Editor’s note: This article is part of Just Security’s series on reparation mechanisms in the context of Russia’s war against Ukraine.

Author’s notes: This post is made in my personal capacity.

The proposals discussed in this post as well as other legal options for securing reparations are discussed in detail in my study for the European Parliamentary Research Service, published on Feb. 23, 2024.

The confiscation of Russian State-owned assets, in particular Russian Central Bank (RCB) assets, has been a source of anxiety, creativity, and tension for European States and institutions for two years. Proposals have been generated by the European Commission (representing 27 European Union States) and the Council of Europe (representing 46 member States from across Europe and beyond).

Here, I analyze three European proposals that seek to overcome or circumvent the key barrier to confiscation – the high level of immunity from enforcement that attaches to central bank assets in international law. In the U.N. Convention, which is ratified by 13 European States (though is not yet in force) such assets are deemed to be immune. Many European States also have legislation and/or case law providing for a high level of immunity. As a result, European proposals tend to focus on breaking the link between the principal and the profits or interest earned on it.

Proposal 1: Windfall Contributions

This is a proposal by the European Commission to use windfall contributions from frozen Russian assets to finance Ukraine’s recovery.

Central securities depositories (CSDs) are specialized financial institutions that hold and invest securities for the assets’ owners. A number of CSDs hold RCB assets, which are blocked as a result of EU restrictive measures. By investing liquid assets, CSDs are generating windfall profits. For example, Euroclear, a Brussels-based private clearinghouse and securities depository, had to stop all payments to Russia as a result of sanctions. It is now in possession of almost EUR 200 billion worth of assets and cash. These holdings generate gains: Russian-sanctioned assets have generated EUR 3 billion euro in interest and EUR 34 million in management costs.

The EU Commission’s proposal would “pool together” the revenues obtained on invested RCB assets and channel them through the bloc’s common budget to Ukraine. This  proposal has received endorsement from a number of EU leaders, including the unanimous agreement of ambassadors of the 27 EU countries to support the proposal. Belgium has already taken similar action by seizing profits generated from the RCB’s frozen reserves of EUR 1.7 billion, promising to create a fund from the taxes collected from these profits, with a significant portion designated to assist Ukraine.

On Feb. 12, the EU adopted a law to set aside the windfall profits made on frozen RCB assets. CSDs will be prohibited from using net profits and must keep revenues from the Russian assets separate. The law applies to institutions holding more than one million euros of RCB assets. As has been noted, however, the legislation will not apply retroactively to the proceeds accumulated in 2023. The European Commission is also preparing further legislation to seize the profits that will be set aside, and then transfer them to a fund for Ukraine. Russia has responded by labeling the plan as “theft” and stating that “this is the appropriation of something that doesn’t belong to you.”

Immunity challenges

It is difficult to discern who holds ownership in the revenue obtained from reinvesting RCB assets. As one author has noted (here), the Central Securities Depositaries Regulation, as well as other EU legislation and Euroclear procedures, suggest that, as they reach maturity, Russia’s assets are reinvested to protect the company and its clients to manage risks and maximize returns. Another author has noted that Euroclear’s website suggests that the income from reinvestment will no longer be considered Russia’s income, but instead will be classed as belonging to Euroclear (see here). However, as has already been noted, beyond this, it cannot be known where the property rights in interest have been assigned due to a lack of public access to contracts between Euroclear and its clients, such as the RCB. The bare assets on RCB balance sheets do, however, belong to the RCB or other Russian entities and must in principle be paid back once the sanctions are lifted in addition to the principal sum of the initially immobilized assets.

Practical challenges

The European Central Bank has expressed concern for the reputation of the Euro as well as the security of European government bonds as a store of value for other central banks. Germany and France have echoed this concern. Some have suggested that the EU coordinate with other States in the G7 to ensure that reputational loss is shared. Euroclear has said that it is “already facing a significant number of legal proceedings ongoing, almost exclusively, in Russian courts” over the immobilized assets, adding that the probability of unfavorable rulings was high.

In reality, the sum that this proposal will produce is relatively small. Belgium estimated that windfall contributions will generate around EUR 3 billion a year, compared to approximately $411 billion (EUR 383 billion) worth of damage to Ukraine. The EU’s most recent estimates put the figure at 15 million euros over the next four years.

Proposal 2: European Investment Common Fund

The European Commission  has also proposed creating a structure to manage frozen RCB funds (see here and here) This would involve “active management through sound investment,” allowing for the use of RCB assets “on a temporary basis to generate resources to support Ukraine,” allowing for the use of all interest accrued on the assets, as well as interest accrued in excess of the contractually agreed sums. Once the sanctions against Russia are lifted, the assets would be returned.

The Commission envisages a system of voluntary contributions, with incentives to transfer revenues to the EU for Ukraine’s reconstruction. Mandatory transfer may also be possible under Article 311 of the Treaty on the Functioning of the European Union. It is foreseen that the Fund could be used to transfer the assets held by CSDs such as Euroclear. On current calculations (here and here) if the fund generates an annual return of 5 percent, the EU could send between  EUR 1.5 billion to 3.3 billion a month to Ukraine indefinitely.

