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The United States is urging Europe to cut taxes on earnings from frozen Russian assets as part of a proposal to finance Ukraine through loans against future profits that it says will free up $50 billion.
Daleep Singh, US deputy advisor for national security and international economics, told the Financial Times that the G7 is discussing Washington’s idea of advancing the value of interest income on assets to get the money to Kiev as early as this summer.
Western allies tied up 260 billion euros of Russian central bank assets following Moscow’s invasion of Ukraine in February 2022, but have since been divided over what to do with the frozen treasury.
Washington favors outright confiscation of the reserves and handing them over to Ukraine, but many European officials have warned that such a move would violate international law, disrupt global markets and undermine the status of the euro.
Instead, the United States last week proposed raising tens of billions of euros for Ukraine by guaranteeing loans against future profits from the frozen assets. It hopes to get the allies’ agreement at the G7 leaders’ summit in Italy in June.
Singh said the move could involve issuing bonds to the private sector or a loan by one or more G7 governments that would be repaid primarily with interest income. He argued that allies should aim to unlock around $50 billion in financing for Ukraine through the proposal.
But for the idea to work, Singh told the FT it would be crucial to “maximize the annual interest income” from the assets.
By discussing where to reinvest the money and changing the tax treatment of income streams, the value of interest paid could reach up to 5 billion euros a year, he said.
“Where the assets are invested matters, but the level of taxation also matters,” he said. “We should maximize every euro from these locked reserves for the benefit of Ukraine.”
Lenders would need a guarantee of being repaid, which could be achieved by setting aside a certain percentage of reserves, he said.
But the United States is still likely to face an uphill struggle to get Europe to agree to its latest proposal, with the setting aside of reserves as collateral likely to be controversial.
European Central Bank President Christine Lagarde said during a visit to Washington DC this week: “I have seen four different schemes or proposals to get around what many other jurists or lawyers – even in some administrations in this country – consider to be a very serious legal obstacle. serious that can be interpreted as a violation of the international legal order”.
The urgency of bringing forward extra money has been heightened by a months-long stalemate in the U.S. Congress over the aid package for Ukraine. The House of Representatives is expected to vote this weekend on sending $60 billion in new military aid to Kiev.
The majority of the Russian central bank’s assets – around 190 billion euros – are held at Euroclear, a central securities depository based in Belgium. These generated €3.85 billion in after-tax profits from Russia’s full-scale invasion.
Belgium taxed such profits at the normal corporate rate of 25%. Since the start of the war, according to Euroclear’s financial statement, it has raised 1.2 billion euros and is expected to earn another 1.7 billion this year.
Waiving these taxes would require “significant legal changes to the corporate tax system in Belgium”, said a person involved in the discussions, who therefore believes this is unlikely to happen.
EU countries are trying to reach a deal to hand Kiev around 3 billion euros in profits this year, to be spent mainly on military purposes. But Singh said the downside of making such annual transfers is that “it may be too little too late to make an appreciable difference for Ukraine.”
Valdis Dombrovskis, executive vice-president of the European Commission, hopes that decisions on the matter can be made “in the coming months”.
“This work should not be seen as something that replaces financial support from international donors, but rather as a supplement,” he told the Financial Times.
Singh said that even if Congress passes the U.S. package, it would not diminish the importance of the Russian resource proposals. “Mobilizing sovereign reserves would only strengthen the impact of the supplement [aid package] rather than replacing it,” he said.
“The numbers are important in terms of direct impact and also for the signal they would send to Putin that he cannot survive us.”