EU’s Plan to Leverage Frozen Russian Assets Raises Debate Over Borrowing Costs and Market Risks

The European Union’s effort to leverage immobilised Russian state assets to support Ukraine has triggered warnings that such a move could increase borrowing costs for governments across the bloc, though several analysts say any effect on sovereign debt markets is likely to remain limited. The European Commission, searching for a long-term financing solution for Kyiv, is focusing on a €140bn “reparation loan” backed by Russian central-bank reserves frozen since 2022. Euroclear, which safeguards most of these funds, has raised strong objections.

According to the Financial Times, Euroclear chief executive Valérie Urbain wrote in a letter that “the resultant risk premium will lead to a sustained increase in European sovereign bond spreads, raising borrowing costs for all member states”. The concern revolves around whether global investors could interpret the initiative as de facto confiscation—an action prohibited under international law. If overseas reserve holders fear their assets might be vulnerable inside Europe, trust in European financial stability could erode, pushing up yields.

Yet analysts argue that this proposal does not carry the same weight as the EU’s unprecedented step in 2022 to freeze Russian central-bank assets four days after Moscow launched its full-scale assault on Ukraine. That initial immobilisation produced only a short-lived reaction in bond markets. Robert Timper, chief strategist on the Global Fixed Income Strategy team at BCA Research, said, “I don’t expect much of a market reaction to this, so there won’t be any cost to governments in terms of a higher debt service cost.” He added, “The immobilisation of Russian assets in 2022 was a first and is what mattered for asset owners, as it meant that they lost access to these assets”. In his view, “What ultimately is done with these assets should have a much smaller effect.”

Nicolas Véron, senior fellow at the think tank Bruegel, described the 2022 freeze as “a constraint put on the Russian reserves and therefore a demonstration to the world that, given the circumstances, the EU was willing to put big constraints on reserves held on its territory.” He noted, “That didn't rock global markets.”

Research from Capital Economics also suggests fears of foreign central banks or sovereign wealth funds pulling back from European markets are exaggerated. The firm argued that there are few alternative safe and liquid assets available outside the Western financial system, making any large-scale diversification unlikely. It further observed that since 2022 “we have observed a broad shift by central banks, especially in China and emerging markets, to gold as a reserve asset,” a trend highlighted by Timper, who emphasised that the shift “has had little effect on sovereign bonds”.

Although official documentation has not been released, Capital Economics outlined the likely structure of the loan mechanism. Euroclear would convert the cash balances held for the Russian Central Bank into a long-dated, zero-coupon EU bond. Euroclear’s assets would shift from cash to EU debt, while its liability to the Russian Central Bank would remain unchanged—an element central to the EU’s position that the plan does not constitute confiscation. The proceeds from the bond sale would then be provided to Ukraine in the form of an EU loan.

Under the current model, Ukraine would only begin repayment once Russia ends its war of aggression and agrees to compensate for the destruction caused. After that, the Commission would repay Euroclear, and Euroclear would reimburse Russia, completing the cycle. The Commission maintains that this structure remains legally sound and does not violate confiscation rules.

Member states participating in the scheme would guarantee the loan, stepping in if reimbursements fall short. While the framework allows Russia to reclaim assets if it pays reparations, this scenario is widely viewed as virtually impossible. Urbain argued that compelling Euroclear to invest in a “zero-interest tailored-debt instrument funding” would inevitably be seen by Moscow as confiscation, risking retaliation and legal actions for which she insisted Euroclear must be fully protected.

Véron likewise warned that Russia’s reaction, rather than the legal mechanism itself, poses the greater threat. “This is not a confiscation… but there will be Russian propaganda saying it is a confiscation,” he said. “It's not outlandish to imagine that if the reparations loan is decided, Russia will do something that may be detrimental to the global markets.” Analysts have also noted that Moscow has already made it more difficult for Western companies to exit the Russian market, a sign that tit-for-tat economic measures remain a possibility.

Belgian Prime Minister Bart De Wever has voiced sharp concerns, demanding watertight guarantees to ensure Euroclear is protected from any losses or retaliatory actions. The Commission, meanwhile, faces growing political pressure to finalise the proposal, especially as a US peace framework envisions using frozen Russian assets to set up US-run investment vehicles for Ukraine and Russia. European commissioner for economy and productivity Valdis Dombrovskis has argued that a reparation loan backed by frozen Russian assets is “what can provide sizeable support for Ukraine without putting additional and substantial fiscal burden on the EU or its member states”.

Véron expects the blueprint to be completed by the end of the year, with potential disbursements beginning in the first quarter of 2026 should national parliaments approve the arrangement. Ukrainian President Volodymyr Zelenskyy has stressed the urgency of the funding, saying it is needed in 2026, ideally “at the very beginning of the year”.

A €140bn loan would represent an enormous intervention—roughly 80% of Ukraine’s GDP last year and around 0.8% of the EU’s total economic output. Whether it proceeds ultimately depends on political agreement. Ukraine requires continuous multi-year support to sustain its defence effort, yet many EU countries are constrained by high debt levels and limited fiscal space. A failure to deliver long-term assistance, however, risks heightening the possibility of Ukraine’s defeat and bringing Russia’s security threat closer to the EU’s borders.

By fLEXI tEAM