EU Support to Ukraine through Windfall Profits: Reparative Value, International Law, and Future Pathways
Over two years into the Russian Federation’s full-scale invasion of Ukraine, the fate of Russian assets frozen by Western sanctions is followed almost as closely as battlefield developments. Considering the figures at play (assets worth an estimated $300 billion), this is unsurprising. Ukraine’s recovery and reconstruction is estimated to cost at least $486 billion (and rising), with yearly defence costs for Ukraine (with international support) totalling an estimated $64.8 billion in 2023. Therefore, the European Union (EU)’s recent announcement that it is sending “windfall profits” of frozen Russian assets to Ukraine—estimated to total €3 billion per year—is a significant development. However, scrutiny is warranted.
This post analyses the EU’s windfall profits measure and the surrounding context from the perspective of international law. Although noting that the defence of Ukraine must remain a priority, we propose that the windfall profits (or a significant percentage of them) should be used to bring reparative value—addressing past and ongoing harm—to victims of the war.
The EU’s Windfall Profits Measure
On July 26, 2024, the EU announced that it had transferred €1.5 billion to Ukraine, stating that these “extraordinary revenues” originate from “immobilised Russian assets.” Although some media reporting described these funds as the “interest” that has arisen from frozen assets, the matter is more complex.
Since the full-scale invasion, an estimated €210 billion worth of assets belonging to the Central Bank of Russia (CBR), including the Russian National Wealth Fund, have been frozen within EU Member States by EU restrictive measures (sanctions). The vast majority of these assets were frozen while under the management of EU-based Central Securities Depositories (CSDs), particularly Euroclear.
Owing to the restrictive measures in place, EU-based CSDs are prohibited from making transactions (other than balance sheet management transactions) related to the management of reserves and assets of the CBR (see also Decision (CFSP) 2022/335 and Decision (CFSP) 2022/395). As a result, principal, interest, coupons, dividends, and other income on securities to the CBR gained through reinvestment of the liquid assets has accumulated into extraordinary cash balances and revenues. As CSDs are prohibited from transferring the revenues generated from the frozen Russian assets and are obliged to manage the funds, unexpectedly high profits have returned to the CSDs (for a summary, see Franchini).
Council Decision (CFSP) 2024/577 of February 12, 2024, amended underlying Ukraine-related EU restrictive measures legislation to require CSDs holding more than €1 million worth of the CBR’s assets and/or reserves to separately account for “extraordinary cash balances” that arise owing to EU restrictive measures from February 15, 2024, onwards (art. 1(8)). These CSDs are also required to separate related revenues and are prohibited from disposing of ensuing net profits to the benefit of shareholders or third parties (art. 1(8)(b) and (c)). On this basis, the EU Commission pushed for these funds to be transferred to Ukraine.
On May 21, 2024, Council Decision (CFSP) 2024/1470 realised this aim. This Council Decision again amended the underlying restrictive measures legislation and obliged CSDs to contribute 99.7 percent of “net profits” from the underlying cash balances (after deduction of corporate tax and retention of a small share to ensure compliance with capital and risk management requirements) to the EU which, in turn, will “be used to support Ukraine” (art. 1(2)(11)). The Decision specifies that 90 percent of the funds will be sent to Ukraine through the European Peace Facility, with the remaining 10 percent sent through EU programmes “financed from the Union budget” (Council Decision (CFSP) 2024/1470, art. 1(2)(11)), such as the Ukraine Facility.
The European Peace Facility largely relates to military and defence assistance, whereas the recently established Ukraine Facility aims to strengthen Ukraine’s financial stability, reconstruction, and reforms necessary for EU accession (Regulation (EU) 2024/792, art. 1(2)). Notably, although an estimated €5 billion has been gained by EU-based CSDs prior to 15 February 2024 from CBR assets frozen by sanctions, the EU decided to avoid acting retroactively to limit legal challenges (see here).
The EU’s windfall profits measure must, however, be distinguished from outright confiscation of CBR assets. Critically, the Council Decision of May 21, 2024, emphasises that the extraordinary revenues “do not constitute [Russian] sovereign assets” and thus “the rules protecting sovereign assets are not applicable” (para. 17). Determining the ownership of the “windfall profits” is of paramount importance as it has been suggested that if the revenues vested in Russia, confiscation of such funds and their transfer to Ukraine might breach the rules on temporariness and reversibility required if the EU relied upon the law of countermeasures as a legal basis.
By assuming that ownership of the revenues belongs to the CSDs within the EU (a point which was not immediately obvious (see here, p. 41)), the EU’s windfall profits measure only has the effect of further regulating CSDs and therefore does not require the doctrines of countermeasures and/or self-defence as justifications (see further below). Nevertheless, the contracts between Euroclear and the CBR are not publicly available, and CSDs could still challenge the measure within the EU courts (see Ripenko). Indeed, even before the funds were made available to Ukraine, Russian officials threatened unspecified legal action in response.
