US Proposal on Frozen Russian Assets Threatens EU Financial Support for Ukraine

US Proposal on Frozen Russian Assets Threatens EU Financial Support for Ukraine

A new U.S. proposal suggests using frozen Russian sovereign assets to create joint investment funds with both Moscow and Kyiv. This plan has reportedly surprised European Union officials and diverges from the G7's current approach of using only the profits from these assets. The American initiative creates a potential conflict with a planned EU loan for Ukraine, which is dependent on those same profits.

Context & What Changed

Following Russia's full-scale invasion of Ukraine in February 2022, G7 nations, the European Union, and Australia froze approximately $300 billion of Russian Central Bank assets (source: World Bank). The vast majority of these assets, estimated at over €210 billion, are held within the EU, with around €191 billion immobilized at the Belgium-based central securities depository Euroclear (source: Government of Belgium, Euroclear). For over two years, the G7 has debated the legality and financial implications of seizing these assets outright. The primary legal obstacle is the principle of state sovereign immunity, a cornerstone of international law that generally protects a state's assets from seizure by another state. Concerns also abound that full confiscation could undermine the international roles of the U.S. dollar and the euro, as other nations might fear their reserves could be seized in future disputes, prompting a flight to other currencies or assets like gold.

As a result, the consensus G7 position, heavily influenced by the European Central Bank (ECB), coalesced around a more cautious approach: seizing not the asset principal, but the unexpected windfall profits generated by them. As interest rates rose, the immobilized assets at institutions like Euroclear began generating significant returns—€4.4 billion in 2023 alone (source: Euroclear). The EU has been developing a mechanism to harness these profits to back a substantial loan package for Ukraine, estimated at €50 billion, to support its defense and reconstruction needs (source: European Commission).

What changed is the introduction of a new, divergent proposal from the United States administration. As reported, this plan eschews the profits-only approach and suggests creating "joint investment funds with both Moscow and Kyiv" using the frozen sovereign assets themselves (source: news.thestaer.com). This represents a radical departure from the established G7 consensus. It moves from a legally cautious framework of using interest earnings to a model that implies utilizing the principal. More startlingly, the concept of a "joint fund" with Moscow introduces an element of cooperation with the sanctioned state, a notion entirely at odds with the G7's policy of isolating Russia and supporting Ukraine. This proposal directly threatens the EU's well-advanced plan and has created significant friction within the transatlantic alliance over the future of financial support for Ukraine and the broader sanctions regime.

Stakeholders

United States: As the proponent of the new plan, the U.S. appears motivated by a desire to unlock a larger, more immediate pool of funding for Ukraine, potentially bypassing domestic political gridlock over aid packages. The proposal may also be an attempt to assert leadership and pressure the EU, which holds the bulk of the assets, to take on greater risk and responsibility.

European Union & European Central Bank: The EU, particularly Belgium, is the most exposed stakeholder. It holds the majority of the assets and would bear the brunt of any legal and financial retaliation. The ECB has repeatedly warned that any move beyond seizing windfall profits could pose a substantial risk to the euro's stability and international standing (source: ECB official statements). The EU's credibility is also tied to its own €50 billion loan plan, which the U.S. proposal directly undermines.

Ukraine: As the intended beneficiary, Ukraine faces renewed uncertainty. While desperate for funding, the concept of a "joint fund with Moscow" is politically untenable and runs contrary to its goal of seeking full reparations from Russia for war damages. The dispute between its main allies, the U.S. and EU, could delay the disbursement of any funds at a critical time.

Russian Federation: The target of the sanctions. Moscow has consistently labeled any action against its sovereign assets as "theft" and has threatened symmetrical and asymmetrical retaliation, including legal challenges and the seizure of remaining Western assets in Russia (source: Russian Ministry of Foreign Affairs). The U.S. proposal's mention of a "joint fund" could be interpreted as a sign of division in the West, but Russia's official stance against any use of its assets remains firm.

G7 Nations (ex-U.S./EU): Countries like the UK, Canada, and Japan are caught between two competing visions from their main allies. The U.S. proposal forces them to take a side, risking a fracture in the G7's united front on sanctions policy, which has been a key pillar of its response to the invasion.

