What happens to frozen Russian funds in the EU?

The EU is discussing using frozen Russian assets to pay war reparations to Ukraine . In addition to funds from Russia's central bank, European depositories also hold frozen securities belonging to millions of Russian private investors who are not on Western sanctions lists. Theoretically, they can reclaim these assets as their rightful owners, but in practice, few succeed.

Zhanna Nemtsova, daughter of the murdered Russian opposition politician Boris Nemtsov and co-founder of the Boris Nemtsov Foundation, has been drawing attention to this problem for months. She believes that private investors' assets should be released and proposes a series of steps to achieve this.

How were Russian assets frozen?

The safekeeping of Russian securities in depository banks is handled by the Russian central securities depository – the National Settlement Depository (NSD), a subsidiary of the Moscow Stock Exchange. However, for foreign securities, which Russians could acquire with just a few clicks via Russian broker apps before the Ukraine war, the NSD acted merely as an intermediary, and the securities themselves were deposited primarily with two European depositories – the Belgian Euroclear and the Luxembourg Clearstream. All Russian transactions involving foreign securities, not only European but also American and other securities, were handled through them.

Many Russian investors only realized how custody works in the spring of 2022, when they suddenly could no longer conduct transactions. Their securities were frozen, just like Russian government reserves and the assets of private individuals and organizations subject to sanctions. Private investors are now hostages to the current situation.

Euroclear and Clearstream terminated their partnership with NSD shortly after the outbreak of the war in March 2022 – in response to Russia's central bank banning Russian brokers from selling securities on behalf of foreign clients. In June, the European Commission enshrined Euroclear and Clearstream's decisions. The sixth EU sanctions package contains a clear ban on European organizations cooperating with NSD.

How many Russian investors are affected?

Neither Russia nor Europe has provided figures on frozen private assets. The depositories have also not provided any information. All that is known is the total value of frozen assets in Europe, including Russian government reserves, which make up the largest portion. According to Reuters, this amounts to approximately €210 billion, of which €185 billion is held by Euroclear.

Russian authorities estimate the frozen assets of legal entities and individuals worldwide at approximately 5.7 trillion rubles. According to the central bank, 20 percent of this is held by private individuals. At the current exchange rate of 95 rubles to one euro, this equates to approximately 12 billion euros belonging to private investors.

The exact number of investors is also unknown. Russian Finance Minister Anton Siluanov speaks of 3.5 million, while representatives of the Central Bank put the figure at five million. The discrepancy could be explained by the fact that the higher estimate includes not only direct owners of foreign securities, but also those who invested indirectly—for example, through investment funds.

If you divide twelve billion euros by five million people, you get an average of 2,400 euros per investor. A Russian broker told Zhanna Nemtsova that most of his clients had this amount frozen – around 200,000 rubles, or slightly more than two current Russian monthly salaries.

How is it possible to reclaim assets?

Investors can attempt to reclaim their assets – if they are not on the sanctions lists. To do so, they need a license from the Belgian Ministry of Finance, which regulates Euroclear. If assets are frozen at Clearstream, they must contact the Luxembourg tax authorities.

However, practice has shown that this is almost impossible without legal representation. Moreover, the legal costs usually exceed the average value of frozen assets many times over. Zhanna Nemtsova told DW that an investor who received a release of his funds from both Euroclear and Clearstream told her he spent €60,000 on the process.

A lawyer must find a guarantor or act as one themselves, explains Aleksey Klimyuk, Senior Investment Adviser at the Russia-based asset management firm Alfa Capital. The guarantor must confirm that the applicant owns the assets, is not subject to sanctions, and no sanctioned person will benefit from the transaction for which a license is being applied for. Furthermore, the applicant must have an investment account in the EU, Switzerland, the UK, or the US, as transactions to an account in Russia are not possible. Such an account cannot be opened without a residence permit.

According to the news platform Brussels Signal, Belgium received 1,214 license applications last year, of which 232 were approved. These were mostly from investors with dual citizenship from Russia and another European country.

"One might think I'm defending the interests of the rich, but that's not the case. The existing procedure protects their interests, but on the contrary, I want it to be more accessible," says Zhanna Nemtsova.

What are the prospects for those affected?

According to Zhanna Nemtsova, the first step should be to raise awareness of the problem. She believes that European officials often fail to grasp the scope of their sanctions policy and that the issue is rarely covered in the European media.

As a next step, Nemtsova proposes an inventory of frozen assets to determine what belongs to private investors who are not on sanctions lists. Afterward, authorities in Belgium and Luxembourg should develop a simplified procedure for investors who cannot afford expensive lawyers. Nemtsova admits that this would likely only benefit individuals with Western residency permits or citizenship. Everyone else would likely have to wait until the war is over and the sanctions are lifted, which could take a long time.

What happens to the frozen assets of the Russian central bank is the responsibility of the European Commission. When asked by DW whether it was also considering the future of private investors' assets, a Commission representative declined to answer. He only said it was a "hypothetical scenario."

Implementing such measures would be difficult because they would require cooperation not only with European but also with US authorities. Even though the frozen assets are not disclosed, it is clear that they primarily concern US securities popular with Russian investors. According to broker data, at the end of 2021, shares of US companies Alphabet, Apple, Boeing, Intel, MetaTrader, Microsoft, and Tesla, as well as Chinese companies Alibaba and Baidu, were most in demand.

The release of US stocks requires a license from the US Treasury Department's Office of Foreign Assets Control (OFAC), which has imposed bans on the Moscow Stock Exchange and the NSD. According to lawyers representing Russian investors, according to the Russian news portal RBC, OFAC has not yet issued a single such license.

Adapted from Russian: Markian Ostaptschuk