Alternative Funding Proposals and International Law
It is important to situate the CSDs’ windfall profits in the context of the discussion surrounding the proposed confiscation of Russian State assets. In recent years, there has been significant debate regarding the possible legal justification(s) for the confiscation of Russian State assets by executive action. In the main, two legal justifications have been posited by international legal scholars: countermeasures; and self-defence (e.g., see here, here, and here).
Third-Party Countermeasures
Russia’s act of aggression against Ukraine is a violation of international law: a position confirmed by the UN General Assembly (see here and here) and the International Court of Justice in its ruling on provisional measures in March 2022 (see p. 211, paras. 84 and 86(1)). This means that it also constitutes an internationally wrongful act within the meaning of Article 1 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts (ARSIWA). Under Article 31 of ARSIWA, and as determined by the Permanent Court of International Justice in The Factory at Chorzów (Germany v Poland) case, “the responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act.”
Within the ARSIWA framework, States can take countermeasures in response to an internationally wrongful act. These are measures “that would otherwise be contrary to the international obligations of an injured State vis-à-vis the responsible State, if they were not taken by the former in response to an internationally wrongful act by the latter in order to procure cessation and reparation” (ARSIWA Commentary, Chapter II, para. 1). It has therefore been argued that Ukraine, as an “injured State,” and other States could invoke direct and third-party countermeasures against Russia due to the erga omnes nature of the obligation to provide reparation (ARSIWA, arts. 42, 48, and 54; Draft Articles on the Responsibility of International Organizations (ARIO), arts. 43, 49, and 57).
Beause countermeasures are intended to induce compliance with international legal obligations, they should be temporary and reversible (ARSIWA, art. 49(2) and (3); ARIO, art. 51(2) and (3)). A measure taken to confiscate CBR assets must, therefore, include a possibility for Russia to reclaim them to avoid the measure being considered permanent. It has been argued that implementing asset confiscation in practice, therefore, could mean that funds are provided to Ukraine as a loan, using the assets as collateral until Russia provides reparation. Alternatively, if funds were directed to a mechanism providing reparation to Ukraine, Russia could be “credited” with any payments made out of this mechanism against the reparation due to be provided should it decide to comply or to claim back any excess paid (see here, p. 27).
Individual and Collective Self-Defence
Given that Russia has committed an “armed attack” against Ukraine through its full-scale invasion, Ukraine is entitled to act in self-defence (UN Charter, art. 51). Other States are permitted to assist Ukraine in its self-defence, given that Ukraine has called upon them to do so (see the judgement of the International Court of Justice in the Military and Paramilitary Activities in and against Nicaragua (Nicaragua v USA) case, at p. 14, paras. 191 and 195). However, measures taken in self-defence must be temporary, necessary, and proportionate (ARSIWA, art. 21; ARIO, art. 21). It is unclear under international law whether asset confiscation, as a non-forcible measure, can be justified through the doctrine of self-defence (see here, p. 31; Buchan), although funds directed towards military support could support the argument in this specific context.
The Wider Context
The EU’s windfall profits measure forms part of the trend towards exploring alternative routes to securing funds to support Ukraine until an explicit unilateral or collective standpoint is taken on the legality of the outright confiscation of Russian assets. Because the Brussels-based Euroclear holds significant CBR reserves, Belgium announced in October 2023 that it would send up to €1.7 billion, attained through levying corporation tax on the profits gained from the frozen CBR reserves, to Ukraine. However, some States have since suggested that Belgium is double-counting these funds in their overall EU contributions for Ukraine.
At the G7 summit in June of this year, its members committed to put in place a $50 billion loan to Ukraine by the end of 2024 “that will be serviced and repaid by future flows of extraordinary revenues stemming from the immobilisation of Russian Sovereign Assets held in the European Union and other relevant jurisdictions.” Furthermore, the United States’ 2023 Consolidated Appropriations Act authorises the Attorney General to transfer assets used in sanctions violations to the Secretary of State to “remediate the harms of Russian aggression” (§ 1708), as exercised in the case of Malofeyev (see here, p. 16-17). However, some experts argue that these alternative measures are “not a substitute for full asset confiscation.”
While justification under international law may not be required in all these cases, the EU has been de facto relying upon the law of countermeasures in certain situations not amounting to outright asset confiscation. The criteria for the immobilisation of the assets in the EU (and allied States) make clear that the sanctions will only be lifted once Russia ceases its war of aggression against Ukraine and compensates Ukraine for the damage caused (see here, n. 195). Furthermore, the G7 loan announcement also suggests an acknowledgment of the temporariness and reversibility requirements when employing countermeasures. Although the EU and allied States might have incentives to remain vague (e.g., to prevent political perceptions of being “at war” with Russia (Wentker)), we recommend clearer communication on the justification for measures (either under international law or otherwise) to promote compliance with international law. Moreover, if the EU embraces the countermeasures justification, the hesitancy to proceed beyond immobilisation to outright asset confiscation suggests that policy and economic factors, such as disruption to global financial markets, remain highly relevant.
