The European Union has approved disbursal of loan of €3 billion for Ukraine as first tranch. This will be repaid using future revenues from frozen Russian Central Bank assets located within the EU. This initiative is part of a broader plan by the Group of Seven (G7) to provide financial support to Ukraine amidst its ongoing conflict with Russia. The loan totals up to €45 billion (cumulative of EU and G7-led Extraordinary Revenue Acceleration (ERA) loans initiative), aimed at supporting Ukraine’s defense and reconstruction efforts. This is the EU’s contribution to a larger G7 initiative planning to lend Ukraine approximately $50 billion.

The seizure or use of frozen Russian assets by the European Union to fund aid for Ukraine will significantly dent global confidence in major reserve currencies like the USD and the EURO. The primary concern is the trust in the safety and sanctity of assets held in Western financial jurisdictions. If nations perceive that their assets can be seized or used without their consent, even under specific legal frameworks like sanctions or war reparations, it might lead to a reevaluation of where to place foreign reserves or conduct international transactions. Countries might diversify their reserves away from USD and EURO towards other currencies or assets like gold, which are seen as more neutral or less prone to geopolitical manipulation. This has already been observed with countries like Russia and China increasing gold reserves or promoting their own currencies in international trade.

There’s a push towards creating or enhancing alternative financial systems that bypass traditional Western financial infrastructure. For instance, China’s Cross-Border Interbank Payment System (CIPS) could see increased adoption, or there might be more bilateral trade agreements that do not rely on USD or EURO.

Under international law, the principle of state sovereignty means that one country should not seize the assets of another without legal justification. However, exceptions can be made through international legal mechanisms like sanctions or as reparations post-conflict. The freezing or confiscation of assets can be legally justified if authorized by international bodies like the UN Security Council or if countries apply unilateral sanctions under their national laws. These actions are typically in response to violations of international law, like aggression or human rights abuses. There’s an ethical question of proportionality – whether the value of assets taken matches the damages or the severity of the breach of international norms by the offending state. Confiscation sets a precedent that might be used against other nations in future disputes, possibly destabilizing international relations.

The loan is part of the EU’s macro-financial assistance (MFA) program for Ukraine, with conditions that include Ukraine’s commitment to democratic mechanisms, human rights, and specific policy conditions outlined in a memorandum of understanding.

The repayment of this loan will be facilitated by the extraordinary revenues generated from the immobilized assets of the Russian Central Bank in the EU. These funds, which are estimated to be around €210 billion, have been frozen due to sanctions following Russia Ukraine war, starting in February 2022. The interest or windfall profits from these assets will be used for repayment.

There are ongoing discussions and legal considerations regarding the use of these assets. The EU has had to navigate complex legal frameworks to ensure the approach is not seen as outright confiscation, which could lead to international legal repercussions or undermine the euro’s standing. The plan involves the interest or profits from the assets rather than the principal amount, providing a legally safer route. The first tranche of this loan, amounting to €3 billion, was disbursed in January 2025, marking the initial step of this financial support. This disbursement highlights the EU’s commitment to aiding Ukraine’s macroeconomic stability, rebuilding infrastructure, and supporting defense needs.

U.S. dollar’s resilience is due to the stability and size of the U.S. economy, the depth of its financial markets, and legal frameworks that support its international use. The lack of a viable alternative with similar attributes makes a complete shift away from the dollar unlikely in the near term. However the use of the U.S. dollar as a tool for sanctions has led some countries to seek alternatives to reduce their vulnerability. Countries like Russia and China have been actively promoting trade in currencies other than the U.S. dollar, partially in response to Western sanctions. This can be seen as an attempt at de-dollarization to mitigate geopolitical risks. There’s evidence of an increase in transactions settled in currencies other than the dollar, particularly in commodities and within certain regional trade blocs like BRICS.

Although the USD remains the dominant reserve currency, any significant move against asset security could further fuel discussions or actions towards de-dollarization among countries wary of U.S. financial policies or geopolitical moves. Freezing Russian Assets will undermine status of EURO as a safe-haven currency, especially if other nations fear similar actions against their assets held in EU countries. This might affect the Euro’s role in global finance, potentially leading to a decrease in its share as a global reserve currency.

Galactik Views