G7 officials backed European efforts to extract billions of euros in profits from frozen Russian assets, a day after U.S. Treasury Secretary Janet Yellen backed the idea.
Finance ministers and central bank governors meeting in Marrakech on Thursday night said they had agreed to explore ways to generate “extraordinary revenue” from frozen Russian central bank reserves to aid Ukraine.
The support comes after Yellen approved EU proposals on Wednesday to revive Brussels’ plans to find ways to use revenue.
Member states have struggled to make progress amid opposition from some EU countries on legal grounds and warnings from the European Central Bank about financial risks.
The proposals would see the EU hand over to Ukraine part of the profits from financial assets owned by the Russian state worth more than 200 billion euros.
What are you considering?
In the days following Russia’s full-scale invasion of Ukraine in February 2022, Kyiv’s Western allies froze more than $300 billion in central bank reserves. Of this $300 billion in assets, more than €200 billion worth of assets are located in Europe.
Much of it lies within the pipes of the European financial system, which is run by the world’s largest clearinghouse: Brussels-based Euroclear.
Since the assets were frozen, ideas have been circulating about how they could be used to aid Ukraine. Many are wary of blanket confiscation, arguing it would violate international law.
Rather than confiscate the assets, some officials have argued for taxing Euroclear’s excess or windfall profits. The tax will apply to profits derived from interest paid on Russian assets.
The European Bank for Settlements declined to comment for this story.
How does it work?
Euroclear plays a vital role in financial markets: ensuring payments.
To do its job, Euroclear receives payments, such as bond notes, and forwards them to asset owners. However, as the underlying assets are owned by the Central Bank of Russia (an entity subject to EU sanctions), Euroclear must retain these revenues.
As the European Central Bank raises interest rates in rapid succession, with the Eurozone benchmark interest rate rising from -0.5% to 4%, Euroclear typically reinvests large cash balances to earn rapidly growing interest.
It is this reinvestment pool that the EU wants to exploit, arguing that it constitutes “windfall profits” that would not exist without the sanctions regime.
According to the latest data from the clearing house, Euroclear made a profit of 1.28 billion euros in the first half of this year due to Russian sanctions. quarterly results.
EU officials first want to force Euroclear to set aside those profits. Only later will they decide how to deliver these products to Ukraine.
Why is it controversial?
The ECB warned the European Commission in June that the plans could shake confidence in global markets and destabilize the euro.
Their concerns center on the idea that if the EU seizes profits from foreign holdings, other central banks will seek to sell their euro-denominated assets.
Central banks hold more than €2.2 trillion of wealth in assets denominated in a single currency, According to data from the International Monetary Fund. Many of these central banks represent countries whose foreign policies are at odds with those of the European Union and the United States.
EU member states are also divided on the issue. Some countries, including Germany, have questioned the legal implications of accessing funds stored at Euroclear Bank.
Why are things moving forward?
To minimize risks, the ECB, several EU countries and the European Commission want the proposals to be endorsed by G7 partners, most importantly the United States.
The breakthrough came on Wednesday, when Yellen made clear that she supports “taking windfall gains from Russian sovereign assets anchored in specific clearing houses and using those funds to support Ukraine.” She said it was part of a broader effort “to ensure Russia pays for the damage it has caused.”
G7 central bankers and finance ministers said in a statement after the meeting on Thursday that other governments would also support the European Bank for Settlements’ plan.
The statement said the allies will “explore how any additional revenue directly derived from fixed Russian sovereign assets held by private entities, which are not required to meet obligations to Russia under applicable law, can be used to support Ukraine and its recovery” and in accordance with applicable law to rebuild”.
EU officials said Yellen’s comments and the G7 statement could help ease the concerns of Europe’s critics.
“International coordination with like-minded partners is fundamental to moving this forward,” an EU diplomat said. “We have some support and assurances from other partners, which is positive,” an EU official said.
What are you already doing?
Belgium said on Wednesday it would use corporate taxes already collected from Euroclear profits to set up a 1.7 billion euro fund specifically for Ukraine.
Prime Minister Alexander De Croo said the money would be used to purchase military equipment and humanitarian support.
Belgium taxes income at the regular corporate rate of 25%, which this year amounted to about 600 million euros. Tax revenue next year is expected to reach 1.7 billion euros, according to a person familiar with the matter.
The EU’s tax on windfall profits will be set at a “higher percentage” than Belgium’s corporate tax, an EU official said.
Additional reporting by Martin Arnold in Frankfurt and Colby Smith in Marrakech
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