Euroclear Warns of Risks in Investing Frozen Russian Assets

Euroclear, the institution holding the majority of frozen Russian assets, has warned that European Union plans to invest these funds in higher-risk investments to increase aid to Ukraine could amount to "confiscation." According to Valérie Urbain, CEO of Euroclear, the plan to reinvest cash proceeds from these assets for higher profits could invite further retaliation from Moscow and undermine the central securities depository's crucial role in the financial system.

Increased Risk and Potential Consequences

In an interview, Urbain questioned, "If you want to increase profits, you increase risk, so who is taking that risk?" With approximately €191 billion of Russian central bank assets trapped at Euroclear due to Western sanctions, the EU Commission is considering how to extract more value from them. Euroclear currently reinvests cash proceeds from maturing Russian assets, such as coupon payments and redemptions, mainly through national central banks. The G7 is using these proceeds to support a $50 billion loan for Kyiv. As the European Central Bank lowers interest rates, profits from these assets have been declining. This has prompted the EU Commission to propose moving cash into higher-risk asset classes that could generate higher returns but also carry a greater risk of losses. Urbain warned that someone would have to make up for these potential losses. "If we have to go beyond our existing and regulator-authorised risk appetite, then systemic risk will definitely increase sharply," she said.

Euroclear's Role in Supporting Ukraine

Urbain noted that Euroclear paid €4 billion to Ukraine last year and €1.8 billion this year. She added that the EU's plan to increase these amounts could involve creating a "special purpose vehicle" (SPV) and transferring Russian central bank assets to this vehicle. This SPV would be able to invest the cash proceeds from the assets in higher-risk investments, "hopefully generating more revenue by taking more risk."

Potential Risks to Euroclear and European Markets

However, Urbain cautioned that such a scenario would "bring a lot of risk to Euroclear and the European markets globally." She said that "legally speaking, creating an SPV would mean 'confiscating' this cash from Euroclear" but would not exempt it from the liability of returning it to the Russian central bank, adding that this would "clearly lead to a situation we cannot sustain."

Lawsuits and Potential Russian Retaliation

Since the full-scale Russian-Ukrainian conflict erupted in February 2022, approximately €260 billion of Russian central bank assets have been frozen in various jurisdictions, and discussions about confiscating these assets have ebbed and flowed, but legal and financial considerations have consistently prevailed. Euroclear faces over 100 lawsuits related to frozen Russian assets, including assets belonging to oligarchs and other sanctioned entities. According to sources close to Euroclear, Russia has already confiscated €33 billion of assets belonging to Euroclear clients, which had previously been frozen at Euroclear's Russian counterpart – the Moscow-based central securities depository. Euroclear holds over €40 trillion in assets and is Europe’s largest central securities depository – a pivotal point in financial markets, facilitating and settling transactions by holding and transferring assets. "We should certainly expect that Russia will take more retaliatory action in all forms," Urbain said. She warned that the only viable prerequisite for such a scenario is that "in case the Russian central bank comes up with any demand to return the money, and the assets are no longer there, then someone has to compensate that amount."

Euroclear's Support for EU Capital Markets Union

Separately, Urbain announced that Euroclear is keen to push ahead with the EU’s initiative to consolidate its fragmented capital markets, which Brussels has been pushing to unlock untapped savings and improve financing for companies. She said that Euroclear would provide a “single access point” for retail and institutional investors across the 27 member states. Urbain also voiced her support for more centralised supervision of central securities depositories, another key element of the EU's capital markets initiative.

Analysis of Economic and Political Dimensions

The presented case highlights the complexity of dealing with frozen Russian assets, and the intersection of legal, financial, and political considerations. While supporting Ukraine is a noble goal, risking the stability of the European financial system could have dire ramifications. It remains to be seen how the European Commission will handle this dilemma, and whether they will find a solution that balances competing necessities.