BRUSSELS — The European Commission is floating a new idea of how to send billions of euros of frozen Russian assets to Ukraine, by replacing the money transferred to Kyiv with EU-backed IOUs.

Brussels is attempting to solve one of the thorniest problems since the beginning of the war — that the West can seize interest generated by Russian assets but not the huge capital sums, which would make a significant difference to Ukraine’s ability to defend itself and rebuild.

The new proposal — described by one official as “legally creative” — could release a major stream of additional funding for Kyiv’s war effort without technically expropriating the Russian assets themselves, which would be legally risky.

According to four officials briefed on the matter, Commission representatives proposed the idea to deputy finance ministers behind closed doors in Brussels on Thursday. The proposition received cautious enthusiasm, but no agreements or commitments were made. One official said a formal proposal could come soon.

Almost €200 billion in Russian assets were frozen in the aftermath of Moscow’s full-scale invasion of Ukraine in February 2022. Most of the assets are held by Euroclear, a financial institution based in Brussels. 

With Ukraine facing an estimated €8 billion budget shortfall next year, EU countries are discussing new ideas to continue financing the war-battered country amid squeezed domestic budgets. 

By swapping the cash for zero-coupon short-term EU bonds, the Commission believes it will avoid accusations of seizing the money. The idea has not been signed off, and other options for making use of the Russian assets are also on the table, the officials said.

In her State of the Union speech on Wednesday, Commission President Ursula von der Leyen said Ukraine would only pay back the loan once Moscow pays war reparations to Ukraine.

How it would work 

Under its rules, any maturing assets that Euroclear holds must be transferred into a deposit account with the European Central Bank, which in turn yields interest on the cash held.

Until now, the EU has used the interest generated to repay its share of G7 loan of €45 billion to Ukraine that will soon be entirely paid out. 

Now that Ukraine is running out of money, the Commission has suggested using those cash deposits at the ECB to fund a “Reparations Loan” to help prop up the war-torn country in the years to come. 

“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 State of the Union address on Wednesday — without offering many details. 

In order to reassure Euroclear, the Commission suggested trading the cash deposits linked to the assets with zero-coupon bonds that will be jointly guaranteed by EU countries. Many hurdles remain before the plan could take effect, especially as national guarantees require unanimity.

The Belgian government and Euroclear have repeatedly warned that using the assets themselves to issue a loan could spell legal trouble.