Residential buildings destroyed by shelling in Borodyanka, Ukraine,a small town northwest of Kyiv on March 3, 2022. (Image from Video: Radio Free Europe)

The Group of Seven and the European Union are discussing a plan to use more than $250 billion in frozen Russian central bank assets as collateral to help fund Ukraine’s reconstruction, according to people familiar with the matter.

Under the proposal, Ukraine’s allies could sell debt to contribute to the war-torn country’s rebuilding, using the frozen assets as collateral. Proponents believe that any settlement to the conflict under international law would find Russia liable to pay for the damage it has caused its neighbor. Should Russia refuse, claims could be made on the frozen assets, the people said.

Discussions are currently taking place at a technical level, meaning a political decision has not yet been taken, said the people, who spoke on condition of anonymity. One of the people said some countries want to move faster than others.

The G-7 has pledged to make Russia pay to rebuild Ukraine and to keep sanctioned assets frozen until it does. Several G-7 nations, including France and Germany, have so far resisted the option of confiscating the frozen assets outright because of legal concerns and the potential consequences on the stability of the euro.

The plan could allow for the creation of a special purpose vehicle that would issues zero-coupon bonds backed by callable collateral, one of the people said. A hierarchy would be established on the collateral that would use the assets held by Euroclear as well as banks, the person said.

The option to use the assets as collateral in the meantime, which was first reported by the Financial Times, is seen as an alternative to that route, said the people. Russia has vowed to legally challenge any attempt to seize assets.

Any move would come on top of EU plans to apply a windfall tax to the profits generated by the frozen central bank assets. Though slowly, that plan is progressing, Bloomberg previously reported. The vast majority of the sanctioned assets are held by the Belgium-based clearing house Euroclear, where they generated €4.4 billion in 2023, according to financial results published last week. Several Russian firms have contested the sanctions and a number of legal proceedings are ongoing, almost exclusively in Russian courts.

The discussions focus on Kyiv’s longer-term needs and are separate from a drive to support Ukraine’s economy in the immediate term. Last week the EU approved a €50 billion multi-annual aid package, while talks in the US over $60 billion in assistance remain stuck in Congress.

Amidst discussions between the Group of Seven (G-7) and the European Union (EU), plans are underway to leverage over $250 billion in frozen Russian central bank assets as collateral for funding Ukraine's reconstruction efforts, according to sources familiar with the matter.

Under the proposed strategy, Ukraine's allies could issue debt to support the rebuilding process, utilizing the frozen assets as collateral. Proponents argue that any resolution to the conflict under international law would hold Russia accountable for compensating its neighbor for the damage caused.

However, these discussions remain at a technical level, indicating that a political decision has yet to be reached. There are differing paces of progress among participating countries, with some advocating for swifter action than others.

While the G-7 has pledged to make Russia financially responsible for Ukraine's reconstruction and maintain frozen assets until this is achieved, some member states, like France and Germany, have expressed reservations about directly confiscating these assets due to legal concerns and potential impacts on the euro's stability.

The proposed plan could involve the creation of a special purpose vehicle responsible for issuing zero-coupon bonds backed by callable collateral. A hierarchical system for collateral distribution, utilizing assets held by Euroclear and various banks, is being considered.

Utilizing the frozen assets as collateral presents an alternative to outright confiscation, a notion initially reported by the Financial Times. Russia has warned of legal challenges should any attempt be made to seize its assets.

This prospective action would complement the EU's plans to impose a windfall tax on profits generated by the frozen central bank assets, a measure that is progressing albeit slowly. The bulk of these sanctioned assets are held by Euroclear, which reported €4.4 billion in profits from them in 2023. Legal proceedings initiated by several Russian firms contesting the sanctions are ongoing, predominantly within Russian courts.

It's essential to note that these discussions focus primarily on Kyiv's long-term needs and are separate from efforts to address Ukraine's immediate economic requirements. While the EU has recently approved a multi-annual aid package worth €50 billion, discussions in the US regarding $60 billion in assistance remain mired in Congressional gridlock.

Source: Bloomberg By Jorge Valero and Alberto Nardelli

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