Brussels’ contentious plan to use frozen Russian sovereign assets to backstop up to €210bn in loans to Ukraine is testing the EU’s political and legal framework to the limit.

But it could also have big consequences for the bloc’s financial markets.

Some fund managers warn that a move to use the frozen assets would drive up the political risks of owning euro assets, and even cast doubt over their status as a global haven.

What is the commission proposing? 

The European Commission has proposed a “reparations loan” for Kyiv, made against the Russian central bank assets, the bulk of which are held at Belgian securities depository Euroclear.

The EU would borrow the money from Euroclear and lend it on to Ukraine at zero interest. Ukraine would be obliged to repay the money after Russia pays postwar reparations, with the frozen assets acting as collateral.

The commission and its legal advisers say this does not amount to confiscation of the assets, as Russia would still retain a claim on the cash and other assets. 

A legal move proposed by the commission would indefinitely lock in the sanctions that have frozen the assets since Russia’s full-scale invasion of Ukraine in February 2022, to ensure Moscow cannot repatriate the cash before it pays reparations. However, some states — most particularly Belgium — remain concerned about the plan.

Why is this relevant to the euro? 

The euro is the world’s second-largest reserve currency, with central banks holding low-risk Eurozone debt such as German Bunds in their rainy day funds. In 2024, the euro accounted for 20 per cent of global central banks’ foreign currency reserves, compared with 58 per cent for the US dollar, according to ECB data.

Policymakers have advocated for the euro playing a more prominent role internationally amid concerns over the status of the dollar this year. But a move to access Russian funds could make central bank reserve managers and other low-risk investors more nervous about holding euro assets, if it makes them seem more vulnerable to the risk of sanctions and geopolitical tensions.

The risk, investors say, is of the kind of reappraisal that the greenback has faced in recent years, as a combination of US sanctions and the Trump administration’s economic policies has left reserve managers wanting to diversify away, for example by buying up record amounts of gold.

“There is a risk [from such a move] to the safe status of the euro,” said Kenneth Rogoff, a Harvard professor and former chief economist of the IMF, but the currency was also threatened by the risk of “future Russian encroachment on Europe’s borders”, he added.

The commission’s proposal was a “reasonable way” to supply funds to Ukraine, he said, adding that Russia could still negotiate full repayment as part of a war settlement.

How are investors reacting? 

Some investors argue there is a risk of undermining the euro’s haven status, despite the single currency gaining more than 12 per cent against the dollar this year.

“Seizing Russian assets is an extremely sensitive issue,” said Christian Kopf, head of fixed income and FX at German asset manager Union Investment. 

If Europe wanted to enjoy a safe haven status similar to Switzerland’s, “it must not interfere with property rights”, he said, adding that the rule of law historically has been one of Europe’s big comparative advantages.

Kevin Thozet, a member of the investment committee at asset manager Carmignac, said such a move would “question the reserve status of the currency”, saying the single currency could suffer as investors demand a “geopolitical premium” for holding euro assets. 

But others said Russia was a special case and the market had been aware of the risk of confiscation since the assets were frozen three years ago. 

“This has just been prepped for so long now,” said Robert Dishner, senior portfolio manager at Neuberger Berman.

Why is the ECB sceptical? 

The European Central Bank’s concerns are twofold. An early version of the commission’s plan was to use the central bank as a lender of last resort to Euroclear.  

Euroclear holds the bulk of the frozen Russian assets and might be liable to refund Russia if the country successfully challenged the freezing of the assets in court. The ECB dismissed a lending promise to the institution out of hand, saying it was illegal, as it was akin to direct funding of governments. Such monetary financing is banned under EU law. 

While Brussels’ latest proposal does not involve an active role by the ECB as lender of last resort, its president, Christine Lagarde, still warned MEPs the plan was at least pushing the boundaries of international law. The proposal is something that is “stretched [and] that hopefully is in compliance with international law” she said this week, adding that Europe’s global reputation could be at stake. 

Karsten Junius, chief economist at Swiss private bank J Safra Sarasin, said the perception of Europe as a region with strong adherence to the rule of law had been one of its critical assets among global investors. Should this be undermined, investors in Asia and the Gulf may look elsewhere, potentially resulting in a weakening of the euro over the medium to long term. 

The ECB’s scepticism is being viewed positively by some economists. 

“The ECB declining to provide backstop is positive for safeguarding the safe-haven status of the euro,” said Mahmood Pradhan, head of macro at the Amundi Investment Institute.

Its opposition to a backstop “draws a firm line” between the ECB’s monetary policy and the EU’s support for Ukraine, he added.

How have EU politicians responded to concerns?

Opposition in large Eurozone capitals to any move to tap the assets on the grounds of market destabilisation has steadily eased as the almost four-year-long war has ground on.

Berlin’s stance exemplifies that shift: Germany was previously in lockstep with the ECB in firmly warning against any schemes to use the assets, but Chancellor Friedrich Merz is now the driving force behind the reparations loan proposal.

That is down to three factors, according to officials and diplomats. Firstly, EU states have actively reached out to big non-European investors to assure them that such a move would not signal a new weaponisation of the euro and that their money was safe in the single-currency area. 

Secondly, the loan proposal is legally sound in terms of it not amounting to a seizure of the assets — still a red line for capitals such as Berlin and Paris — as Russia retains a claim on the full amount, its proponents say.

And thirdly, a political realisation that with EU national balance sheets already under pressure, there is no other alternative way to raise the sums of money that Kyiv requires to remain solvent and continue fighting in 2026 and 2027.

“This is . . . the consensus at the European level. There are absolutely no differences of opinion on this,” Merz said on Thursday. “This money must flow to Ukraine; it must help Ukraine.”