Sanctions
The bank warned against the sanctioned holdings that could threaten the eurozone’s financial stability and liquidity of the common currency
The European Union sparred with the European Central Bank over plans to use profits from more than €200 billion ($217 billion) in frozen Russian central bank assets to help with Ukraine’s reconstruction, according to people familiar with the matter.
Officials in the EU’s executive arm on Thursday countered ECB President Christine Lagarde on the bank’s warning that moves against the sanctioned holdings could threaten the eurozone’s financial stability and liquidity of the common currency, said the people, who who asked not to be identified discussing sensitive discussions.
EU leaders agreed at a summit in Brussels last month to move ahead cautiously with work on a windfall tax plan on the profits generated by the immobilized assets, with the European Commission originally saying it would come forward with a proposal this summer.
But that timeline has slipped until after the commission’s summer break, according to one official, with the EU and the ECB at odds, and member states now also split over the two positions.
The commission has pushed back against the ECB’s arguments, saying that any risk occurred — and was assessed — when the assets were originally blocked in February 2022 after Russia’s invasion of Ukraine, and that so far none of those worries have materialized. The windfall option doesn’t affect the assets themselves or any claims by the Russian Central Bank, nor does it touch upon the EU’s role in safekeeping securities, one of the people said.
Those differences played out Thursday in a meeting of euro-area finance ministers attended by Lagarde and Commission Vice President Valdis Dombrovskis.
Fallout Risk
The ECB chief told the meeting that a windfall tax could undermine the euro and lead to a re-think among reserve holders, one of the people said. She noted that the amount at stake was far greater than the few billions that the move would generate for Ukraine, before urging caution and saying that any decision should only happen if the Group of Seven is on board too.
Lagarde shook her head as Dombrovskis set out the commission’s counterarguments and its case for a windfall tax option, the person said. Some member states echoed Lagarde’s caution, while others noted that it was a matter of how to advance, not if. Finance ministers are meeting again on Friday. The ECB declined to comment.
The frozen assets could generate some €3 billion in windfall profits, though some estimates suggest the figure could be even higher. Over half the assets are in cash and deposits, while a “substantial amount” of the remainder is in securities that will transform to cash as they mature in the next two to three years, Bloomberg previously reported.
Many of the funds are in Belgium at settlement giant Euroclear Ltd., where they generated nearly €750 million by the first quarter of this year. Those profits are already taxable, Euroclear’s quarterly results show, and its reporting suggests that Russia wouldn’t have claims on the net profits as they belong to the clearinghouse. Euroclear’s second-quarter results are due later this month.
In an attempt to bridge the differences, France proposed exploring a two-step process at a separate meeting earlier this week, focusing first on freezing the revenues and then discussing how to use them, two of the people said.
One of the people claimed that the move — coupled with the ECB’s reticence — is directed at undercutting the windfall tax option.
Another condition member states have placed on the process is to seek buy-in with G-7 nations and to coordinate any action jointly with them.
G-7 finance ministers and the EU are expected to the discuss the issue on the sidelines of a broader Group of 20 meeting in India on July 16, the people said. The EU would like to have the G-7 release an informal statement this summer, but a final decision hasn’t been taken yet, the people said.
Discussions between the EU and G-7 have so far been positive, one of the people said. Some nations would prefer to leave stronger alternatives on the table while others want it be clear that the windfall option would only apply to private clearing houses, the person added.
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