According to the latest estimates of the Kyiv School of Economics, Russian aggression has already caused more than US$150 billion worth of damage to Ukraine, which includes physical losses, destroyed and damaged infrastructure facilities and businesses.
In addition, Ukraine has to seek billions of dollars from the Western world to compensate for taxes lost from the destroyed businesses and to finance high spending on defense and social support.
As political cycles commence in partner countries, the risk of financial support shrinking will increase. Some political forces are already suggesting that taxpayers' money should be used to solve domestic problems rather than on Ukraine.
At the same time, for two years now there have been discussions about the need to use Russia's frozen assets and sanctioned Russian oligarchs to rebuild the country. However, Western countries are still afraid to confiscate them in favour of Ukraine.
And while the West is still reluctant to confiscate them in favor of Ukraine, these assets keep generating hundreds of millions of dollars in income. Income that the Ukrainian government could use right now, while the final decision on confiscation is still pending.
Is it not the right time for confiscation?
In the very first days after the outbreak of the full-scale invasion, Western countries froze billions of dollars of Russian assets held in their jurisdictions. First and foremost, the funds of the Russian Central Bank, but also the assets of oligarchs close to the Russian dictator were subject to restrictions.
The total amount of frozen assets is estimated at $300 billion. However, the figure is only an estimate, as some Russian oligarchs' assets are still being found in the Western countries, while other Russians, such as Abramovich or his close associate Shvidler, are trying to withdraw their assets from the sanctions in courts.
The difficulty of tracing Russian assets is one of the reasons why it is so hard to collect them in favor of Ukraine.
For example, public reports and statements indicate that 7.5 billion euros worth of Russian assets have been frozen in Switzerland, and 20 billion euros in the United Kingdom. However, the largest volume of frozen Russian assets is held in the European Union.
"Our partners tell us that there is currently no legal mechanism to recover these funds in favor of Ukraine, which, in my opinion, means that there is no political consensus, because a mechanism can be found," said Vladyslav Vlasiuk, secretary of the working group on sanctions against Russia.
Although the EU has repeatedly expressed its readiness to seize Russian assets for the benefit of Ukraine, no concrete steps have been taken in this direction in the year and a half into the war. Probably, one of the reasons for the lack of political consensus on the issue is the fear that such actions may not be appreciated by investors from the countries of the global South, as well as China and Saudi Arabia. The latter keep a significant portion of their reserves in euros and US dollars.
Given all the risks associated with the confiscation of Russia's assets, our partners are trying to find alternative ways to use the frozen funds, including for the benefit of Ukraine.
For example, European Commission President Ursula von der Leyen said she would present a plan to collect the proceeds from frozen Russian assets in favor of Ukraine. In particular, these proceeds should become one of the sources of funding for a special instrument to support Ukraine's recovery worth 50 billion euros, which was announced on the eve of the recovery conference in London.
The Ukrainian government also believes that collecting at least part of the proceeds from Russian assets is the most feasible way to use these funds for the benefit of Ukraine right now.
"Our perfectly natural wish is to find a political way to seize these assets for Ukraine's recovery. This is the main track of our activities. However, before the assets are seized, the most feasible solution is income taxes (charged on those assets - EP). I believe that it is the source that can work for the recovery right now," said Sergii Marchenko, Minister of Finance of Ukraine, in an interview with EP.
Belgian "deposits" of Russian assets
Of all the Western countries, Belgium has perhaps the largest amount of frozen Russian assets. The amount of money at stake reaches 196.6 billion euros, which is more than in traditional "havens" for Russians' funds, such as Switzerland or the United Kingdom. How is this possible?
The fact is that Belgium is home to the headquarters of one of the two international securities depositories, Euroclear.
Euroclear is an important part of the global financial infrastructure. Its role is to accept, issue and distribute its clients' securities quickly and efficiently, and to provide domestic and international communication with a focus on client and investor security.
Euroclear accounts hold assets of about 2 million clients worth €37.6 trillion. Every year, the depository performs 295 million transactions. Given this scale, it is not surprising that the largest share of Russian assets was circulating here.
Of the nearly €200 billion of Russian assets on Euroclear's accounts, €180 billion are assets of the Russian Central Bank, and the rest belong to sanctioned Russians.
