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The European Union’s more powerful arm against Russia for the Ukraine invasion is without doubt the sanction power. The restrictive measures packages against relevant persons, companies, and agencies from Russia are the most prolific sanctions regime in its history. The 14th package of sanctions against Russia was adopted on June 24, 2024. But hand in hand with sanctions, new problems and questions have arisen, such as sanctions circumvention and the use of the extraordinary net profits from frozen assets for Ukraine’s reconstruction.
The EU has adopted several sanctions packages against Russia in response to the military aggression against Ukraine. Source: REUTERS
Could the EU make Russia pay for Ukraine reconstruction?
The war in Ukraine has glowing recent discussions over the legality of permanently confiscating assets frozen under financial sanctions. Some politicians are pushing for the introduction of measures that would permit states to confiscate assets because governments have passed a decision to freeze them under a sanction mechanism. Afterwards, these funds will be used to compensate the victims of the sanctioned target.
According to European Union sources, there are around €210 billion of resources from the Central Bank of Russia which have been frozen in the European member states. These resources generate revenues due to the high increase in interest rates. For a long time, the bosom of the EU debated about how to use this profit to help Ukraine in its reconstruction and to overcome the effects of war.
Source: Council of the EU and the European Council
The first movement to go this way was the Council’s adoption of the decision clarifying the obligations of Central Securities Depositories (CSD) holding assets and reserves of the Central Bank of Russia (CBR) that are immobilised due to the EU’s restrictive measures. The EU prohibited any transactions related to the management of reserves and assets of the CBR.
Moreover, the Council decided that CSDs holding more than €1 million of CBR’s assets must account for extraordinary cash balances accumulating due to EU restrictive measures and keep corresponding revenues separate. According to some estimates, re-investments of these cash incomes have generated more than €5 billion in profits for the CSDs. In addition, CSDs shall be prohibited from disposing of the ensuing net profits. This decision adopted in February left the door open for new regulation regarding the use of these net profits.
Finally, the EU approved the Council Regulation (EU) 2024/1469 which authorises the use of net profits from the frozen assets of the Central Bank of Russia to support Ukraine’s recovery, reconstruction, and self-defence against Russia’s war of aggression. The first key element to understand this new regulation is the concept of “net profit”. Commonly known, the most popular form of the European restrictive measures is the financial sanctions: frozen assets in the European banks and financial institutions. However, in the European arena, it should not be confused with confiscation, which implies the existence of a prior court-approved judgement. Asset freezing is only a preventive measure. For this reason, persons targeted by a financial sanction do not lose the property of the capital. The EU does not confiscate the frozen assets, it will use only the benefits generated for them.
This new mechanism will help Ukraine with the reconstruction of the country. Source: European Commission
In international practice other solutions have been adopted, for example, Canada and the United States have designed systems for confiscating Russian-linked funds. Canada’s Special Economic Measures Act includes provisions for the repurposing of funds and empowers the government to use confiscated funds for various purposes. These include the reconstruction of a foreign state adversely affected by a grave breach of international peace and security; the restoration of international peace and security; and the compensation of victims of a grave breach of international peace and security, gross and systematic human rights violations or acts of significant corruption. Similarly, the US introduced a bill that permits the government to confiscate Russian-linked funds under sanction and use them for the benefit of the people of Ukraine.
From theory to practice: how will this money be used to support Ukraine?
Recital 26 of Regulation (EU) 2024/1469 stipulates that CSDs holding assets and reserves with a total value of more than €1 million will be required to make a financial contribution out of their corresponding net profits. This is equivalent to 99.7 % of such accumulated net profits as from 15 February 2024. The payments will be made every six months until the central securities depositories no longer have excess profits on their balance sheets. This cessation of excess profits is expected to occur when the restrictive measures, which currently prohibit transactions with the assets and reserves of the Central Bank of Russia, are lifted.
Moreover, Annex XLI of this regulation sets that the amounts transferred shall be allocated to Union expenditure instruments supporting Ukraine. Thus, 100% will be transferred to the Ukraine Facility. In addition, in order to respond to unforeseen situations or new developments and needs, annual deviations up to a maximum of 10 % shall be possible.
Reactions of Moscow
After the adoption of the 13th package of sanctions, the Russian Foreign Ministry affirmed that the sanctions of the European Union were illegal, undermining the international legal prerogatives of the UN Security Council. In line with the statement, Russia expanded the blacklist of European citizens who are prohibited from entering Russia for providing military assistance to Kyiv, as well as individuals involved in the freeze of Russian state assets. The list of targeted individuals included representatives of the Council of Europe, members of legislative assemblies of European Union countries, members of the OSCE Parliamentary Assembly, and the Parliamentary Assembly of the Council of Europe (PACE).
Conclusion
The European Union is showing a big commitment to the European sanctions regimes. It is the cornerstone of its foreign policymaking. In this way, it covers all sides of the sanctioning phenomenon, and this latest step is certainly an ambitious one: the use of net profits from Russian frozen assets. However, the European position is more cautious than that shown by other G7 countries such as Canada or the United States. The EU is not talking about confiscation but about the net benefits of capital, but when sanctions are lifted the capital will be returned to the owners.
For further thought:
- Who is the legitimate holder of the profits from the frozen capital?
- Should percentages be set as the legal interest on money reserved for owners of capital?
- Should the EU respond in the same way as its G7 partners?
Suggested readings:
- Mills, Claire. “Sanctions against Russia”. House of Commons Library. 17 Juli 2024
- Prokopenko, Alexandra. “How the Latest Sanctions Will Impact Russia—and the World”. Carnegie Politika. 20 June 2024
- Bismuth, Régis. “The New Frontiers of European Sanctions and the Grey Areas of International Law”. Groupe d’études géopolitique. 2023
