The US is pushing for the expropriation of $291bn in Russian Central Bank reserves frozen in the West and urging the EU to transfer the funds to Ukraine.

The move marks a shift in the US stance on the use of these seized assets, with discussions taking place within the G7 in December to formulate a strategy for seizing Russian reserves by February 24, 2024, the second anniversary of the invasion of Ukraine, The Bell reports.

Ukrainian President Volodymyr Zelenskiy, after a December visit to Washington, said that he had discussed the issue of transferring Russian reserves to Ukraine and believes that this money should be spent on protecting Ukraine.

Following the start of the war, approximately €260bn of the Russian Central Bank's assets were frozen in G7 countries, mostly by Euroclear in Belgium, as well as other EU countries and Australia, comprising nearly half of Russia's $643bn in international reserves as of February 2022.

In December both the FT and then The New York Times reported that the United States has changed its point of view on the use of Russian Central Bank reserves seized in the West and is now, albeit gently, insisting that this money should be transferred to Ukraine.

The majority of these funds, over €210bn, are located in EU countries, with €191bn held in the Euroclear depository in Belgium. Another €19bn is frozen in France, €7.8bn in Switzerland and only €4.6bn in the US.

While Western officials are considering various options for the use of these funds, including supporting Ukraine's economy and financing its budget deficit, concerns about potential repercussions, both economic and geopolitical, accompany the decision.

The EU, particularly Germany, France, and Italy, has been reluctant due to fears that such a move could jeopardise financial stability and undermine trust in the euro's status as a reserve currency, thus driving up borrowing costs for the EU that could cost it billions in the long run. The European Central Bank (ECB) has been especially outspoken in its opposition to any scheme that illegally seizes the CBR’s money.

An alternative scheme proposed by the EU is to impose a 100% tax on the profits these assets earn, which is legally much easier to do but would only generate about €3bn a year. The assets of the Russian Central Bank could also be used as collateral for borrowing by the Ukrainian government on the international market in another option.

Another issue being discussed is whether this money can be used only to restore the Ukrainian economy and finance the Ukrainian budget deficit or can be spent directly on the purchase of weapons, NYT sources say.

If the assets are seized one of the legal arguments to justify this is that the Russian money will be seized in lieu of reparations for the destruction Russia’s aggression has caused, but if this argument is used then the CBR’s assets could only be legally used for reconstruction and not the purchase of weapons to sustain the current conflict.

A written American presentation to the G7, seen by the NYT, proposes to allocate money in successive tranches through the World Bank or the European Bank for Reconstruction and Development (EBRD) – in this case there will be no talk of direct purchases of weapons, as the mandates of both development banks precludes them from dealing in arms.

A US official told The New York Times that the issue of using Russian reserves will remain on the agenda even if Republicans agree to unblock a $50bn aid package for Ukraine.

But momentum to expropriate Russian reserves is clearly building as Western countries cast about for alternative ways to fund Ukraine’s war and subsequent reconstruction. Ukraine fatigue has become palpable in the last six months of 2023 and financial support packages from both the US and the EU have run aground in the face of opposition but politicians. However, a renewed effort to pass these stalled packages will be made in January and February.

As the threat of expropriation builds, the Kremlin has made it clear it will retaliate by expropriating more Western assets that remain in Russia. When asked by journalists in the last days of December if there is an expropriation list, presidential spokesman Dmitry Peskov replied: “There is,” without giving more details.

Seizing the CBR funds would be entirely unprecedented. Other central banks have been frozen in other sanction regimes – including funds from the Central Banks of Iran, Iraq, Syria, and Venezuela – but the money has never been seized and almost always returned to the object of the sanctions after the sanction’s regime is lifted. (Iranian funds remain frozen after 45 years but remain the property of Iran.) Central bank funds have always been seen as sacrosanct assets in the international financial system.

For third countries, including China, India and Saudi Arabia, which between them control more than $5 trillion in international reserves, the confiscation would send a signal that it is not safe to keep money in Europe and if they exit that could dramatically weaken the euro and the EU’s financial system.

As discussions unfold within the G7, the decision on the fate of the Russian reserves will be crucial, with potential repercussions on international financial dynamics and geopolitical relations for years to come should the CBR money be seized.