Belgium moves first to tap Russian central bank's frozen reserves, creates a €1.7bn Ukraine fund

Belgium moves first to tap Russian central bank's frozen reserves, creates a €1.7bn Ukraine fund
Belgium is creating a €1.7bn Ukraine fund that is funded by taxing the profits earned by the Central Bank of Russia's frozen $300bn reserves. / bne IntelliNews
By Ben Aris in Berlin October 12, 2023

Belgium has become the first European country to seize the profits of Russia’s frozen $300bn of Central Bank of Russia (CBR) reserves, it was reported on October 11.

Belgium will create a €1.7bn fund from the taxes charged on profits generated from frozen Russian assets, according to Belgium's prime minister, Alexander De Croo.

"Here in Belgium, we have taxation on the income from these frozen assets. Last year, it became obvious to us that the income taxes on these assets should be 100% aimed at helping the Ukrainian people. We did it last year and will do it this year," the prime minister noted.

These funds will go to the military, and humanitarian aid will be sent to the European Peace Fund to support the macroeconomics of Ukraine.

The president of Ukraine, Volodymyr Zelenskiy, thanked De Croo for the initiative and said that the money from the €1.7bn fund will be used next year, UBN reports.

"It is crucial that Belgium became the first country to start using frozen Russian assets to support Ukraine against Russian terror,” Zelenskiy said.

Only days after Russia’s invasion of Ukraine last year the EU imposed the CBR sanctions that froze half of Russia’s reserves held in Europe.

Since then, the funds have become a political football as a debate raged over the legality of seizing the funds to use as reparations to pay for the reconstruction of Ukraine’s economy post-war.

Western courts are free to freeze funds believed to be accumulated as a result of criminal activity. Seizing them – transferring the ownership of those funds – is legally more difficult, however. The frozen funds technically still belong to the CBR and should be returned after the war is over. Legally, to seize the funds there needs to be a criminal conviction, or in the case of countries, the EU would need to declare war on Russia.

The West has been reluctant to illegally seize the funds as it fears undermining its property rights and sparking an exodus of funds held in Europe by other countries that could destabilise both the financial sector and the euro. The European Central Bank (ECB) has been especially outspoken against requisitioning the CBR’s money for the damage it would do to the reputation of Europe’s common currency.

While the EU has ruled out seizing the CBR’s principle capital, the legality of seizing the profits generated by that capital is less clear. After a year-long hunt, about two thirds of the capital was discovered to be held by the Belgium-based Euroclear payment-and-settlement system, invested into various securities that are generating approximately $3bn a year of profit for the CBR.

However, the Belgium proposal neatly side-steps all the property-right problems as it proposes to only redirect the taxes on the profits to Ukraine, taxes the government is entitled to levy and use as it likes. Both the principle and the profits from investments will remain untouched and continue to technically remain the property of the CBR.

The development is important as Ukraine will run out of money if the international community reduces its funding next year. Following the removal of a $300mn allocation from a US spending bill at the start of October, funding for Ukraine is in increasing doubt.

Ukraine’s 2024 budget expects $43bn in funding from the international community to cover the $39bn deficit – half of all of Ukraine’s funding for next year is supposed to come from its foreign partners. US President Joe Biden has proposed to submit a bill for a package ranging from $50bn to $200bn, according to various reports this week, that would put the funding issue to bed for the next one or two years. But the passage of the bill, which may be submitted in the coming month, is in doubt.

US support for Israel will not affect aid to Ukraine, the US president's national security adviser, Jake Sullivan, said on October 11. The US can support Ukraine in Europe, its allies in the Indo-Pacific region, and Israel in their hour of need, as the White House tries to play down worries that further funding of Ukraine’s war with Russia are about to dry up.

The EU is also debating a four-year, €50bn package, however, the visibly growing Ukraine fatigue has also raised question marks over this allocation. For example, Hungarian Prime Minister Viktor Orban has already suggested that €50bn is too much and wants to cut the sum in half.

Due to uncertainty of further US support, the chairwoman of the US Federal Reserve bank, Janet Yellen, approved the EU's plan to tax the Russian Federation’s frozen assets on October 12.

Yellen strongly supported the EU's plan to introduce a windfall tax on frozen Russian assets as a way of increasing the funding for Ukraine. It is hoped the plan will also stimulate the attraction of new funds to support Ukraine.

The governments of some EU countries were waiting for official US approval of a plan to use the profits obtained from more than €200bn of frozen assets belonging to the CBR before giving the green light to its own €50bn package. The Russian assets in Euroclear had generated €750mn in profit by the first quarter of this year.

After a meeting in Brussels with Ukrainian President Vladimir Zelenskiy on October 11, the Belgian prime minister promised to create a fund of €1.7bn to finance assistance to Ukraine. Euroclear received €1.7bn in profit from investing frozen Russian assets in the first half of 2023.

While the Belgium money will help, it remains far too little to pay for the reconstruction of Ukraine. Kyiv School of Economics recently estimated the value of just the physical damage to the country at $150bn and, in April, the World Bank estimated the total cost of the damage at $411bn. Without using the frozen CBR money to pay for Ukraine’s recovery, the plan has turned to calling on the private sector to invest into Ukraine, as outlined at the Ukraine Recovery conference held in London in June. But that remains an ambitious goal, given that investors remain wary as Ukraine has a corruption problem that is far from being solved.

An extension of using taxes on frozen Russian assets is likely to be included in the 12th sanctions package that is currently being prepared. The European Commission has not yet described the details for the new sanctions package, although all deadlines have already passed.