The Potential Reparative Value of the Windfall Profits Measure
As the EU windfall profits measure likely does not require a legal justification under international law, the EU has discretion over how it utilises the funds. The Council Decision notes that the funds are to be used “to support Ukraine and its recovery and reconstruction, as well as its self-defence against the Russian aggression,” including via the European Peace Facility and the Ukraine Facility (para. 23). Importantly, the current division of funds (90 percent to supporting Ukraine’s defence and 10 percent to the Ukraine Facility) is not set in stone. The Council Decision states that this allocation “shall be reviewed yearly, and for the first time before 1 January 2025” (art. 1(11)(b)).
As a starting point, the importance of the EU’s support for Ukraine’s defence should not be understated. Indeed, reparation in the strict legal sense (i.e., voluntarily provided by Russia to Ukraine) will be impossible if Ukraine is defeated, and this is generally unlikely to materialise in the near future. However, more of the EU’s attention should be paid to the importance of measures that hold reparative value for victims of the war, or those which could be considered “interim reparations.” Indeed, there is a growing recognition that sanctions and asset confiscation have a role to play in victims’ reparation (see here).
Although at face value the Ukraine Facility appears promising, publicly available information suggests that it focuses on the recovery and reform of Ukraine as a State (with a view to EU accession). The positive impact on individual victims is challenging to measure. Nevertheless, the windfall profits, due to their scale and connection to the Russian State, could have significant reparative value for individual victims, both practically and symbolically. Indeed, although the windfall profits themselves do not belong to Russia as a matter of (international) law, there is a clear connection between these funds and the Russian State. Therefore, the EU should take a more human-centred approach with the windfall profits to support victims who have suffered harm as a result of the conflict (see also Moffet).
While not a legal requirement, one worthwhile approach is to channel a percentage of the funds into the envisioned compensation fund related to the Register of Damage for Ukraine, which the EU recently joined as a participant. The claims the Register is collecting so far represent a clear example of a human-based approach. Prioritising the success of the envisioned international compensation machinery through the channelling of funds would allow at least some successful claims to be awarded. This would also strengthen the coherence of the EU’s policy responses to the full-scale invasion. Indeed, other mechanisms which may deliver reparation and/or assistance to victims, such as the International Criminal Court’s Trust Fund for Victims, will also only be able to do so with sufficient funding. If the EU decides to support individual victims more directly, it is important that victims and actors working on the implementation of reparation participate in shaping the process.
Moving beyond the windfall profits measure, clarity regarding the international legal justification(s) of measures related to frozen Russian assets is critical as this can impact the legal usages of the funds. Importantly, if a measure to gather funds is justified based on the law of countermeasures, the funds must be used to induce Russia to comply with its obligation to provide reparation to Ukraine.
Under the ARSIWA/ARIO frameworks, reparation consists of restitution, compensation, and/or satisfaction. While funding the reconstruction of Ukraine could be considered a form of restitution or compensation, it is not immediately clear that providing military support, humanitarian assistance, and/or the Ukraine Facility’s recovery plan would constitute reparation under international law. An argument could be made that using the funds for military support for Ukraine could induce compliance by Russia with its obligations of cessation and non-repetition (ARSIWA, art. 30). However, it would be more plausible to employ the justification of collective self-defence if funds are used for military support.
A human-based interpretation of the definition of reparation under ARSIWA is also possible. The injury for which Russia owes reparation to Ukraine includes moral damage such as “individual pain and suffering, loss of loved ones, or personal affront associated with an intrusion on one’s home or private life” (see ARSIWA Commentary, art. 31, para. 5). Moreover, Russia’s obligation to provide reparation to Ukraine may extend to individuals as the ultimate beneficiaries (ARSIWA, art. 33).
In funding proposals that rely upon international law, the EU (and/or its allies) should (when legally sound) (1) use collective self-defence to justify funds going towards military support for Ukraine, (2) employ third-party countermeasures to justify funds going towards reconstruction or recovery where the reparative value is clearly articulated, and (3) support reparation for individual victims through the future compensation fund attached to the Register of Damage or other mechanisms delivering reparation, in line with a human-based approach.
Conclusion
The EU’s decision to send repurposed windfall profits from frozen CBR assets to and in support of Ukraine is likely to become an important source of support for Ukraine in coming years, even though these are worth considerably less than the sought-after frozen CBR assets themselves. In line with the critiques and suggestions made in this post, it is important that the development of the EU’s windfall profits measures—as well as potential, more far-reaching, future approaches to Russian assets—prioritise the needs of individual victims of the war to the highest extent possible and continue to respect international law.
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James Patrick Sexton is a PhD researcher at the T.M.C. Asser Instituut, a research centre for international and European law, and the University of Amsterdam.
Victoria Kerr is a solicitor and legal consultant for the T.M.C. Asser Instituut, a research centre for international and European law based in The Hague, and REDRESS, a human rights organisation based in London.
Photo credit: President of Ukraine
