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<\/p>\nThe use of Russian assets has had little impact on financial markets \u2014 good news for the EU and Ukraine, stresses a Ukrainian economist.<\/p>\n
Since 2022, Western partners have played a crucial role in maintaining Ukraine\u2019s economic resilience. However, future financing depends on political consensus.<\/p>\n
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\u2019s defeat and shift Russia\u2019s security threat directly to the EU\u2019s 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.<\/p>\n
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 \u201creparations loan\u201d worth \u20ac140 billion, using already due but frozen Russian assets as collateral.<\/p>\n
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.<\/p>\n
However, data shows these risks are overstated. Since Russia\u2019s full-scale invasion of Ukraine, European financial markets have been under stress. Yields on German government bonds \u2014 the benchmark for safe assets in the euro area \u2014 have risen sharply compared to pre-war levels. Initially, short-term yields jumped, reflecting uncertainty and the European Central Bank\u2019s (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.<\/p>\n
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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.<\/p>\n
The picture shifted slightly when discussions moved from freezing to using the assets, particularly to support Ukraine. At that time, European governments\u2019 borrowing costs rose modestly \u2014 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.<\/p>\n
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.<\/p>\n
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 \u2014 inflation, interest rates, and the overall economic outlook. The use of frozen Russian assets was not perceived as a structural threat to Europe\u2019s financial system.<\/p>\n
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.<\/p>\n