The EU will approve a deal to turn frozen Russian assets into support for Ukraine

European leaders aim to approve controversial plans to use frozen Russian assets to support Ukraine at a meeting in Brussels on Thursday.

The unprecedented proposal for what the EU has called a “reparation loan” – would see Kiev receive €140bn (£121bn) worth of frozen Russian state assets currently held by Euroclear, a Belgium-based financial institution.

The plan was months in the making, in part because of the legal complexities surrounding it, as well as concerns among member states about upsetting global financial stability.

Belgium, in particular, has been reluctant to support the use of frozen assets because it is nervous about having to bear the consequences if Russia legally challenges Euroclear.

Russia has reacted angrily to any suggestion that the EU could use its money.

For the EU, the problem of how to continue supporting Kiev’s fight against Russian aggression has become more pressing as US support for Ukraine has waned.

As of July, EU member states have provided around €177.5bn (£154bn) in financial support to Ukraine. But in the absence of any progress toward a ceasefire agreement, Ukraine will need more money as Russia’s full-scale war approaches its fifth year.

The cost of rebuilding and rebuilding Ukraine is also estimated by the UN and the World Bank at well over $486bn (£365bn; €420bn).

Around €210bn (£182bn) of Russian investment was frozen by the EU when Moscow launched its full-scale invasion in February 2022.

The largest share – about 185 billion euros – is in Euroclear, a clearing house for financial transactions in Brussels that operates under the jurisdiction of the EU.

When they were first frozen, most of these Russian investments were in the form of government bonds, a type of loan made to the government that is repaid over a period of time.

These bonds have already fallen; in other words, Russia must receive both its original loan and the interest. But due to the sanctions imposed on it in 2022, Moscow does not have access to this money.

The EU is using the interest from the frozen Russian assets for the defense of Ukraine from spring 2024 and this amounts to up to 3 billion euros per year.

The EU is now considering redirecting the frozen funds themselves to Ukraine as a zero-interest “reparation loan”. So much-needed liquidity would be available immediately—provided Kiev paid it back through reparations from Moscow after the war was over.

International law states that sovereign assets cannot be confiscated directly. Although frozen, these assets remain the property of Moscow and their seizure is a legal challenge.

To get around this problem, the EU could “borrow” Russia’s frozen money held by Euroclear and replace it with an IOU backed by all member states assuming the debt.

It could also offset Euroclear’s worries about how to pay Russia if the war ended suddenly and Moscow demanded its assets back.

Belgium was still critical of the proposal on Thursday morning, but left the door open to it if it received assurances that the risk would be shared by all member states.

The EU’s foreign affairs chief, Kaia Callas, told the BBC’s Today program that Belgium’s concerns were “understandable” and that Belgians “shouldn’t take the risk alone”.

Russia is furious at the use of the ideal for its investments.

The move would be the “theft of the century” and would provoke retaliation and harm the West’s financial stability, Russian Ambassador to Italy Alexei Paramonov said.

If EU leaders give the green light for reparations at a summit on Thursday, the European Commission will begin drawing up the formal legal proposal for the loan.

The most obvious problem with the “reparations loan” scenario is that it depends on Ukraine winning the war and Russia agreeing to pay damages.

There is no guarantee that Russia will agree to this. If it doesn’t, the EU could write off Kiev’s debt – but it would still have to pay back the money it borrowed to finance the debt to Euroclear.

This burden will effectively fall on European taxpayers – an inconvenient option for most European governments.

There is also concern among European central bankers about potentially setting a difficult legal precedent that could undermine global financial stability – as well as deter other countries from sheltering their assets in the West.

Neither Euroclear nor EU countries want to be seen as unreliable custodians of foreign wealth. Even in the context of Russia’s war, they must respect the international monetary order.

Poland, as well as the Scandinavian and Baltic countries, enthusiastically endorsed the plan, which Finnish President Alexander Stubb called “brilliant”.

“I think it will work and help Ukraine finance itself,” he said.

Other European leaders more sympathetic to Moscow, such as Hungary’s Viktor Orbán and Slovakia’s Robert Fico, may oppose it.

If the plan prompts Moscow to retaliate against Hungarian companies, Orbán said, it will be difficult to explain to Hungarians “why they should support the confiscation of frozen Russian assets.”

However, German Chancellor Friedrich Merz said that while the decision would “ideally” be unanimous, it could also be passed by a large majority – which would bypass Budapest’s veto.

Another point of contention revolves around how Ukraine will be allowed to spend the money.

Ukraine faces a €42 billion shortfall in its “survival budget” for 2026, according to the Ukrainian Center for Economic Strategy.

Brussels and Paris would like to use the funding to provide budget support to Kyiv, said Muytaba Rahman, managing director for Europe at Eurasia Group.

Others, such as Germany, want Ukraine to commit to spending the funds to buy European weapons.

“It is important that these additional funds are used solely to finance Ukraine’s military equipment,” Mertz wrote in the Financial Times, adding that EU member states and Ukraine “will jointly determine” which weapons to buy.

For its part, Kiev opposes any restrictions on the use of frozen Russian assets.

Iryna Mudra, a senior legal adviser in the Ukrainian administration, told Reuters that “the victim, not donors or partners, should determine how to address their most urgent needs for protection, recovery and compensation.”

Ukraine reserved the right to decide how to allocate resources, Ms. Mudra said, adding that some would have to go to other sectors such as reconstruction and victim compensation.