The use of Russian assets has had little impact on financial markets — good news for the EU and Ukraine, stresses a Ukrainian economist.
Since 2022, Western partners have played a crucial role in maintaining Ukraine’s economic resilience. However, future financing depends on political consensus.
Given the ongoing war, Ukraine needs reliable, multi-year funding to sustain its defense and essential state services. Cutting financial support would increase the likelihood of Ukraine’s defeat and shift Russia’s security threat directly to the EU’s borders, resulting in higher defense costs than current aid levels. Securing additional funding from the budgets of EU member states seems politically difficult in light of strained public finances.
A feasible solution, therefore, appears to be the use of Russian assets held in Europe, which were frozen in 2022 and of which more than 60 percent are managed by the financial company Euroclear in Brussels. Recently, the European Commission proposed a “reparations loan” worth €140 billion, using already due but frozen Russian assets as collateral.
Ukraine would only begin repaying the loan once Russia pays reparations. Although this proposal does not involve confiscation (and therefore carries virtually no legal risk), Belgium recently blocked it, partly due to concerns that such a step could unsettle European financial markets.
However, data shows these risks are overstated. Since Russia’s full-scale invasion of Ukraine, European financial markets have been under stress. Yields on German government bonds — the benchmark for safe assets in the euro area — have risen sharply compared to pre-war levels. Initially, short-term yields jumped, reflecting uncertainty and the European Central Bank’s (ECB) tightening of monetary policy in response to the inflation shock. Long-term yields rose more slowly but remained elevated, indicating persistent geopolitical and fiscal risks.
A new study by Centre for Economic Strategy (CES), based on movements in EU government bond yields, shows how markets reacted to announcements about the use of frozen Russian assets. The effects were minimal and short-lived. When the assets were first frozen in 2022, without any plans for their future use, there was no significant market reaction. Investors viewed the freeze as a legal and political step that neither changed the financial environment nor created new uncertainties.
No lasting rise in borrowing costs
The picture shifted slightly when discussions moved from freezing to using the assets, particularly to support Ukraine. At that time, European governments’ borrowing costs rose modestly — mainly for ten-year bonds, which serve as a benchmark for medium-term financing. Yet the increase was small, comparable to movements typically seen after a minor credit rating downgrade or other general negative news.
Equally important: these fluctuations faded within days and almost completely disappeared within two weeks. Markets did not reassess risks further, and there was no sustained rise in borrowing costs across EU member states. Long-term (30-year) bonds, which would reflect deeper concerns about legal risks or financial stability, showed virtually no reaction. Short-term (2-year) bonds fluctuated slightly more but quickly returned to previous levels.
This consistent pattern is revealing: investors followed the news on Russian assets closely but remained calm. They briefly adjusted to new information and then returned their focus to fundamentals — inflation, interest rates, and the overall economic outlook. The use of frozen Russian assets was not perceived as a structural threat to Europe’s financial system.
Uncertainty costs more than using the assets
This evidence shows that fears of financial instability are overblown. However, the debate over potential risks has taken on a life of its own, and that, in itself, is becoming a problem. The strategy now should be not to delay action but to communicate and implement measures clearly and carefully. Here are several policy recommendations.
- Unified communication. EU institutions should outline the legal steps and process of the reparations loan in a single, coordinated message, including to G7 partners. A unified stance removes ambiguity and reassures investors that decisions are well thought out.
- Timing adjustments. National financial authorities can make small, routine timing adjustments, for instance, avoiding the sale of large volumes of 10-year bonds in the days following major announcements. Such tweaks are simple and inexpensive ways to smooth short-term market turbulence without altering broader financing strategies.
- Clear monetary policy separation. The ECB and national central banks should emphasize that monetary policy remains independent of decisions concerning Russian assets. They should also remind markets that instruments to maintain stability remain available.
- Finally, Ukraine should present a clear plan for using these funds, with focus on defense, reconstruction, and essential public services, while coordinating communication with its EU and G7 partners.
Source: Frankfurter Allgemeine Zeitung
