EU to offer initial steps for tapping sanctioned Russian assets for Ukraine

The European Union will propose the first steps on December 12 toward applying a windfall tax to the profits generated by frozen Russian central bank assets, a move aimed at directing the proceeds for Ukraine’s reconstruction.

The draft proposal, seen by Bloomberg, sets out a “Step 0” identifying which frozen funds the measure would apply to and a “Step 1” outlining the actions the central securities depositories holding those funds would need to take.

“After deduction of expenses and national taxes, the ensuing profits would be clearly identified and accounted for in line with statutory capital and risk management requirements. This will make possible their transfer and assignment to the EU budget for the benefit of Ukraine at a later stage,” the document says.

The proposals include recommendations to shield the entities holding the assets from legal risks and retaliation, as well as exemptions for central securities depositories holding small amounts.

The EU, Group of Seven nations and Australia have frozen about €260 billion ($280 billion) in Russian Central Bank assets in the form of securities and cash, with more than two thirds of that immobilized in the EU. The majority of the EU-based assets are held in Belgium by the clearing house Euroclear, where they have earned about €3 billion so far this year.

Despite backing from the G-7 for the windfall measure, the EU is taking a gradual approach, given concerns raised by the European Central Bank, the International Monetary Fund and several member states.

The plan’s “Step 2,” which envisions transferring the net revenue generated by the frozen funds to the EU’s 2024-2027 budget, would require those concerns to be overcome before the commission presents a further proposal.

Based on current interest rate assumptions, the EU estimates that the taxable proceeds could reach €15 billion over the next four years, according to the document.

The proposal makes clear that the returns generated by the frozen assets are not due to Russia, nor are they Russia’s property, because they are distinct from the principal immobilized assets themselves. At the same time, there can be no “legitimate expectation” that the revenues remain with central securities depositories and their shareholders as the profits are a result of sanctions and extraordinary circumstances, the draft notes.

“The faster we act, the more significant the amounts we can mobilize to help Ukraine,” the proposal concludes.