Among the many challenges facing Ukraine since the start of the Russian invasion in February 2022, one lies far from the battlefield - securing the means to finance its defense.
That need has become even more acute as Moscow claims to be making progress on the front, and its economy is proving more resilient to unprecedented sanctions than many expected.
In response, Ukraine's European allies have backed Germany's proposal to turn Russian state assets held in Belgium into a "reparations loan" for financial support to Ukraine next year.
But the use of the property itself has proven much more controversial, with Belgium accusing the European Union of “downplaying” its risks.
What are frozen Russian assets in the West and why is this proposal meeting so much resistance?
What is frozen and where is it located?
Many experts, as well as the Central Bank of Russia, estimate that between $300 billion and $350 billion in assets, including cash, bonds, and stocks in numerous countries, are frozen in the West.
As is the case with other central banks, some of Russia's gold and foreign currency reserves are invested in assets such as hard currencies, gold, and government bonds.
These assets should not be confused solely with frozen private assets: many Russian individuals and companies sanctioned by the West also have their own private assets, such as real estate or yachts, frozen.
Most of the Russian assets frozen by the EU - around €185 billion out of an estimated €210 billion - are held in Euroclear (Euroclear), the Brussels Central Securities Depository.
This is because a large part of Russia's foreign currency reserves were already there before the sanctions.
A large portion of these assets have matured since 2022 and have now become cash.
The Russian Central Bank did not provide a detailed breakdown of frozen assets.
What is the EU proposal and why did Belgium reject it?
The EU proposal, championed by German Chancellor Friedrich Merz, would convert 140 billion euros of Russian state assets held in Belgium into a “reparation loan” for Ukraine next year, European Commission President Ursula von der Leyen told reporters on December 3.
The program does not amount to confiscating money, as it would take the form of a loan, she said, although Ukraine would only have to repay it if Russia pays reparations for the war damage caused.
EU countries have already started using interest earned on around 210 billion euros of frozen Russian assets to help with Ukrainian defense.
The International Monetary Fund (IMF) has estimated that Ukraine will need 135 billion euros in 2026 and 2027.
EU leaders are expected to vote on the reparations loan at a summit in Brussels on December 18th.
Most EU countries support the plan, but it has faced sharp criticism from Belgium, which holds the bulk of frozen Russian assets in the EU.
The Belgian government claims that it will bear the brunt of any Russian lawsuit if problems arise with an EU loan based on the asset.
She also assessed that such a move would jeopardize the possibility of a peace agreement in the short term.
"We are persistently appealing for an alternative, namely for the EU to borrow the necessary sums on the market," said Belgian Foreign Minister Maxime Prevost.
The European Commission is expected to present options to resolve the impasse, but Prevot claims that the draft text "does not address our concerns in a satisfactory manner."
He claims that the risks could lead to the "bankruptcy of Belgium".
"If Russia takes us to court, there is every chance that they will win the case and then we, Belgium, will not be able to repay those 200 billion euros, because that is equal to the entire annual federal budget."
"That would mean bankruptcy for Belgium."
Belgian Prime Minister Bart De Wever also expressed concern, writing to von der Leyen to complain that the plan was "fundamentally flawed."
What does Euroclear say?
Euroclear CEO Valeri Urban made similar arguments.
De Wever says other EU countries must provide Belgium with legally binding guarantees that the risk will be shared if the Ukrainian loan fails or if sanctions against Russia are lifted.
But this is seen as problematic, because the European Central Bank has warned that it cannot be the lender of last resort for such a program.
Instead, Belgium proposed an EU loan worth 45 billion euros to Ukraine for the coming year, using reserves from the existing common budget of the 27 member states.
German Chancellor Merz, however, believes that a better path is to use frozen Russian assets.
He described the need as "increasingly urgent" and called on leaders to unite around this idea.
"Ukraine needs our support. Russian attacks are intensifying. Winter is on the doorstep...
"And in that regard, I hope we can reach a common solution within the European Union."
EU High Representative for Foreign Affairs Kaia Kalas also supports the reparations loan plan, arguing that it would strengthen the European stance against Moscow and serve as an incentive for President Vladimir Putin to negotiate.
Verle Kollert, a professor of financial law at the Catholic University of Leuven, told BBC News that she believes Belgium's concerns are justified.
"Euroclear has a contractual obligation to repay the money to the Russian Central Bank upon its first demand."
"The only reason she hasn't done it already is the sanctions."
If sanctions are lifted while money has already been lent to the EU, Belgium, not Euroclear, will be financially threatened, she points out.
She warned that using frozen foreign reserves for other purposes could undermine confidence in the European financial system.
Kollert argues that a European market-based loan for Kiev would be safer.
"The advantage of taking money from frozen Euroclear funds is that it is interest-free, but not risk-free."
Due to mounting pressure, Merz postponed a planned visit to Norway last week and traveled to Brussels to meet with Prime Minister De Wever and Commission President von der Leyen.
After the meeting, Von der Leyen and Merz said they had held "very constructive" talks with De Wever.
EU leaders failed to reach consensus on a similar plan in October.
Watch the video: Do the introduction of sanctions achieve the desired results?
What does Russia say?
Russia strongly condemned the proposal.
One of its top bankers threatened the European Union with 50 years of litigation if the plan was implemented.
Andrei Kostin, chairman of VTB, one of Russia's leading state-owned banks, said it was unacceptable for Moscow's frozen assets to be transferred to Ukraine.
“As for confiscating our money, we can ultimately do without it,” he said.
"The only problem is that this money could be used for war, not peace."
Foreign Ministry spokeswoman Maria Zakharova warned that the global financial system would "feel the consequences" of any move related to the seizure or diversion of Russian assets.
The state-run RIA news agency reported that the retaliation could target $285 billion in foreign direct investment from the West in Russia.
Watch the video: Bypassing sanctions - how Russians continue to buy iPhones
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