Profits from frozen assets of RF will be transferred to Ukraine. What does this mean?

Russian funds, even if the West decides to confiscate them completely, will not be enough to compensate for all the losses and destruction caused to our country by Russia.

Russia's immobilized assets and the proceeds from them are lying dormant in banks and depositories around the world. Russia cannot use them because of sanctions, and there is not enough political will to confiscate funds. However, in Europe, they say that there is no appropriate mechanism and note the risks to the international financial system that such confiscation could cause.

What to do with Russian money is a debate that has been going on since the beginning of the full-scale war in Ukraine. Now it is becoming more concrete.

On 8 May, the ambassadors of the European Union reached a preliminary agreement on the use of profits from the use of frozen Russian assets in the EU for the benefit of Ukraine. On 14 May, the procedure is to be finalized at the level of the Council of the European Union.

Back in April, the US House of Representatives approved a bill on the possibility of confiscating Russian sovereign assets in favor of Ukraine. That is, the United States is ready to transfer to Ukraine all frozen Russian assets on its territory. According to various estimates, it is about $6-8 billion.

However, most of Russia's funds are kept in Europe, which is not ready for such a radical step. EUR 192 billion, or 70% of the assets frozen by the West, are concentrated in the Euroclear depository in Belgium. In the first quarter of 2024 alone, these assets returned €1.6 billion in interest.

It is this money that is planned to be seized. However, at least €220 billion of Russian funds remain in the EU financial system.

Euroclear CEO Valerie Urbain opposes the complete confiscation of funds, as "such a decision would have a very negative impact not only on Euroclear but also on financial markets in general".

"If our clients feel that the law is no longer being enforced and that their assets could be confiscated, it could open a Pandora's box. It could make large international investors turn away from Europe," she says.

The use of interest is a compromise, as it is not a sovereign asset of the Russian Federation.

"These revenues do not belong to Russia because they are not sovereign assets. There is a difference between capital and income from it," says Josep Borrell, Vice-President of the European Commission, High Representative of the EU for Foreign Affairs and Security Policy.

What amount Ukraine can expect to receive

In total, Russia's immobilized assets can bring in about $5bn a year, Reuters previously reported, citing officials from the G7 countries.

However, as Valérie Urbain explains, the European authorities plan to seize 87% to 89% of the profits from Russian assets, and the remaining funds "will serve as a buffer that we can use, if necessary, to pay the costs of ongoing court hearings". More than 100 proceedings have been opened against Euroclear in Russian courts.

"A number of law firms help us defend ourselves. The probability that we will win these cases is quite low. But we continue to fight," she says.

The CEO of the depository estimates the income from the Russian assets frozen in their custody at €2-3 billion a year, depending on changes in interest rates.

In 2023, Euroclear earned more than €4 billion from Russian assets. However, this money, firstly, has to be taxed, the rate of which is 25% in Belgium. And secondly, a 0.3% fee for asset management is deducted from the amount.

Currently, European experts agree on a figure of €3 billion a year, which is what Ukraine can expect.

From the beginning of 2024, income from Russian assets will be accounted for and kept in other accounts, separately from Russian sovereign assets, to avoid confusion.

Where the money will go

It is planned that 90% of the confiscated proceeds will be used to purchase weapons for the Armed Forces through the European Peace Fund, while the remaining 10% will be transferred to the EU budget and given to Ukraine for reconstruction, support of its defense industry or other, including humanitarian, needs.

"We have agreed that this money can be used to purchase weapons not only in the EU but also around the world," explains German Chancellor Olaf Scholz.

The issue of non-military assistance was agreed upon in view of the position of neutral countries such as Austria, Ireland, Malta and Cyprus. Hungary and Slovakia also support the refusal to purchase arms. Their prime ministers, Viktor Orban and Robert Fico have long been dubbed "Putin's friends" in the press.

According to Iryna Mudra, Deputy Head of the Presidential Office, "Such an agreement is better than nothing".

"But it would be better for Ukraine if such income could be transferred from Russian assets held in all EU financial institutions, not just Euroclear," she emphasizes.

When Ukraine will get the money

The European Commission expects that EU member states will promptly approve a proposal to transfer most of the profits from Russia's frozen assets to purchase weapons for Ukraine.

"We hope for a quick agreement between the member states so that the first payments can be made by the summer," says Christian Wiegand, spokesperson for the European Commission.

Earlier, it was reported that the first tranche of the profit from the blocked assets could come in July 2024. The most important thing is to coordinate all bureaucratic procedures.

In addition, in June, during the G7 summit in Italy, the G7 countries are expected to announce their position on Russia's frozen assets. The discussion will last until the end of May, although it has already become known that the G7 countries are no longer discussing the issue of full confiscation of Russian assets. The priority is to find alternative ways to benefit from the frozen funds. Although the United States and the United Kingdom insist on full confiscation.

Besides, during the summit, the issue of $50 billion in aid to Ukraine will be discussed, part of which is to be returned at the expense of excess profits from frozen Russian assets.

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As of the end of 2023, the World Bank estimated the damage caused by Russian aggression at $500 billion, while the total amount of frozen Russian assets is currently estimated at $282 billion. It's interesting to note that the exact figure is not mentioned anywhere, only in the range of $260 billion to $300 billion.

But in any case, Russian funds, even if the West decides to confiscate them completely, will not be enough to compensate for all the losses and destruction caused to our country by Russia.

The €3 billion a year that Ukraine will receive from the proceeds of frozen Russian assets is a drop in the bucket. However, it is much better than if these funds continued to lie dormant in European accounts.