The EU appears to have ruled out seizing the circa €200bn of assets in Europe belonging to the Central Bank of Russia (CBR) that were frozen at the start of the war in Ukraine over a year ago, the bloc said on June 21.

An European Commission legal team has been working on the issue for several months, but concluded it “sees no credible legal avenue allowing for the confiscation of frozen or immobilised assets on the sole basis of these assets being under EU restrictive measures,” it concluded in a seven-page report, as reported by Bloomberg.

While the EU and the courts has the power to freeze assets it suspects are the result of illicit activity, Europe’s strong property rights laws mean that a court or a country can only take procession of those assets if criminal activity is proved in court. In the case of counties, Europe would have to declare war on Russia (or visa versa) to have the legal right to seize the money. Technically the €200bn remains Russian property and in theory it will have to be returned to the CRB at the end of the war.

Ignoring the law and seizing the CBR’s money arbitrarily carries much deeper risks that will undermine the creditably of the euro and dollar and could destabilise the international financial system, Gunter Deuber, the head of research at Raiffeisen Bank, said in a recent bne IntelliNews column.

Abandoning seizing these assets will make rebuilding Ukraine much more difficult. The World Bank estimated the cost of the damage done to Ukraine by Russia to date is $411bn, but that cost is rising daily. A total of $300bn of CBR assets were reported frozen by the West, two thirds of which is held in Euroclear in Belgium, most of it in securities.

“If we don’t use these assets then Ukrainian reconstruction and recovery will not be adequately funded and will fail. Western taxpayers won’t pay – official financing will fall off a cliff when the war ends, and the private sector cannot be expected to do the heavy lifting on what is essentially a Western public good,” Timothy Ash, the senior sovereign strategist at BlueBay Asset Management in London, said in a note.

However, it appears that is exactly the plan: as bne IntelliNews reported, at the Ukraine Recovery conference in London on June 21 there was a clear shift in the message, calling on the private sector to step up and invest in Ukraine’s reconstruction.

Critics of the decision argue that it is vital for European security to see Ukraine restored, as it is “now our front line with an expansionist Russia,” and a bulwark against further military adventurism by Russian President Vladimir Putin, says Ash.

“I would wager that many of those now arguing against using frozen Russian assets were the same people who totally misread Russia over the past 15 years. They never got the strategic threat from Russia and still don’t. They just don’t get the strategic imperative. They sat on their hands for the past 15 years when the risks from Russia were obvious,” says Ash.

However, the EU has not given up on the idea of getting some use out of the frozen funds. The EU is exploring options to invest the €200bn and send the profits to Ukraine. The caveat on this idea is that if the investments lose money, instead of making it, then the European taxpayer would be on the hook to cover such losses and Russia would have to be compensated using EU taxpayer cash – not a very politically attractive prospect.

Another, and the preferred, option is to ask for a “windfall contribution” from firms with Russian holdings that are generating substantial investment profits to transfer a significant amount to the EU.

The advantage of this method is that the EU would not be managing the frozen Russian money and it minimises the legal risks. The EC working paper states that this model would not have an impact on financial stability, preserve the business models of the involved firms, and maintain fairness in terms of taxation without affecting the legal status of the assets.

EC President Ursula von der Leyen says a committee will present a proposal for utilising these assets before the summer break in mid-July.

More than half of the frozen assets are in cash and deposits, while a significant portion is in securities that will mature into cash within the next two to three years.