Other Sovereign Nations (e.g., China, Saudi Arabia): These nations are critical observers. The seizure of a sovereign state's reserves sets a powerful precedent. If the G7 proceeds with full confiscation, it could accelerate a global trend of de-dollarization and diversification of central bank reserves away from Western jurisdictions, fundamentally altering the architecture of global finance.

Evidence & Data

– Total Frozen Russian Sovereign Assets: Approximately $300 billion (€280 billion) (source: World Bank, Atlantic Council).
– Assets Held in the EU: Estimated at over €210 billion. A confirmed €191 billion is held at Euroclear in Belgium (source: Euroclear H1 2024 report).
– Profits Generated: The assets at Euroclear generated €4.4 billion in interest in 2023. Projections for 2024-2027 estimate annual profits in the range of €3-5 billion, depending on interest rate trajectories (author's assumption based on public data).
– Proposed EU Funding Mechanism: A €50 billion loan for Ukraine (Ukraine Facility), with the interest and principal repayments to be serviced by the windfall profits from the frozen assets (source: EU Council Regulation 2024/792).
– Assets Held in the U.S.: A significantly smaller amount, estimated between $5 billion and $8 billion, is held in the United States (source: U.S. Treasury Department).
– Legal Precedent: There is no direct precedent for seizing the central bank assets of a major power with which one is not formally at war. Legal justifications being explored rely on the concept of "countermeasures" under international law, which allows a state wronged by another to take otherwise illegal actions to compel the wrongdoing state to cease its actions and make reparations.

Scenarios (3) with probabilities

Scenario 1: Status Quo Ante — EU Plan Prevails (Probability: 65%)

The U.S. proposal is ultimately rejected by a unified EU bloc, strongly backed by the ECB and key member states like Germany and France. Citing unacceptable legal and financial stability risks, the EU persuades Washington that fracturing allied unity is more damaging than any potential benefit from the high-risk plan. The U.S. shelves the idea, and the G7 reaffirms its support for the EU’s existing mechanism to use only the windfall profits to secure the €50 billion loan for Ukraine, which then proceeds as planned.

Scenario 2: A Fractured Compromise (Probability: 30%)

Intense U.S. pressure leads to a hybrid solution. The “joint fund with Moscow” idea is dropped as politically toxic, but the U.S. succeeds in forcing a more aggressive approach than the EU’s initial plan. This could involve the G7 collectively securitizing multiple years of future interest payments to raise a larger sum upfront, or using the profits to fund direct arms purchases via a U.S.-administered fund in parallel with the EU’s mechanism. This outcome would likely cause significant implementation delays and persistent friction between the U.S. Treasury and EU institutions.

Scenario 3: Unilateralism and a G7 Split (Probability: 5%)

Failing to persuade its allies, the U.S. administration acts unilaterally or with a small coalition of non-EU partners. It moves to seize the small tranche of Russian assets held in the U.S. (~$5 billion) and creates its own fund for Ukraine. This act would defy the European position, creating a major transatlantic diplomatic crisis. It would set a conflicting legal precedent and severely weaken the G7’s credibility and the international sanctions regime, while providing only a marginal amount of funding to Ukraine.

Timelines

– Immediate (0-3 Months): Critical period of intense diplomatic negotiations within the G7. The EU will accelerate efforts to finalize and implement its windfall profits legislation to present a fait accompli. The outcome of the next G7 leaders' summit will be a key decision point.
– Medium-Term (3-12 Months): A definitive path will be chosen. If Scenario 1 or 2 prevails, the first funds from a G7-backed mechanism could begin to reach Ukraine by early 2026. If a split occurs (Scenario 3), this period will be marked by diplomatic fallout and competing legal challenges.
– Long-Term (1-5+ Years): Regardless of the path taken, Russia is certain to initiate complex, multi-jurisdictional legal battles that will last for years. The precedent set by the G7's final decision will begin to manifest in central bank reserve management strategies globally, with potential long-term impacts on the status of the dollar and euro.

Quantified Ranges

– Value of Frozen Russian Sovereign Assets: $280-$320 billion.
– Annual Profits from EU-held Assets: €3-€5 billion, contingent on prevailing interest rates.
– Total Potential Funding for Ukraine (EU Plan): A loan of ~€50 billion, serviced by the above profits.
– Potential Funding from Unilateral U.S. Seizure: $5-$8 billion (principal).
– Estimated Ukraine Reconstruction Costs: Over $486 billion and rising (source: World Bank, Feb 2024 estimate).