Immunity challenges

Property law provides that there is no distinction between a State’s property right to the principal and its right to the returns generated by investing the principal. Russia would therefore have ownership interests in both, and the seizure of Russia’s investment returns would engage the same immunity hurdles as seizing Russian assets. Given that Russia would own the returns generated on its assets, the transfer of returns to Ukraine would create a change in ownership, implicating immunity.

One solution may be to argue that Russia did not intend for its RCB assets to generate profit, so it does not have a right to the profits generated through investment. According to Russian Federal Law No 86-FZ, 10 July 2002, Art. 3, the RCB does not seek to “derive profits,” and its assets are instead used to “organise and implement its currency regulation and currency control.”  This argument appears to be legally compelling, but it may also be applicable to the assets of other central banks that do not seek to derive profits from their functions. Therefore, from a policy point of view, this argument may not be sufficiently narrowly tailored and could lead to unintended consequences.

Practical challenges

The transfer of control of assets from CSDs may mean that they can no longer fulfill their contractual obligations as asset safe-keepers, and face the risk of litigation. The Commission is aware of these  “prudential risks” (see here). It would also be an operational challenge to build new capacities in the short period of time, such as identifying new counterparties, introducing new accounts, and building accounting and settlement capacities.

It is possible that the Commission could justify its proposal as a third-party countermeasure, though it would be challenging to meet the conditions of temporariness and reversibility. Professor Philip Zelikow argued that RCB assets could remain delineated as Russian property, rather than commingled with other non-Russian funds. Using funds traceable to the Russian State may make it legally more justifiable, since the funds could then be returned when the countermeasure terminates, assuming Russia had complied with its obligation to provide full reparation.

There is also uncertainty surrounding what would happen if the investments were to drop in value, leading to legal action against States involved in the Investment Fund. As noted by the Commission, there will also be challenges in terms of investing such a large amount of funds quickly, and without disrupting the market.

As with the first proposal, returns are small compared to Ukraine’s reconstruction costs. Ukraine has already pointed out that the expected amount would be insufficient.

Proposal 3: International Compensation Commission and Trust Fund

A report of the Committee on Political Affairs and Democracy urges the Council of Europe’s (COE) Parliamentary Assembly to call for the establishment of an international compensation mechanism. It recommends that COE member and non-member States cooperate in the transfer of frozen assets to the mechanism. The fund could cover a range of losses, including infrastructure damage, environmental impacts, economic losses incurred by companies and investors, and costs associated with hosting and supporting displaced persons. The already established Register of Damage would record Ukrainian losses in preparation for an international claims process.

The report also calls for the establishment of an international trust fund, where Russian confiscated assets will be deposited, ensuring transparency, accountability and equitable disbursement of funds used for compensation. This would be an arrangement for the temporary holding of assets until an international compensation fund would be ready to disburse payments. The establishment of an impartial and effective international claims commission would o adjudicate claims presented by Ukraine and affected entities seeking reparation.

Immunity challenges

A compensation mechanism would require the collective transfer of assets into a collective fund, entailing a permanent change in ownership over the assets. This would prima facie violate immunity, but the report suggests that countermeasures could be invoked to preclude wrongfulness. The report suggests that, as of Nov. 14, 2022 (the date of GA Resolution A/RES/ES-11/5), Russia has been put on notice of its international obligations and has a formal obligation to comply. As regards temporariness and reversibility, States could agree, when transferring the assets, that they will be returned to Russia if it complies with its obligations. Alternatively, rules for the mechanism might credit Russia for paid reparations, reducing its remaining obligations. If the assets’ value exceeds owed reparations (which is unlikely), the excess could be returned.

From another angle, the report argues that the countermeasures could avoid the law of immunity through implementation by the executive arm of government, without judicial involvement. This proceeds on the assumption that executive or legislative action does not engage immunity (though it may engage other rules of international law).

Practical challenges

Most States do not permit outright confiscation of foreign State assets. This option would likely require domestic legislation enabling the seizure of Russian State assets. As has been noted here, this legislation would need to be limited to the circumstances currently facing the international community – emphasizing the “special” nature of this remedy – in order to avoid concerns about other States using similar measures against the seizing states.

Unlike the U.N. Compensation Commission that awarded US$52 billion to compensate individuals, companies, and governments that proved damages due to Iraq’s 1990 invasion and occupation of Kuwait, the proposed commission cannot be a subsidiary organ of the U.N. Security Council due to Russia’s veto power. The proposal also comes at a time when Russia has not suffered military defeat. How can Russia’s liability be determined? It seems it would have to operate on the basis that Russia’s liability is settled by, among others, the UNGA’s recognition of Russia’s responsibility for aggression.

IMAGE: The Berlaymont, headquarters of the EU Commission, is lighted in blue and Yellow, the colors of the Ukrainian flag for the anniversary of the large scale invasion of Ukraine by Russia on Feb. 23, 2023 in Brussels, Belgium. (Photo by Thierry Monasse/Getty Images)