In order to raise money for Ukraine, the EU considers investing frozen Russian state assets.
According to a document, the European Commission anticipates earning returns of about 2.6% from investing assets belonging to the Russian central bank that have been frozen as a result of EU sanctions.
The legal options for exploiting Russian reserves that have been frozen within the EU have been investigated, including investing them to produce returns that may be used to support Ukraine's reconstruction. The EU countries established a working group last month to investigate what may be done in response to such an unprecedented attempt, which involves legal, political, and economic concerns.
According to Anders Ahnlid, a Swedish diplomat in charge of leading the group, "there is a consensus among [EU] member states that it's important to examine very, very carefully, what can be done under the instructions that we've been given, including that what is going to be done will have to be in compliance with EU and international law." He continued, "We are in an exceptional situation and probably any solution that we will come up with will be of a nature that hasn't been there before."
The Commission document discusses the legal grounds for investing in Russian assets, as well as the risks involved, and provides estimates of potential investment returns. It will be considered by national experts gathering on Tuesday.
The Commission thinks it may establish its case for investing Russian central bank assets and reaping rewards for the advantages of Ukraine in international law given that Russia's invasion of Ukraine amounts to a "exceptional and gross violation" of international and humanitarian law.
It noted, adding that it would necessitate modifying the EU sanctions rule, "This appears to justify not only the unprecedented restrictive measures adopted so far, but also an equally exceptional measure aimed at compensating the damages caused by those violations."
It also emphasized that taking concerted action with the G7 and other nations would have "both political and market advantages," as it would prevent the EU from scaring off investors who might otherwise avoid investing in European financial infrastructure.
The owner of frozen assets should be entitled to recoup the money as well as any returns that were contractually agreed upon prior to the assets being frozen under the EU sanctions framework, if and when sanctions are restored. Nonetheless, the Commission believes that any more returns might be taken and used for Ukraine's reconstruction.
"If active management allows to generate gains beyond those contractually agreed, then the owners of the managed assets should not benefit from those gains after the measure is lifted," the Commission argued.
Quantifying those gains depends on how much money is invested, and how.
The EU estimates that over two-thirds of the $300 billion in frozen Russian central bank reserves currently held in the EU, including €191 billion in Belgium and €21 billion in another unnamed EU nation, are kept in the G7, the EU, and Australia. The memo states that "the details now emerging tend to confirm [that] initial estimate."
Although it still does not completely understand where the reserves of the Russian central bank are kept, it has added a need to report on their location in its most recent set of sanctions against Russia in an effort to get a clearer picture.
The Commission stated that investing such billions in "liquid, highly-rated assets" with a short maturity may result in "meaningful annual revenues with a median of around 2.6 percent."
Equity investments would yield higher returns, but riskier asset classes could result in losses of up to €4 billion annually, raising "political and financial implications" if the EU were to reimburse Russia for losses it incurred when investing its assets. In contrast, "the risk of losses on a high credit-quality, shorter-term portfolio at current yields seem very remote."
Yet, "losses can never be excluded," the Commission wrote, and as a result, the issue of "who bears any residual risk in case [of] such losses... will require a clear legal answer."
By fLEXI tEAM