Protecting the euro: what happens if the EU uses frozen Russian assets

Next week, the European Council will revisit discussions on how it should use frozen Russian assets to support Ukraine. The topic jeopardizes confidence in the euro, economists warn. But Sergey Romanchuk, a financier and member of ACI's Foreign Exchange Committee, believes that the market is not taking this threat seriously yet. There are four reasons for this.

One of the main political and financial topics of recent weeks is the EU's discussion of a scheme to finance aid to Ukraine from frozen Russian assets. After the outbreak of a full-scale war in 2022, EU countries, the G7 and Australia blocked about €300bn of the Russian Central Bank's reserves. Most of these funds - about €185 billion - are held in the Belgian depository Euroclear, making Brussels a key link in any scheme.

One of the ideas is a "reparation loan", in which funds are actually lent to Ukraine at 0% under the guarantee of future reparation payments from Russia. The initiative is intended to solve the problem of the Ukrainian budget deficit, which has become critical due to the reduction of US aid. It is assumed that such a loan will be repaid only if Russia eventually pays reparations.

The possibility of using the blocked assets of the Russian Central Bank to finance a "reparation loan" was discussed at a meeting of the European Council on October 23, 2025. But no decision could be made. Belgium, where Euroclear is located, is against such a scheme. It is expected that the issue will be discussed again at the next meeting of the European Council on December 18-19, 2025.

Brussels is well aware that any decision on frozen reserves could have long-term consequences. Russia retains formal claim rights to these funds, mostly deposited in Euroclear. On December 12, the Central Bank of Russia has already stated that it considers the direct or indirect use of its assets to be "illegal and contrary to international law" and filed a lawsuit against Euroclear to recover damages - in the Moscow Arbitration Court.

Belgium has even requested additional financial guarantees from the EU - it needs a "cash buffer," or insurance for Euroclear, to protect it from potential retaliation from Russia, Politico wrote. No specific amount has been named, but it should cover expenses that Euroclear may incur, such as legal fees, and compensate for potential losses.

That is why the Europeans deliberately designed the scheme in such a way that formally it does not look like a direct confiscation: it is a loan against assets.

But even as it stands, the proposed plan has predictably sparked intense controversy over legal risks, confidence in the euro and potential retaliation by other countries.

The European Central Bank and Euroclear itself are being extremely cautious. Their mandate is to preserve the reliability of the European financial system and the sustainability of the euro as the world's reserve currency.

Talks about the use of Russia's sovereign funds have been going on since they were frozen in 2022. As the Financial Times wrote Saudi Arabia and Indonesia, for example, feared for the future of their own reserves held in the West. And as early as 2024, Saudi Arabia's finance minister warned that his country might sell some of its European debt assets if Russian reserves were confiscated. Chinese authorities have also criticized the proposal to use frozen Russian assets to help Ukraine.

Sovereign fund managers cannot ignore political risk and the potential need for a premium for holding euro-denominated assets when discussing resource allocation. Many notable economists and bank analysts share these concerns. For example, Harvard University professor Kenneth Rogoff has warned that using frozen Russian funds to help Ukraine in the form of a "reparation loan" is a risk "to the safe status of the euro."

The logic here is clear: if one day large sovereign assets are finally used without the owner's consent, the long-term attractiveness of the euro as a reserve currency for third countries should diminish.

However, actual market data does not yet confirm the scale of these concerns. News about the discussion of the mechanics of the use of Russian reserves does not have a noticeable impact on the euro exchange rate: this topic has not yet become the dominant market narrative determining the behavior of currency market participants.

On February 28, 2024, European Commission President Ursula von der Leyen publicly stated that "it is time to start talking" about using windfall profits from frozen Russian assets to buy arms for Ukraine. How did the euro react? A move of about 0.3% for the day - within the normal daily noise for EUR/USD. There were no "euro falls on news of Russian reserves" reports in either reviews or comments, and the market was alive with US Fed rates and inflation data. On Ma 21, 2024 , the EU formally decided to use the profit from frozen Russian reserves (not the capital itself) to support the defense and reconstruction of Ukraine, the euro exchange rate was not affected.

