EU plans to finance Ukraine by investing frozen Russian assets is 'creative but legally risky'

Three months after the idea was first floated, plans by the European Union to invest frozen Russian assets to generate revenue to finance Ukraine’s reconstruction appear stalled.

The proposal is described as “deeply problematic” and faces “significant hurdles” from legal experts.

The use of frozen Russian assets was to be discussed by EU leaders who met in Brussels on Thursday for an extraordinary summit. Continued support for Ukraine, a topic of regular discussion among leaders since Russia launched its attack nearly a year ago, has been made all the more important by the presence of Ukrainian President Volodymyr Zelenskyy in Brussels.

In draft conclusions written ahead of the summit and seen by RockedBuzz via Euronews, leaders pledged to step up work with international partners “towards the use of Russia’s frozen and immobilized assets to support Ukraine’s reconstruction and repair , in accordance with international law”.

Estonian Prime Minister Kaja Kallas was among those calling for “a European solution to proceed with the use of frozen assets” upon her arrival in Brussels.

“We get it, as I’m a lawyer by trade, I’ve been trained to find solutions,” he added, suggesting that the EU leverage those assets as part of a deal between the two warring countries “because Ukraine has a request to Russia to repair what it has caused to all the damage in Ukraine”.

«A few billion for the reconstruction

According to an EU official who spoke ahead of the summit, the main idea on the table remains to invest frozen assets to generate profits and use only those.

“Legally in a sanctions regime, you have to be able to pay that money back when the sanctions regime is suspended, so you can’t spend it and then find yourself without the money. You can’t do that so you have to cover (the frozen amount),” he said the official.

About 300 billion euros of international reserves owned by the Russian Central Bank have been frozen by Western allies since Russia first sent its tanks into Ukraine on February 24.

Theoretically, assets frozen due to the sanctions could remain frozen indefinitely. Unlocking them would require the individual or sanctioned entity to successfully challenge the order in court or victims to organize their own legal battles to receive some of the frozen assets in compensation.

“What you can do is use it and benefit from it and use that money and certainly for reconstruction,” the EU official insisted. “So if you manage (the) 300 billion euros well, you can manage some of it for reconstruction. That’s the theory.”

The idea of reinvesting the frozen money and using the profits to support Ukraine was initially proposed by the Commission in November as part of its “Make Russia Pay” plan. He estimated then that rebuilding Ukraine would require at least €600 billion, but the cost is likely to have soared since then, as Russia has subjected Ukraine to relentless rocket attacks in recent months, including on key civilian infrastructure.

Yet, nearly three months later, there’s still a long way to go about the proposal.

“The first fundamental question is where are Russia’s assets? It sounds trivial, but it’s a crucial question. There are central banks, commercial banks, stock exchanges, there are European Union member states, and all the G7 members ,” the EU official said.

“We will do a mapping first and we need to look at all the obstacles,” they said, adding that “some will say there are too many legal uncertainties and possible legal actions.”

“Creative plan, but legally risky”

That is the view of Evan Criddle, a law professor at William & Mary Law School in the United States, who told RockedBuzz via Euronews that the proposal “would be deeply problematic under international law”.

Some countermeasures that allow the use of assets in very specific circumstances can be taken under international law. But “any use or disposition of Russian assets for other purposes, however well-intentioned, such as generating revenue that could be used to help Ukraine, would go beyond the generally accepted purposes of internationally legal countermeasures,” he added.

Russian entities, for example, could claim that they are entitled to some of the profits generated by investing the frozen assets and challenge the decision of both the General Court of the European Union and the European Court of Human Rights, Francis Bond, a Lo ha a leading international financial sanctions practitioner at Macfarlanes law firm told RockedBuzz via Euronews.

And then there are practical matters, he said, like finding an asset manager brave enough to take on the legal liability and public scrutiny that would come with managing frozen Russian assets.

“Plus of course, as the small press always says: the value of your investments can go down as well as up. If investments lose money, the Commission could find itself in the unenviable position of securing Russian assets with public money or inviting a flood of lawsuits substantial by the owners of the assets,” said Bond.

“If I were legal adviser to the EU and its partners,” concluded Criddle, “I would advise against this creative but legally shady plan.”