The European Commission has been under pressure to secure long-term financing for Kyiv. Its most likely option — a €140bn “reparation loan” backed by immobilised Russian state assets — has drawn criticism from Euroclear, the main custodian of the funds.
According to the Financial Times, Euroclear chief executive Valérie Urbain warned in a letter that “the resultant risk premium will lead to a sustained increase in European sovereign bond spreads, raising borrowing costs for all member states”.
The concern centres on whether investors view the scheme as amounting to confiscation, which is prohibited under international law. Any perception that foreign reserves held in Europe could be at risk might undermine trust in European financial systems, driving up bond yields.
Yet analysts interviewed by Euronews Business say the current proposal carries far less risk than the EU’s original move in 2022 to freeze Russian central-bank assets — an action that caused only a brief shift in bond markets.
Robert Timper, chief strategist on the Global Fixed Income Strategy team at BCA Research, said: “I don’t expect much of a market reaction to this, so there won’t be any cost to governments in terms of a higher debt service cost.”
He continued: “The immobilisation of Russian assets in 2022 was a first and is what mattered for asset owners, as it meant that they lost access to these assets”. He claimed: “What ultimately is done with these assets should have a much smaller effect.”
The EU froze billions of euros of Russian assets on 28 February 2022, four days after Moscow launched its full-scale invasion of Ukraine.
Nicolas Véron, senior fellow at the Brussels-based think tank Bruegel, said: “It was a constraint put on the Russian reserves and therefore a demonstration to the world that, given the circumstances, the EU was willing to put big constraints on reserves held on its territory.” He added: “That didn’t rock global markets.”
Capital Economics similarly argued that fears of a broad retreat by foreign central banks or sovereign wealth funds from European markets are overstated. “Even if there is some loss of confidence, the impact would likely be small as there is a limited range of liquid, high-quality assets that central banks can invest in outside Western financial markets,” it wrote in a recent report.
Concerning the shifting trends in the bond market, Timper added that since the immobilisation of the Russian assets in 2022, “we have observed a broad shift by central banks, especially in China and emerging markets, to gold as a reserve asset. This trend is likely to continue, but was already underway before the recent discussions around the use of Russian assets.” He expects this diversification trend to continue but added that so far this “has had little effect on sovereign bonds”.
How the loan would work
While the details haven’t been released, Capital Economics said in their report that Euroclear would use the cash it holds on behalf of the Russian Central Bank (CBR) to invest in a long-dated, zero-coupon EU bond. Euroclear’s assets would change from cash balances to an EU bond, but its liability to the CBR would remain unchanged. This is key to holding up the law, which prohibits confiscation.
The proceeds from the bond would then be used by the EU to lend to Ukraine.
As Euronews reported earlier, Ukraine would be asked to repay the loan only after Russia ends its war of aggression and agrees to compensate for the damages caused. After that, the Commission would repay Euroclear, and Euroclear would repay Russia, completing the circle. The Commission insists this is not confiscation.
The loan would be guaranteed by the participating member states, who step in if there is not sufficient reimbursement of the loan. According to the current plans, Russia would be able to recover the assets if it agreed to pay reparations, but that is seen as virtually impossible.
CEO of Euroclear Valérie Urbain said in her letter that forcing Euroclear to invest in “zero-interest tailored-debt instrument funding” in order to enact the scheme would be seen as confiscation by Russia, leading to retaliation and potential legal challenges that Euroclear should be covered for.
Bruegel’s Véron agreed that the main threat comes from Russia’s response: “This is not a confiscation… but there will be Russian propaganda saying it is a confiscation.” He added: “It’s not outlandish to imagine that if the reparations loan is decided, Russia will do something that may be detrimental to the global markets.”
Capital Economics also cautioned that tit-for-tat measures could carry economic costs, noting that Moscow has already complicated Western companies’ efforts to exit the Russian market.
Belgian Prime Minister Bart De Wever raised concerns at last month’s EU summit, demanding bulletproof guarantees from all member states to ensure Euroclear is protected from losses or retaliation.
The Commission meanwhile, faces mounting pressure to outline its plan, particularly as a current US peace proposal suggests the Russian assets should be used to establish US-led investment funds in Ukraine and Russia.
In an interview with Europe Today, European commissioner for economy and productivity Valdis Dombrovskis said a reparation loan backed by frozen Russian assets is “what can provide sizeable support for Ukraine without putting additional and substantial fiscal burden on the EU or its member states”.
Véron expects the plan to be finalised by the end of the year, with disbursements potentially starting in the first quarter of 2026, pending parliamentary approvals in several member states.
Ukrainian President Volodymyr Zelenskyy has said the funds are needed in 2026, ideally “at the very beginning of the year”.
A €140bn loan would be substantial — roughly 80% of Ukraine’s GDP last year and about 0.8% of EU GDP.
The financing ultimately depends on political agreement. Ukraine needs stable, multi-year support to maintain its defence effort, but many EU states are constrained by high debt levels. Failure to provide funding, however, risks increasing the chance of Ukraine’s defeat and bringing Russia’s security threat closer to the EU’s borders.