Vice-President of the European Central Bank (ECB) Luis de Guindos has warned that frozen Russian assets to finance Ukraine by Europe could dent the Euro’s reputation as a safe currency, even though many in the European Union continue to advocate for this action. Guindos is evidently afraid that if the EU pursues a reckless policy of using frozen Russian assets to rebuild Ukraine, the reputation of European financial institutions and the continent’s premiere currency will be permanently damaged.
“Our position on utilising the dividends and interest from the frozen assets is clear. First: this should be a global decision, ideally involving all members of the G7,” Guindos told De Standaard and La Libre Belgique newspapers on November 29, according to a transcript published on the ECB’s website.
“First: this should be a global decision, ideally involving all members of the G-7,” the deputy chief said. “In addition, we have to be careful because this could lead to reputational damage.”
“We have to look beyond this conflict in isolation, and there could be implications for the euro as a safe currency,” he continued, adding that the ECB should consider the long-term reputation of the euro since it is “the second most important” currency in the world.
“I think there are other ways to finance the reconstruction of Ukraine,” Guindos concluded.
Brussels has been seeking a way to swiftly implement plans to apply a windfall tax on the profits generated by frozen Russian Central Bank assets and tap those proceeds for Ukraine’s reconstruction. The ECB and other experts have warned against such a move, especially since estimates suggest that more than €200 billion of the sanctioned sovereign assets are in the EU.
According to the World Bank, the European Commission and the United Nations, reconstruction costs for Ukraine are upwards of $411 billion. It is recalled that in November 2022, European Commission President Ursula von der Leyen told bloc leaders that a plan to allocate confiscated Russian assets toward such costs is being worked.
“Russia and its oligarchs have to compensate Ukraine for the damage and cover the costs for rebuilding the country,” the EC president stated at the time. “And we have the means to make Russia pay. We have blocked €300 billion of the Russian Central Bank reserves, and we have frozen €19 billion of Russian oligarchs’ money.” The EU also set up in February 2023 a working group to determine whether frozen Russian assets could be allocated to Ukraine’s reconstruction.
It is believed that the EU and G7 countries have seized half of the total Bank of Russia assets held abroad since the Russian military operation began in February 2022. The European-held assets now sit in Belgium’s clearinghouse, Euroclear, and this has generated debate among policies because of the legal and political issues.
Leyen’s confidence last year has not materialised, though, and US Secretary of the Treasury Janet Yellen admitted in February that there were significant obstacles in confiscating major frozen Russian assets.
“We have, on this small scale, seized assets, but there are certainly legal challenges in doing more than that,” she explained to Reuters at the time.
The bigger issue, however, is not how to utilise Russian funds to reconstruct Ukraine but the long-term damage the West has inflicted on its financial institutions and reputation by pursuing illegal methods to hurt Moscow. Guindos’ recent statement is not the first time that the ECB has warned about the damage that pursuing such a policy will have.
In June, the ECB warned that other central banks could “turn their back[s]” on the euro if interest-rate proceeds from the Russian frozen assets are used, especially if the EU acts unilaterally without other G7 countries, according to a draft internal EU note reported on by the Financial Times. “The implications could be substantial: it may lead to a diversification of reserves away from euro-denominated assets, increase financing costs for European sovereigns and lead to trade diversification,” the note added.
The ECB’s warnings come amid the ongoing global trend of de-dollarisation, divorcing from Western institutions, and the construction of non-Western financial systems by Moscow and Beijing. However, as an Al-Jazeera report noted back in March, “It isn’t just Beijing and Moscow. From India to Argentina, Brazil to South Africa and the Middle East to Southeast Asia, nations and regions have accelerated efforts in recent months towards arrangements to reduce their dependence on the dollar. At the heart of these de-dollarisation initiatives is the fear in many capitals that the US could someday use the power of its currency to target them the way it has sanctioned Russia, according to political economists and sanctions experts.”
Although the ECB and innumerable global experts have warned against using frozen Russian assets to reconstruct Ukraine, it appears that many in the European Union are still pursuing the reckless policy without even considering the long-term effects this could have on their global image, especially as countries like Saudi Arabia, India and Brazil continue to rise. Many of these countries do not distinguish between the EU and the US and see a wider West weaponizing their financial institutions and currencies.