According to Bloomberg, most of the frozen assets on Euroclear accounts are cash and deposits, while a "significant portion" are securities, including bonds and stocks.
The second European securities depository is Clearstream. The company is registered in Luxembourg and also holds frozen Russian assets on its accounts. However, no information on the total amount of such assets and their structure is available in open sources.
Taxes on income from income
Locating Russia's frozen assets is just the first step in making them work for Ukraine's benefit. However, it is this step that ultimately allowed the EU to come up with the needed solution, which can be adopted relatively easily.
The point is that the assets in Euroclear accounts keep generating income. However, like the assets themselves, this income belongs to Russia. Therefore, confiscation of this income in favor of Ukraine in the near future is as problematic as confiscation of the assets themselves.
However, in accordance with Euroclear procedures and EU regulations, the depositary must reinvest such income, i.e., invest it further in instruments that also generate income. In this case, the income from reinvestment will no longer be considered Russia's income, but will be classified as Euroclear's income.
Unlike the decision to confiscate the Russian assets themselves, the transfer of such reinvestment income does not require a consensus among all EU members.
"This is really a loophole. It turns out that the EU has found money that is not Russian in this process," says Natalia Shapoval, head of the KSE Institute.
"From a legal and political point of view, recovering funds from Euroclear is the most flawless way to make Russian assets work for good. Belgium and other countries that opt for this path need not worry about violation of international law or the risk of retaliation from Russia.
This could potentially result in billions of euros being recovered from Russia. As the world continues to witness a high interest rate environment, earnings on Euroclear reinvestments have risen significantly. Thus, while in 2022 Euroclear reported €822 million in income from frozen Russian funds, in the first half of 2023 the amount of such income reached €1.74 billion.
Such amounts are considered excessive profits for conservative instruments in which the depository invests. And these excess profits are partly caused by Russia itself, having attacked Ukraine. The outbreak of the great war triggered "shocks" in the food and energy markets, which adversely affected inflation. To tackle rising prices, leading central banks had to raise their interest rates at record pace, which ultimately led to high returns.
As tight monetary policy in the West continues, Euroclear's income from reinvestment of Russian assets will continue to grow and reach more than €3 billion by the end of the year. If they are transferred to Ukraine, these funds will cover about half of the amount that still needs to be raised for the rapid recovery this year.
Currently, the EU is exploring two ways to transfer part of the income from Russian assets to Ukraine.
The first way involves taxing the depositary's income with a so-called "windfall tax," or a tax on excess profits. Progress has already been made in this direction.
In 2022, Belgium withheld 76% of the income received from frozen Russian assets in Euroclear accounts, totaling €625 million. Under normal circumstances, all of these tax revenues would have been kept by Belgium, but on May 12, 2023, the Government announced that it would transfer €92 million to Ukraine, split equally between military and humanitarian and other aid.
The second way is to transfer to Ukraine all the excess profits Euroclear and other depositories have made from reinvesting income from Russian assets. This way, although more difficult to implement, is justified because these excess profits were made precisely because of Russia's attack on Ukraine.
The fact that some proceeds from frozen Russian assets have been transferred to Ukraine is certainly commendable. However, it does not negate the need to confiscate the assets themselves for future reconstruction. And the work in this direction continues with its small "victories" and "failures".
For example, recently, the UK government announced that it would not lift sanctions against Russia until it compensates Ukraine for the damage it has caused. Skeptics believe that this decision was made primarily to avoid confiscating frozen Russian assets and setting a precedent in their law.
Meanwhile, a bipartisan bill has been registered in the United States that could give the president the power to effectively confiscate Russian assets.
"This draft law refers to the Emergency Powers Act. According to it, the President will be authorized to make a "transfer" of Russian assets to a national escrow account, from where they can be transferred to Ukraine. The United States will also create an international escrow account where other partners will be able to deposit confiscated Russian funds," explains Anna Vlasiuk, a member of the Yermak-McFaul sanctions group.
The future of this bill will be decided in the fall, after the end of the holiday season in the United States. However, it could potentially provide a significant impetus to launch similar processes of confiscation of Russian assets around the world.
After all, the implementation of the principle "the aggressor must pay" is a moral and legal obligation of the entire civilized world.