Proposal to use Russian assets to rebuild Ukraine stalls over euro reserve currency fears

European leaders have asked for further study and international co-ordination before committing to a plan to raise revenue from frozen Russian central bank assets to pay for the reconstruction of Ukraine, due to a desire to avoid accidentally damaging the reputation of the euro as a safe currency.

The European Union estimated earlier this year that repairing the damage to Ukraine caused by Russia’s invasion would cost almost €400 billion, a figure expected to have risen significantly since the destruction of the Nova Kakhovka dam flooded large parts of the country.

For months, EU legal teams have been searching for a way to allow billions in sanctioned Russian assets to be deployed somehow to avoid taxpayers footing the bill – not by confiscating the money, but by using it to generate profits that would then be passed to Ukraine.

But hopes that the 27 EU leaders would be able to sign off on a concrete proposal when they met at a summit in Brussels this week were dashed after the European Central Bank raised concerns about any step that might undermine the euro’s safe reputation and damage its position as the world’s second reserve currency, The Irish Times understands.

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In their joint conclusions, the leaders acknowledged that progress had been made in developing a plan for using the assets, but said that it would need to be developed “in co-ordination with partners”.

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This refers to the idea that various international allies should agree to jointly take the same step, to avoid an impact on any one currency.

“It’s about how your currency is perceived internationally,” an EU official close to the discussions said.

Ireland’s Minister for Public Expenditure and Reform Paschal Donohoe, who leads discussions among finance ministers as president of the Eurogroup, said it was important to co-ordinate with other global currencies of countries that are “like-minded partners to the European Union in supporting the people of Ukraine”.

“The international role of the euro is a very important pillar of the resilience of what is now the second reserve currency in the world,” Mr Donohoe said.

“It will be important to think about how we can co-operate with other international partners across the world in dealing with a proposal like this.”

Roughly €100 billion in liquid cash belonging to the Russian central bank is stuck in the cross-border settlement service Euroclear Bank in Belgium, where the Russian state cannot access it due to sanctions.

As interest rates have ticked up, the money has begun to earn interest, a rate of return that is subject to taxation under Belgian law.

In recent weeks, the EU began to consider whether Belgium could impose a windfall levy on the interest earned on the Russian assets, which would then be used to pay for the reconstruction of Ukraine, sources say. The sum raised would be expected to about €3 billion a year, based on European Central Bank rates.

This plan began to gain momentum ahead of this week’s summit, eclipsing an older idea that the billions could be invested on behalf of the Russian central bank until such time as the sanctions are dropped, with any returns on the investment used to pay to rebuild Ukraine.

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[ Ukraine plans for its future even as the war rages on ]

This so-called “prudent custodianship” model, however, had raised complex questions over what would happen if the investments accidentally lost money, and whether a guarantee for any such losses would need to be given to the Russian central bank.

With further debate over the ideas lying ahead, some EU leaders said the Russian assets should be used as soon as possible, and insisted it was the just way to pay for the reconstruction of Ukraine.

“It’s important not to wait until some point in the future, the Ukrainians need housing and schools and hospitals right now,” Latvian prime minister Arturs Krisjānis Kariņs told reporters.

“There’s lots of money sitting, it’s like low-hanging fruit, the frozen Russian assets. We need to find a legal basis to utilise, mobilise these assets to help Russia pay for the damage Russia is causing in Ukraine.”

Estonia’s Kaja Kallas said it was “totally legitimate” for the money to be used in this way when “we see every day how Russia is destroying Ukraine”.

“It’s fundamentally wrong that our taxpayers get to pay for something that we haven’t caused. It has to be from Russia, it has to be from their assets,” she said.