Risks & Mitigations

– Risk: Legal Entanglement. Russia initiates lawsuits against Euroclear and other financial institutions in jurisdictions friendly to it (e.g., China, UAE), seeking to freeze their assets in retaliation. Mitigation: G7 governments must provide full legal and financial indemnification to the private institutions they are compelling to hold and process these funds. A unified legal framework, citing international law on countermeasures, must be established and consistently applied by all participating nations.

– Risk: Financial System Instability. A perception that Western-held sovereign assets are unsafe triggers accelerated diversification of reserves by non-aligned nations, leading to upward pressure on U.S. and EU borrowing costs. Mitigation: Communication must be precise and consistent: this action is an extraordinary countermeasure to a clear violation of the UN Charter, not a new policy tool for routine disputes. Adhering to the more conservative profits-only approach is itself a key mitigation strategy, as it respects the principle of sovereign immunity over the asset principal.

– Risk: G7 Disunity. An unresolved dispute between the U.S. and EU on this issue spills over, weakening cooperation on other critical files, from China policy to climate change. Mitigation: The U.S. must be persuaded that the value of a unified G7, which magnifies its global financial and political power, is a greater strategic asset than the marginal financial gains of its riskier proposal. An honest broker, perhaps the UK or Canada, could facilitate a consensus.

Sector/Region Impacts

– Public Finance: The outcome is critical for Ukraine's medium-term fiscal survival and its ability to fund both defense and essential services. For G7 nations, a failure to utilize the Russian assets would increase pressure for more direct taxpayer-funded aid. A major shock to the reserve currency system could increase sovereign borrowing costs globally.
– Financial Services: Central securities depositories (Euroclear, Clearstream) and custodian banks are at the epicenter of legal, operational, and reputational risk. The entire asset management industry would be affected by a shift in global reserve allocation strategies.
– Infrastructure: The primary purpose of these funds is the eventual reconstruction of Ukraine's devastated infrastructure. The size, speed, and reliability of the funding mechanism will directly determine the pace of rebuilding cities, energy grids, and transportation networks.
– Europe: As the holder of the assets, Europe bears the most direct risk of Russian retaliation and financial market disruption. The credibility of its capital markets union and the international role of the euro are at stake.

Recommendations & Outlook

For G7 Governments and Public Finance Ministries:

1. Prioritize Unity: The strategic imperative is to maintain a unified G7 front. A fractured approach would be a significant victory for Moscow. The U.S. should be strongly advised to withdraw its new proposal in favor of reinforcing the existing, consensus-based EU plan.
2. Reinforce Legal Foundations: G7 nations should immediately issue a joint declaration of the legal basis for using the windfall profits, grounding it firmly in the doctrine of countermeasures in international law. This creates a stronger shield against Russian legal challenges and reassures other sovereign asset holders.
3. Accelerate Implementation: The EU must move swiftly to operationalize its €50 billion loan facility. Demonstrating that the current consensus approach can deliver meaningful funds to Ukraine is the most effective counterargument to calls for riskier alternatives.

For Financial Institutions and Infrastructure Investors:

1. Seek Clarity and Indemnity: Custodians like Euroclear must secure explicit, legally binding indemnities from the EU and G7 governments against all potential legal judgments and retaliatory measures resulting from their mandated role.
2. Monitor Geopolitical Risk: Investors in sovereign debt and firms involved in infrastructure development should model the systemic risks associated with the different scenarios. A G7 split (Scenario 3) would be a significant negative indicator for market stability.

Outlook:

The U.S. proposal, particularly the “joint fund with Moscow” element, is highly unlikely to be adopted. (scenario-based assumption). The legal and financial stability risks for the EU are too profound, and the political optics are unworkable for Ukraine and key European allies. The most probable path forward is a reaffirmation of the windfall profits approach (Scenario 1), but the U.S. intervention will likely force the EU to accelerate its timeline and potentially agree to a more flexible use of the funds. (scenario-based assumption). The core challenge remains that even the full €50 billion EU loan, serviced by these profits, is a fraction of Ukraine’s needs. This debate is a prelude to a much harder conversation about who will ultimately pay for Ukraine’s reconstruction and how to make Russia contribute, a question this policy maneuver fails to resolve.