Commerzbank wrote before the EC summit on October 23 this year that potentially using frozen Russian assets to help Ukraine is "another critical point that could affect the future of the euro." The bank's analysts explicitly warn of the risks to the attractiveness of the eurozone and the euro's status as a reserve currency. The topic is actively discussed in analytics as a structural risk, but the spot price was hardly affected.

On Dec. 3, the European Commission unveiled a plan to use frozen Russian assets or borrow against them to raise about €90 billion for two years of support for Ukraine. The euro rose 0.3% on expectations of a Fed rate cut, with analysts pitching the political news as a secondary story in market commentary.

Why is the market reacting this way? There are several reasons.

Firstly, in the short term, euro quotes are much more dependent on other factors: interest rate differentials between the US and the eurozone, macroeconomic statistics, the dynamics of bond yields and the general level of risk appetite.

Fluctuations in the share of the euro in the official reserves of central banks are important from the point of view of the status of the currency, but by themselves create relatively small capital flows and rarely lead to a sharp shift in short-term market equilibrium. A significant impact on the exchange rate in the short horizon is usually caused by targeted currency interventions, which is not the case here.

Second, the discussed scheme of using Russian assets as collateral for a loan may be perceived by investors in European assets as less radical than a direct seizure. The same Rogoff, for example, adds: the European Commission's proposal is a "reasonable way" to provide funds to Ukraine, while Russia can agree on full repayment of the debt as part of the conflict settlement.

In fact, the CBR assets placed in the West have lost their functional reserve value as early as 2022. The Russian central bank has no access to these funds and cannot use them for interventions or settlements. In other words, a precedent has already been set, and countries that see the risk of a similar scenario for themselves took it into account in their reserve allocation strategy three years ago.

That is, the political risk associated with the freeze is already included in the assessment. From this point of view, the current discussions in the EU change only the legal "wrapper", but not the very fact of inaccessibility of Russian assets.

Thirdly, investors may consider the current situation as exceptional. Ukraine, even if not legally, is politically perceived as part of the European space, and Europe has long been providing Kiev with large-scale financial and military support.

If China, Indonesia or Saudi Arabia seriously envision such a scenario of a direct military confrontation with the EU, they cannot ignore this risk in their reserve allocations. But for most of these countries, the probability of such a development seems extremely low. At the same time, the EU is trying to act as carefully as possible in the legal field to minimize the perception of a radical change in the rules of the game.

Fourth, the euro has almost no comparable competitors in the role of the world's second reserve currency. Nor, for that matter, does the dollar as the first. Periods of unconventional economic and financial policies in the US, including the presidency of Donald Trump, have indeed increased the perception of the risks of owning the dollar and pushed some investors to diversify into the euro and gold, among others.

Other currencies have even less claim to the role of "safe harbor": there is simply no comparable financial market in terms of depth and liquidity.

China is in no hurry to fully open its financial account and liberalize capital flows. Japan's economy is much smaller than that of the US, EU or China, and the yen-denominated government debt market is undergoing its own structural shifts with rising yields. Switzerland is too small to accommodate all potential flows. Gold remains the main beneficiary of the erosion of confidence in traditional jurisdictions.

Whatever the final decision in Brussels regarding Russian assets, it will not change the list of available alternatives: in the foreseeable future, the euro will continue to occupy the second place in the global hierarchy of reserve currencies.

I believe that the fate of the euro and its exchange rate dynamics will depend more on how and when the war in Ukraine ends than on the formal fate of the frozen Russian funds. Political expediency forces European leaders to choose "the lesser of evils".

The largest military conflict in Europe since World War II is a very different kind of risk for the euro: it will determine changes in the economy, fiscal policy, the structure of debt markets and financial flows, with different consequences on different horizons. Military spending could, for example, stimulate economic activity in the short term, while a significant part of the "reparation loan" financing would actually go to support the European military-industrial complex.

At the same time, unfavorable scenarios cannot be ruled out: the defeat of Ukraine and, in the extreme case, a direct military clash between Russia and NATO. All this changes the risk profile of Europe in a qualitatively different way and, accordingly, the fundamental factors for the euro.

In this context, the key political choice is where, how and to whom to mobilize resources to support Ukraine now and reduce risks in the future. Against the background of these tasks, the question of what exactly will happen to the euro exchange rate in the short term is objectively receding into the background.

This article was AI-translated and verified by a human editor