EU set to endorse deal to turn frozen Russian assets into support for Ukraine

European leaders aim to endorse 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 “compensation loan” would see Kiev receive €140bn (£121bn) worth of frozen Russian state assets currently held by Belgium-based financial institution Euroclear.

The plan has taken months to prepare, partly due to the legal complexities surrounding it, as well as member states’ concerns about upsetting global financial stability.

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

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

For the European Union, the problem of how to continue to support Kiev’s struggle against Russian aggression has become more urgent since US support for Ukraine has waned.

As of July, EU member states had 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 all-out war approaches its fifth year.

The UN and World Bank also estimate that the cost of reconstruction and recovery in Ukraine far exceeds $486 billion (£365 billion; €420 billion).

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 – is in Euroclear, a clearinghouse for financial transactions in Brussels that operates under the authority of the European Union.

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

These bonds have now matured; In other words, Russia is set to get its initial loan back plus interest. But due to sanctions imposed in 2022, Moscow cannot access these funds.

The European Union has been using the benefits from frozen Russian assets to defend Ukraine since the spring of 2024, amounting to 3 billion euros annually.

The European Union is now considering redirecting the same frozen funds to Ukraine in the form of an interest-free “reparations loan.” Much-needed liquidity will be available immediately – with the understanding that Kiev will repay it through reparations from Moscow once the war is over.

International law stipulates that sovereign assets may not be completely confiscated. Although these assets have been frozen, they remain the property of Moscow, and seizing them represents a legal challenge.

To get around this issue, the EU could “borrow” Russia’s frozen funds held by Euroclear and replace it with a debt security backed by all member states pledging the debt.

This could also allay Euroclear’s concerns about how it would repay Russia, if the war suddenly ended and Moscow demanded its assets back.

On Thursday morning, Belgium was still expressing its criticism of the proposal, but was leaving the door open to it, if it received guarantees that the risks would be shared among all member states.

Kaja Kallas, the EU’s foreign affairs coordinator, told the BBC’s Today programme, that Belgium’s concerns were “understandable” and that Belgians “should not take risks alone”.

Russia is angry at the idea of ​​its investments being exploited.

Russia’s ambassador to Italy, Alexei Paramonov, said the move would be the “theft of the century” and would provoke retaliation and harm Western financial stability.

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

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

There is no guarantee that Russia will agree to this. If not, the EU could forgive Kiev’s debt – but it would still have to repay the money it borrowed to finance Euroclear’s debt securities.

This burden will effectively fall on European taxpayers – an uncomfortable choice for most European governments.

There are also concerns among European central bankers about the possibility of creating a difficult legal precedent that could undermine global financial stability – as well as discouraging other countries from locating their safe-haven assets in the West.

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

Poland, as well as the Scandinavian and Baltic countries, enthusiastically supported the plan, which Finland’s President Alexander Stubb called “genius.”

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

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

Orban said that if the plan leads to Moscow retaliating against Hungarian companies, it will be difficult to explain to the Hungarians “why they should support the seizure of frozen Russian assets.”

However, German Chancellor Friedrich Merz said that while the decision should “ideally” be unanimous, it could also be adopted by a large majority – which would circumvent a veto in Budapest.

Another sticking point is how Ukraine is allowed to spend the money.

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

Mujtaba Rahman, managing director for Europe at the Eurasia Group, said Brussels and Paris want to use the funding to provide budget support to Kiev.

Others, such as Germany, want Ukraine to commit to spending money on European arms purchases.

“It is important that this additional money is used only to finance Ukrainian military equipment,” Merz wrote in the Financial Times, adding that EU member states and Ukraine “will jointly determine” which weapons will be purchased.

For its part, Kyiv opposes imposing any restrictions on its use of frozen Russian assets.

“The victim, not donors or partners, should decide how to address their most pressing defense, recovery and compensation needs,” Irina Mudra, the Ukrainian administration’s chief legal adviser, told Reuters.

Mudra said Ukraine reserves the right to decide how to allocate resources, adding that some should be directed towards other sectors such as reconstruction and compensation for victims.