Stay informed with free updates
Simply register at War in Ukraine myFT Digest – delivered straight to your inbox.
The United States is urging Europe to cut taxes on income from frozen Russian assets under a proposal to finance Ukraine by borrowing against future profits, which it says would free up $50 billion. dollars.
Daleep Singh, US deputy national security adviser for international economics, told the Financial Times that the G7 was discussing an idea from Washington to advance the value of interest income on assets to channel money in kyiv this summer.
Western allies tied up 260 billion euros of Russian central bank assets after Moscow invaded Ukraine in February 2022, but have since been divided over what to do with the frozen funds.
Washington favors confiscating the entire reserves and handing them over to Ukraine, but many European officials have warned that such a move would violate international law, destabilize global markets and undermine the status of the euro. .
Instead, the United States proposed last week that tens of billions of euros could be raised for Ukraine by guaranteeing loans against future profits generated by frozen assets. He hopes to secure an agreement from allies by the G7 leaders’ summit in Italy in June.
Singh said the move could involve an issuance of bonds to the private sector or a loan by one or more G7 governments that would be repaid first through interest income. He argued that allies should work to unlock about $50 billion in funding for Ukraine through this proposal.
But for the idea to work, Singh told the FT it would be essential to “maximize annual interest income” from the assets.
By discussing how money is reinvested and changing the tax treatment of income streams, the value of interest payments could reach €5 billion a year, he said.
“Where the assets are invested is important, but so is the degree of taxation,” he said. “We should maximize every euro of these locked-up reserves for the benefit of Ukraine.”
Lenders would need assurance of being repaid, which could be achieved by setting aside a certain percentage of reserves, he said.
But the US may still struggle to get Europe to agree to its latest proposal, with setting aside 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 plans or proposals to get around what many other jurists or lawyers – including in some administrations of this country – consider it a very serious legal obstacle which can be interpreted as a violation of the international legal order.
The urgency to provide additional liquidity has been reinforced by the months-long impasse in the US Congress over the Ukraine aid plan. The House of Representatives is expected to vote this weekend on sending $60 billion in new military aid to kyiv.
The bulk of the Russian central bank’s assets – around 190 billion euros – are held at Euroclear, a central securities depository based in Belgium. These have generated €3.85 billion in after-tax profits since Russia’s full-scale invasion.
Belgium taxes these profits at the usual corporate rate of 25 percent. Since the start of the war, it has collected 1.2 billion euros, according to Euroclear financial statements, and is expected to earn another 1.7 billion euros this year.
Removing these taxes would require “significant legal changes to the corporate tax system in Belgium”, said one person involved in the discussions, who therefore considered it unlikely to happen.
EU countries are trying to reach an agreement to return around 3 billion euros in profits to kyiv this year, which will mainly be spent on military purposes. But Singh said the downside of making such annual transfers is that “it might be too little and too late to make an appreciable difference for Ukraine.”
Valdis Dombrovskis, executive vice-president of the European Commission, said he hoped decisions could be made on the subject “in the coming months”.
“This work should not be seen as a replacement for financial support from international donors, but rather as a complement to it,” he told the Financial Times.
Singh said that even if Congress approved the U.S. package, it would not diminish the importance of the proposals regarding Russian assets. “Mobilizing sovereign reserves would only strengthen the impact of the additional program [aid package] rather than replacing it,” he said.
“The numbers are important in terms of the direct impact and also the signal they would send to Putin that he cannot outlive us. »
