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Welcome to Wider Europe, RFE/RL’s newsletter focusing on the key issues concerning the European Union, NATO, and other institutions and their relationships with the Western Balkans and Europe’s Eastern neighborhoods.
I’m RFE/RL Europe Editor Rikard Jozwiak, and this week I’m drilling down on two big issues: how the EU could transfer profits from frozen Russian assets to Ukraine — perhaps as soon as July — and the challenges NATO faces as it turns 75.
Brief#1: Will Ukraine Benefit From Russian Assets?
What You Need To Know: The European Union is inching closer to a historic decision on using profits from Russian assets frozen by the bloc to help Ukraine. The Russian central bank’s assets were frozen shortly after the full-scale invasion of Ukraine in February 2022 and have remained so ever since. The securities and cash frozen in the G7, the EU, and Australia are estimated to be worth roughly 260 billion euros ($282 billion). Assets worth an estimated 210 billion euros are in the EU, mostly in Belgium, the home of Euroclear, a user-owned financial services company specializing in securities transactions.
In February, the first step by Brussels was completed by setting aside the profits accumulated from the frozen assets. On March 20, the European Commission proposed the initiation of the second and final step — sending the actual cash to Ukraine. This comes after EU foreign ministers, two days before, tasked EU foreign policy chief Josep Borrell with coming up with a proposal for making this happen. None of the 27 member states have objected so far, although it’s far from a done deal. Leaders and officials from EU member states still have to study the European Commission’s proposal and give it a unanimous green light. Diplomats and officials are expected to start studying the fine print of the text today.
Deep Background: The proposal, seen by RFE/RL, notes that the first step of the process, the setting aside of profits, started on February 15 this year: “the central securities depositories (CSDs) are prohibited from disposing of these profits, or distributing them to shareholders, until the [European] Council decides on the financial contribution to be raised on them to support Ukraine.” CSDs are institutions, such as Euroclear, that hold and administer securities and enable their transactions. The step is thought to have raised something between 2.5 billion and 3 billion euros. The European Commission hopes that this money can be sent to Ukraine by July, provided that member states approve. There are also hopes in Brussels that comparable sums can be sent to Kyiv each year after that, depending on annual interest rates.
There are a number of “assurances” in Borrell’s proposal for member states worried that this move could amount to a seizure of private property — with private ownership being a fundamental EU right — or could damage the bloc’s common currency, the euro. The document notes that “the generation of unexpected and extraordinary revenues…are not the property of the Russian central bank as there is no legal or contractual provision for interest to be paid to the owners of the principal. Since these revenues only exist as a result of the restrictive measures, there can also be no legitimate expectation that they should remain with the central securities depositories and their shareholders.” The proposal also added that any retroactive claims by Moscow won’t be accepted: “Unexpected and extraordinary revenues do not have to be made available to the central bank of Russia under applicable rules, even after the discontinuation of the transaction prohibition. Thus, they do not constitute sovereign assets. Therefore, the rules protecting sovereign assets are not applicable to these revenues.”
Drilling Down
- There are other “goodies” to entice member states to quickly come on board with the proposal: an expected 3 percent of the profits from the frozen assets will remain with the CSDs “to ensure the efficiency of their work.” In the future, the financial services companies will also be able to provisionally retain 10 percent of the profits to cover potential legal fees, as it’s highly likely that Russia will take them to court.
- Several EU officials I have spoken to on background have played down the possibility of damaging the euro’s position as the second reserve currency in the world. The fact that Brussels has pondered this move for several months already without any impact on the common currency in terms of trading or value is being cited in support of that argument. Another argument in support of the move is that other G7 countries are also mulling similar moves, so it might not be just the euro that is potentially exposed.
- Then there is the European Commission’s proposal of how the money should be spent, which gives member states even more potential oversight — and even veto opportunities. Initially, it was thought that the money generated from the profits would go to the reconstruction of Ukraine. But as the war drags on and no one expects widespread reconstruction to start anytime soon, the EU proposal states that 90 percent of the money should go to the supply of military equipment for Kyiv and the remaining 10 percent to regular financial aid.
- That proposed 10 percent would be channeled via the regular EU budget, so it doesn’t need an explicit green light from any member states. But the 90 percent should go via the European Peace Facility (EPF), an off-EU-budget mechanism that has allowed Brussels to send money to Ukraine for arms purchases. The EU has so far sent 5.6 billion euros ($6.1 billion) for the purchase of arms and artillery to Kyiv over the last two years via EPF but has, for the last 10 months, failed to sign off on a 500 million-euro EPF tranche after a long-standing Hungarian veto. The veto stems from Budapest’s dispute with Kyiv over a blacklist produced by Ukraine’s National Agency on Corruption Prevention. The Hungarian bank, OTP, is on that blacklist and labeled an “international sponsor of war” as it continues to do business in Russia.
- While the bank was de-listed in the fall, Budapest has sought assurances that it won’t happen again in the future, something that so far has not occurred. Recently, the EPF ceiling was raised by 5 billion euros specifically for Ukraine, paving the way for even more EU cash for weapons for Ukraine.
- But the rules of the game have not changed. This means that national vetoes, such as the Hungarian one, will be a crucial factor for future tranches. And that means the windfall may not end up in Ukraine by the summer after all.
Brief#2: NATO at 75 — Aging But Still Agile?
