EU governments have been looking to use immobilized Russian assets to fund financial support for Ukraine, which, despite concerns by critics, is unlikely to have major reputational or financial consequences for the eurozone and euro financial assets. But should intra-EU agreement on how to do so remain elusive, European governments will have the option of providing financial support on a bilateral basis. During a summit on Dec. 18-19, the governments of the European Union will discuss ways to continue providing funding to Ukraine, which remains highly dependent on foreign financial support to continue the war against Russia. With much-reduced support from U.S. President Donald Trump's administration, European governments are faced with great pressure to provide funding. Increasing domestic spending pressures, as well as large fiscal deficits and high debt ratios, have led them to look for ways to lend support without incurring further liabilities. EU governments are quite capable of providing funding on a bilateral basis by issuing debt, but prefer to make use of Russian assets to reduce domestic political opposition to increased Ukraine funding, as well as to save interest costs. Currently, European governments are trying to make use of Russia's blocked assets held in various jurisdictions, particularly Belgium, to mobilize funding worth 140 billion euros ($165 billion), of which 90 billion euros is to be disbursed in 2026-27. The so-called reparations loans would see European governments lend blocked Russian assets to Ukraine. The European government would then only repay Russia if Moscow were to pay war reparations to Ukraine.

• In June 2024, G7 members, including three EU members, agreed to provide a $50 billion loan to Ukraine that will be repaid by the profits accruing on immobilized Russian central bank assets.
• Total Russian central bank assets held in Europe amount to an estimated 210 billion euros. Some 192 billion euros is held by Belgium, split between 185 billion euros held by Euroclear and another 7 billion euros held by commercial banks. In addition, France, mainly French banks, sits on 18 billion euros of assets. By comparison, only $5 billion is held in the United States.

EU efforts to use frozen Russian assets to support Ukraine are being constrained by legal risks and Belgian opposition. For weeks, EU governments have been trying to convince Belgium, which opposes the plan in its current form on account of the bulk of the Russian assets being held by Belgium-based securities depository Euroclear and thus facing the greatest financial risks. International law generally allows sovereign assets to be immobilized, but not to be seized. Belgium is concerned that it might be legally required to compensate Russia if the loan arrangement were to be ruled illegal or the block on Russian assets removed. It is also feared that Russia could retaliate by seizing the assets owned by Belgian and European companies in Russia. On Dec. 12, the European Union took a major step to assuage Belgian concerns by freezing the assets of the Central Bank of Russia (CBR) indefinitely, or until a qualified majority votes to unblock them. While the European Court of Justice may eventually rule that this decision was illegal, in the short to medium term, it minimizes the risk of the block on Russian assets not being extended due to opposition from some member states like Hungary or Slovakia. In response, the CBR filed a lawsuit in Moscow seeking damages, which will likely lead to the seizure of 17 billion euros' worth of Euroclear-owned assets held by Russia. Against this backdrop, Belgium remains adamant that it will not support the EU plan during the Dec. 18-19 European Council summit. According to media reports, other countries, most notably Italy, are also skeptical of the plan.

• The EU Commission has also proposed a European Central Bank-backed liquidity facility to ensure the ability to immediately honor Russian claims in case the assets are unfrozen. The ECB strongly opposed the move, which it claimed would represent monetary financing of government debt. The ECB is very likely to prevail here because the Maastricht Treaty prohibits the financing of government deficits and EU governments will have to find a different workaround to deal with liquidity risks.
• Canada, Japan and the United Kingdom, though not the United States, have signaled their willingness to align their policies with the European Union. The UK holds an estimated $34 billion worth of Russian central bank assets. Norway is looking into providing credit guarantees for the loan to help address Belgium's concerns about disproportional risks it faces. This will help reduce the relative reputational costs to the euro.

If EU governments fail to reach a decision to use the frozen Russian assets, many of them will lend money to Ukraine on a bilateral basis. Lending Russian assets to Ukraine would allow the European Union to provide support without having to issue interest-bearing debt. But unless Ukraine repays the loan — which it only needs to do if Russia pays war reparations as per the present loan agreement — European governments will remain on the hook for all CBR claims, even if they remain frozen indefinitely. This also means that if the assets are unfrozen and Russia has not paid Ukraine, either Ukraine will have to repay the loan, which is highly unlikely, or EU governments will need to issue debt to repay Russia. Should an agreement not be reached, most EU governments will likely end up providing financial support on a bilateral basis, as the negative consequences of an outright Ukrainian defeat outweigh the financial costs. European governments are quite capable of providing financing on a bilateral basis, as 200 billion euros is equivalent to 1% of EU GDP, meaning that keeping Ukraine afloat for the next two to two and a half years would add a mere 0.5% points of GDP to the 2026 and 2027 fiscal deficits and add a point of GDP to the debt ratio. Providing financing by way of joint debt issuance is less likely given the opposition of the more creditworthy EU member states, such as Germany and the Netherlands, which are concerned about being on the hook for the repayment of joint EU debt.

• The IMF estimates that Ukraine requires a total of 135 billion euros' worth of financing in 2026-27. The European Union foresees providing 90 billion euros as part of the reparations loan, in addition to other funding. The 140 billion euros that is meant to be mobilized under the war-reparations loan scheme would go a long way toward getting Ukraine financially to the end of 2028 and close to a possible change in U.S. policy as Trump's second term ends.
• Russia's central bank has filed a lawsuit for damages arising from the EU decision to freeze its assets. The lawsuit was filed in Moscow and its main purpose is to pave the way to seize European assets held in Russia, primarily 17 billion euros' worth of assets owned by Euroclear.

If the European Union finally seizes the Russian assets, it will make some countries more wary of holding central bank reserves in European jurisdictions, as they will consider the indefinite block on assets as akin to expropriation, but any divestment efforts will be limited and their impact on European financial markets and euro financing costs will too. While the reparations loans may provide geopolitical adversaries with incentives to reduce their holdings of euro area assets, most euro creditor countries have friendly relations with the EU and would not divest their euro assets. The only two governments that hold significant amounts of euro assets are China ($3.4 trillion) and Russia ($730 billion). Russian assets have already been immobilized and hence cannot be divested. While China may hold up to an estimated $600 billion of euro-denominated assets, it is unlikely to divest a significant share of its euro holdings, not least because of a lack of alternatives. The People's Bank of China might stop accumulating euro assets or it might even sell a small share of its reserves, but not being at immediate risk of EU sanctions, it would at most reduce euro holdings to a level more in line with its external euro liquidity needs. (Besides, a large sale of euro assets would drive up the renminbi-euro exchange rate and undermine Chinese exports to the euro area.) After all, it will want to hold euros to support trade transactions. Most other reserve-issuing countries, such as Canada, Japan and the United Kingdom, will likely fall in line with the European Union in terms of reparations loans, which means that the euro will not become less attractive on a relative basis, thus limiting diversification opportunities. Finally, from Beijing's perspective, holding dollars is even riskier than holding euros. In conclusion, the impact on the euro following the extension of the reparations loan will be limited and manageable.

• The share of gold in global central bank reserve assets has increased significantly due to increased central bank purchasing and increasing gold prices. The share of gold in official reserve assets has increased from around 10% in 2016 to 25% today. China has continued efforts to reduce its dependence on the dollar in the wake of the Russian invasion of Ukraine. It has also stepped up gold purchases, driven by concerns about the stability of the dollar, financial sanctions and increased geopolitical uncertainty.