The European Commission is floating a new idea of how to “creatively” tap Russia’s $300bn of frozen assets without the need to appropriate, which is legally questionable, by replacing the money transferred to Kyiv with EU-backed bonds, guaranteed by the 27 EU members.

The argument is that the EU can seize the interest earned by the bonds and use it to make loans, but leave the underlying capital untouched, which remains the legal property of the Central Bank of Russia (CBR).

The EU has been paying out around €1bn a month to Kyiv from a G7 $50bn loan, secured by the future profits from the invested frozen funds, approved on June 13 at a G7 summit in Italy. However, with around $45bn of that money already disbursed, Brussels is casting about for fresh sources of capital to help Ukraine.

As reported by bne IntelliNews Ukraine is standing on a financial cliff this year as the budget is short of $8bn-$19bn of unsecured external funding to close the hole and up to $60bn next year, according to the latest calculations by the International Monetary Fund (IMF).

The US used to supply some 40% of Ukraine’s funding needs, but has withdrawn from supporting Ukraine and sent no money since US President Donald Trump took office in January. As bne IntelliNews reported, Europe can’t afford to take over the burden of supporting Ukraine as it slides slowly into its own debt crisis.

The frozen CBR funds is one of the few large pools of money available to finance Ukraine’s resistance to the Russian aggression but legally Europe cannot confiscate it unless it declares war on Russia. Member states fear that illegally seizing the money will undermine confidence in both the euro and Europe’s banking system, as well as bring down a deluge of legal suites by Russia.

In order to sidestep these problems the European Commission (EC) is proposing to swap the cash for zero-coupon short-term EU bonds, which the Commission believes will avoid accusations of seizing the money as technically the bond’s principle remains Russian.

The idea has not been signed off yet, and other options for making use of the Russian assets are also on the table, the officials said.

The idea is still on the drawing board and one of several ideas being discussed, Politico reports.

So far, the EC has only tapped the interest earned by cash paid out from the CBR’s original investments into western assets that are held by the Belgium-based Euroclear, which accounts for €190bn of the total. Those investments pay out cash, which is held by Euroclear, but the cash pile itself has also not been touched so far. In 2023–2024, this interest income will be running at €3–4bn per year.

The EU plan is to securitise these income flows by turning them into a financial instrument — in effect, bonds backed by the future profits on Russia’s frozen assets. These bonds can then be used to raise the so-called “Reparation Loans” for Ukraine, providing upfront funding against future income.

European Commission President Ursula von der Leyen said the loans would only be repaid to Russia after the war.

“Ukraine will only pay back the loan once Russia pays for the reparations. The money will help Ukraine already today,” Commission President Ursula von der Leyen told the European Parliament during her annual EU State of the Union address (video, transcript) on September 10.

The EU argues this is legally different from seizing the assets themselves, since the principal remains untouched and only the earnings (which Russia cannot legally claim under sanctions) are redirected.

The Kremlin claims that both the principal capital and the proceeds from its investments belong to Russia and Brussels has no right to use the interest payment cash either. Presidential spokesman Dmitry Peskov called the scheme “stealing.”

Euroclear’s management have stringently objected to the scheme, saying it's illegal. To assure Euroclear, the EC is suggesting the cash for the Reparation Loans be converted to zero-coupon bonds that are underwritten by EU members

If the Reparation Loans scheme goes ahead, Russia is almost certain to bring cases before international courts, such as the International Court of Justice or arbitration panels, arguing that diverting proceeds from its central bank assets violates the principle of sovereign immunity.

Sovereign assets are usually protected from confiscation or interference, unless specifically allowed under international law by a UN Security Council resolution, which Moscow would veto.

Euroclear itself may also face lawsuits if counterparties or investors argue that the treatment of Russian assets undermines their property rights or investor protections. Although Euroclear has been indemnified by EU governments, the risk of civil litigation in Belgian courts remains high.

Non-Western governments like China and the Gulf states are also likely to back Russia, as they will argue that using Russian assets sets a precedent that puts their own reserves at risk.

Even if Russia cannot enforce rulings in Western courts, the Kremlin has threatened to seize Western owned assets, mostly privately owned, which are trapped in Russia and worth an estimated $300bn as well, Reuters reports.