Bloc has frozen since the early months of the Russia-Ukraine war.

The profits generated by these frozen assets have been significant. The Euroclear Depository in Brussels, Belgium, holds most of these frozen Russian assets in the bloc. Nevertheless, not all EU countries are on the same page. Due to their self-declared neutral position, some EU countries, including Austria, do not want these profits channeled to Ukraine as military assistance. Moreover, the bloc's green light to use the earnings of frozen assets for military purposes seems to signal a change in the sanction paradigm, one already well-established in the United States.

The EU estimates that the profits earned from frozen assets held in the bloc will total between 15 billion and 20 billion euros by 2027, which includes around 3 billion expected euros this year alone. The agreement stipulates that 90 percent of the proceeds will go into an EU-run fund for military aid for Ukraine, with the other 10 percent allocated for humanitarian assistance to Kyiv. This is a significant step, as it allows Ukraine to access substantial funds for acquiring arms and ammunition against a backdrop of plummeting equipment, ammunition, manpower, and defensive fortifications. With the Russian military preparing for a stepped-up offensive over the coming months, the timing of delivering these funds is crucial. Separately, U.S. Secretary of State Antony Blinken just announced $2 billion worth of foreign military financing earmarked for Kyiv.

A significant portion of these assets in the EU is held in Belgium at the Euroclear depository. Belgium holds the EU presidency until the end of June and has played a crucial role in this agreement. Belgium is also separately collecting tax on the profits from Euroclear, which is set aside for Ukraine. For the fiscal year 2024, Belgium expects to receive 1.7 billion euros, which is already mostly allocated for Ukraine's military.

However, not all EU members favor the bloc's new commitment to substantive military assistance for Ukraine. Countries like Hungary and Austria have been reluctant to send military aid, even in light of significant interference efforts by Russia in their own countries. In Austria, the police recently arrested a former Austrian intelligence officer on allegations of spying for Russia. To address the reluctance of these countries, the agreement includes special safeguards that allocate around 10 percent of the funds for general humanitarian aid.

Neutral EU states can opt out of the plan to use the profits of Russia’s frozen assets to buy weapons for Ukraine and limit themselves to providing non-military aid to Kyiv. This compromise is already favored by Austria, which will abstain from voting on allocating 90 percent of funds for military assistance. Austria welcomed this addendum, stating its neutrality prevents it from supplying lethal material to Ukraine. Nevertheless, this highlights that even after the full-scale invasion of Ukraine by Russia, many European countries have not fully woken up yet to the threat posed by Moscow. Russia, in particular, has voiced its disapproval, threatening the West with a 'severe' response and 'endless' legal challenges if the assets are touched. Despite this, the EU remains resolute in its decision. Discussions on the issue will continue in mid-June at the next G-7 meeting in Italy.

Managing frozen assets is a nuanced issue marked by divergent viewpoints. Key concerns revolve around establishing the legal grounds for asset seizure and distribution, potential implications for the rule of law or the perception thereof, impacts on the Euro's status as a reserve currency, and the specter of reciprocal actions, such as Russia seizing Western assets. The United States has set a legal precedent through executive orders, seizing assets from Iraqi and Afghan central banks in the past. Conversely, Europe lacks such a precedent, making the redirection of profits from Russian frozen assets to Ukraine's defense a notable advancement.

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