Most people outside of banking circles may not have heard of Euroclear, a Brussels-based settlement provider that facilitates the transfer of ownership of securities between buyers and sellers. This firm is now at the heart of a significant geopolitical dispute between Russia and the European Union. The controversy arises from an EU initiative to leverage frozen Russian assets held at Euroclear to finance Ukraine’s war effort. In response, Russia’s central bank has filed a lawsuit in Moscow, seeking damages for the freezing of its assets.
This legal action represents an attempt to seize assets worth 17 billion euros (approximately US$19.9 billion) held by Euroclear in Russia on behalf of its clients. Furthermore, Russia is pursuing claims on similar Euroclear assets in other jurisdictions that are not part of the international sanctions imposed on Russia, such as China, Hong Kong, and certain Gulf and Central Asian states.
Understanding Euroclear’s Role
To fully grasp the implications of these competing claims, it is crucial to understand Euroclear’s function and origins. Euroclear operates as a central securities depository (CSD), an essential yet often invisible piece of infrastructure for financial markets. The primary role of a CSD is to transfer ownership of securities—titles of ownership of financial assets—from seller to buyer once payment is confirmed.
As an international CSD, Euroclear handles a wide range of financial instruments across various markets and jurisdictions, including Eurobonds, supranational agency bonds, government and corporate debt, money market instruments, and asset-backed securities. It also provides critical collateral management and securities borrowing and lending services. In 2024, Euroclear processed 331 million transactions worth 1.16 trillion euros and held more than 40 trillion euros of clients’ assets.
The firm’s privileged position depends on trust. Depositories like Euroclear process ownership changes via book-entry transfer, meaning assets are held by the CSDs and recorded in a database of holdings, conferring legal ownership of the titles. This system ensures uncontested and efficient transactions, reducing the risk of one side of a trade not fulfilling its obligations. If trust in this system falters, the book-entry transfer system could break down, leading to market instability.
Risks of the EU’s Plan
The EU’s plan to use frozen Russian assets as collateral for loans to Ukraine introduces significant risks. If market participants fear politically motivated asset seizures, they may relocate their holdings to jurisdictions perceived as safer, potentially weakening Euroclear’s position and destabilizing the markets it serves.
Recent EU proposals have evolved to avoid outright seizure of the Russian assets. Instead, the assets are to be frozen indefinitely. Under this arrangement, legal ownership remains with Euroclear’s Russian clients, while Euroclear uses these assets as collateral for loans to the EU to finance Ukraine. However, this raises critical questions: What happens if sanctions are lifted or Russia’s legal challenges are successful? Could Euroclear demand immediate repayment from the EU? And could Euroclear withstand the financial strain of restoring all these assets to their Russian owners en masse?
These uncertainties pose a threat to Euroclear’s stability and, by extension, the smooth operation of the global markets it serves. Even unsuccessful litigation by Euroclear’s Russian clients could freeze Euroclear’s holdings at national CSDs in non-sanction jurisdictions for extended periods, creating operational problems and unsettling its clients.
Historical Context and Legal Challenges
The European Commission has suggested that Euroclear compensate clients for Russian-related losses using its immobilized Russian funds. However, this would mean fewer funds available for loans to the EU for financing Ukraine. The issues are further complicated by Euroclear’s history and its role in the vast multitrillion-dollar Eurodollar and Eurobond markets for offshore currency deposits and debt securities.
Founded in 1968 by Morgan Guaranty Trust in Brussels, Euroclear supported the burgeoning Eurodollar and Eurobond markets, which included Soviet dollar deposits seeking refuge from US jurisdiction during the Cold War. Belgium and Euroclear had an interest in nurturing Soviet trust, formalized in the 1989 Belgium–Luxembourg Economic Union–USSR bilateral investment treaty, still in force between Belgium and Russia. The treaty guarantees fair treatment, protection against expropriation, free transfer of funds, and provides for dispute resolution and arbitration mechanisms. Allowing Russian assets to be used as loan collateral may breach that treaty.
Implications for European Financial Leadership
Europe’s leadership in offshore currency and debt markets, and the international financial infrastructures that support them, was established in the 1950s and 1960s due to perceived political risks in the US. However, similar perceived risks in Europe now threaten this leadership if the plan to leverage Russian assets against its will is realized.
Euroclear is a rare example of a European global financial services champion that could provide valuable economic returns to fund Europe’s future ability to counter external threats. This could be achieved both directly, through the generation of revenues and taxes, and indirectly. Euroclear acts as part of a backbone for the EU’s financial infrastructures, helping to make Europe a central and critical part of the global financial system, enhancing market integration in Europe and across the globe, and channeling large reserves of international capital into the European financial system.
A misstep now could damage that competitive advantage, cause financial turmoil, and potentially divert asset flows away from Europe to other competing jurisdictions in the longer run.
Nikiforos Panourgias, a senior lecturer at Queen Mary University of London, highlights the potential risks and complexities involved in the EU’s strategy.
The unfolding situation requires careful consideration of the legal, economic, and geopolitical ramifications. As the EU navigates these challenges, the decisions made could have lasting impacts on the global financial landscape.
