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Russia's monetary authority has announced it is seeking damages amounting to $230 billion from the securities depository Euroclear. This action represents a direct warning from the Kremlin against proposals to utilize frozen Russian sovereign funds to aid Ukraine.

The Substantial Demand

According to reports in Russian state media, the monetary authority filed a claim last week for approximately 18 trillion roubles. This amount corresponds to the aforementioned $230 billion demand.

EU leaders will determine in the coming days on a proposal to use approximately €210 billion in frozen Russian assets. The proposal involves granting Ukraine with a substantial loan to fund its military and economic needs.

Most of these funds, totaling €185 billion, reside at the Euroclear clearing house in Brussels. Euroclear acts as the main custodian for the Russian immobilised sovereign wealth.

A Clash Over Legality

European Union officials have argued that their plan is on solid legal ground. Their position is based on the principle that ownership of the sovereign wealth remains with Russia, despite being it was frozen in European jurisdictions shortly after the full-scale military offensive of Ukraine.

The Russian government, in contrast, has labeled any utilization of the assets as theft. It has warned of retaliatory actions, such as seizing EU private investors' holdings within Russia.

The head of Russia's sovereign wealth fund, a figure who has assumed a key role in peace negotiations, stated on a social media platform that Russia "will prevail in court" and regain its assets. He warned that the European Union, the euro, and Euroclear "will suffer" from the plan.

Geopolitical Maneuvering

With statements seen as an effort to drive a wedge between Europe and the United States, the official characterized the proposal as "a severe attack on property rights and the international reserves system established by the United States."

The clearing house refused to provide a statement on the latest lawsuit. The institution has previously stated it is contending with more than 100 legal cases in Russian jurisdictions.

Legal Hurdles Ahead

Although judges in EU countries are unlikely to enforce rulings from Russian courts, experts expect Moscow to pursue implementation in countries with closer relations to the Kremlin.

"The Bank of Russia could try to implement a Russian court's decision against Euroclear in jurisdictions like China, Hong Kong, the UAE, Kazakhstan, and other sympathetic states, provided that relevant holdings can be identified," commented a legal expert from an NSP law firm.

EU Countermeasures

EU officials indicated they are working on steps to deter other countries from aiding any Russian legal action against EU companies. Additionally, they are designing safeguards to shield EU member states with investments in Russia from what they term "illegal expropriation."

How the Funding Would Work

According to the detailed scheme, the EU would provide an first €90 billion loan to Ukraine, using the proceeds generated from the frozen assets at Euroclear. Critically, Russia's legal claim on the underlying funds would remain unaffected.

Kyiv would only be required to repay the money if and when Russia agreed to pay reparations for the immense destruction inflicted during the ongoing war.

Alternative Proposals

Belgium, backed by Italy, Bulgaria, and Malta, has asked the EU to consider an different method for funding Ukraine. This involves joint EU debt issuance to secure a loan, using unused funds within the EU budget.

This alternative move, however, demands full agreement among all 27 EU countries. Hungary's government, viewed as aligned with the Kremlin, has already signaled its objection.

Commenting on Monday, the EU top diplomat, a senior official, said the reparations loan as "the most credible option" for aiding Ukraine. "This mechanism is secured against the Russian frozen assets, meaning it is not drawn from our public funds, which is also significant," she remarked. "Furthermore, it sends a powerful signal that if you cause all this destruction to another country, you must pay for the reparations."