What You Need To Know: On April 4, NATO celebrated 75 years. Manneken Pis, Brussels’ iconic fountain statue of a little boy peeing, was decked out in a NATO costume, and the original Washington treaty, which established the military alliance in 1949, was flown to Brussels from the U.S. capital under tight security for the foreign ministers of the 32 NATO allies to admire.
But that was about as much fun as the aging military organization could manage for now. The foreign ministers were gathering on April 3-4, about three months before a crucial NATO summit in Washington on July 9-11. And, at their meeting, they dealt with the same issues that member-state leaders will in the summer — the war in Ukraine and how NATO can shore up its support for Kyiv; Ukraine’s prospects of NATO membership; and, finally, who should replace Secretary-General Jens Stoltenberg as he bows out after a decade at the helm later this year. No decisions were made by the ministers on any of these issues last week — a luxury that their bosses, at the July summit, can ill afford.
Deep Background: The most pressing issue is military support for Ukraine. With the U.S aid for Ukraine, worth nearly $60 billion, still stuck in Congress, Kyiv’s European friends are scrambling to get whatever they can to their outgunned partner amid fears of a Russian offensive in the coming months penetrating Ukrainian defensive lines.
Still, the mood is slightly less grim than when I spoke to NATO officials earlier this year. “It’s gloomy at the moment but not catastrophic. Russia is advancing a bit, albeit slowly,” said one diplomat, who was not authorized to speak on the record. Earlier this year, the main issue was how to get artillery shells to Ukraine. While that issue is far from being resolved, NATO members are at least starting to churn them out domestically and procure them around the globe.
The glaring problem now is air defenses, especially missiles to protect Ukrainian cities and infrastructure. Unlike shells, missiles are not something that can be easily sourced outside the alliance or produced quickly in member countries. Before the meeting of the foreign ministers, Stoltenberg suggested a solution to the funding issue for the war effort in which NATO would give Ukraine a five-year military-aid package worth up to $100 billion. Under Stoltenberg’s plan, the money would be provided by all member states, with contributions based on the countries’ gross national income (GNI), which is used to fund NATO’s common budget. The question is whether all members will be on board by July, in time for the summit.
Drilling Down
- The secretary-general’s proposal is very much part of what NATO officials refer to as the “institutionalization of Ukraine aid.” In essence, this is NATO’s attempt to take over various ad hoc initiatives to aid Ukraine. Consider the 50-country Ukraine Defense Contact Group (also known as the Ramstein format), which is now under U.S. leadership and meets almost monthly to provide Ukraine with arms. Or the F-16 coalition, a group of about a dozen NATO allies training Ukrainian pilots to handle the fighter jet.
- The military alliance is already facing obstacles, however, with one of them being Hungary. Budapest is against any move that would suggest that NATO is involved in a war, including the military alliance taking over the training of Ukrainian soldiers. There was an aim inside the organization to finalize a draft mandate for a Ukraine mission — which would take over the various efforts to provide military aid — at last week’s meeting of foreign ministers, but the proposal is far from ready.
- There has also been little movement on Ukraine’s potential membership in NATO. At the alliance’s summit in Vilnius last year, it was agreed to do away with the Membership Action Plan (MAP) for Ukraine. The MAP is basically all the necessary political and military reforms that new members have to undertake before joining.
- But since then, Ukraine’s path to possible membership has not been clearer, and there is no timeline. Eastern member states, such as those in the Baltic region, want to go beyond the “Vilnius language,” but others, such as the United States and Germany, don’t. Even if Ukraine did fulfill conditions for membership, such as anti-corruption and security-sector reforms, the elephant in the room is still the war. With almost no appetite for a direct war with Russia, membership is extremely unlikely as long as the fighting continues.
- That raises many questions: What can NATO offer, if anything, in Washington in July? Some sort of partial membership that only covers the territories that Kyiv has under its political control? Can or even should Kyiv accept such a deal that would de facto partition the country? And will all 32 members of the alliance agree to offer such a thing?
- And finally, there is the issue of replacing Stoltenberg. This was supposed to be wrapped up in early April with the big four — France, Germany, the United Kingdom, and the United States — officially backing outgoing Dutch Prime Minister Mark Rutte. In fact, most other members also appear to support Rutte’s candidacy, including several eastern-flank countries such as Estonia and Poland.
- Hungary, however, is ardently against the Dutchman while Turkey, for now, is sitting on the fence. Some ministers raised it in Brussels last week and backed Rutte but there is no consensus yet — plus there is another candidate, Romanian President Klaus Iohannis, who hasn’t given up yet. Expect a lot of wheeling and dealing, which will likely drag on well into the summer.
Looking Ahead
There is expected to be a ruling on April 10 in the European Court of Justice on whether the sanctions against Russian businessmen Petr Aven and Mikhail Fridman should remain in place. In March, the Russian racing driver Nikita Mazepin, son of oligarch Dmitry Mazepin, won his case in the Luxembourg-based court, even though he remains listed for now. The EU can also still challenge the court’s decision and present potential new evidence for the sanctions to remain in place.
That same day, the European Parliament will debate the recent Russian presidential election, which was without opposition and marred by fraud. Expect the revelation from last week that several European politicians, including some members of the European Parliament, were promoted or even paid by the pro-Russian news portal Voice of Europe to be brought up as well.
That’s all for this week. Feel free to reach out to me on any of these issues on Twitter @RikardJozwiak, or on e-mail at jozwiakr@rferl.org.
Until next time,
Rikard Jozwiak
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