On December 12, 2025, Denmark — the rotating presidency of the European Union — announced that EU governments had agreed to initiate written procedures to freeze the Russian Central Bank’s assets in Europe indefinitely.
However, this indefinite freeze on Russian assets is not a sudden measure, but rather a gradual institutional arrangement. Following Russia’s military invasion of Ukraine in February 2022, the US and EU jointly froze approximately €300 billion in Russian overseas assets. Of this, the EU froze approximately €210 billion worth of assets belonging to the Russian Central Bank.
Previously, the West adopted a limited, temporary sanctions framework targeting specific individuals and entities, which required the unanimous consent of all 27 EU member states every six months for extension, and effectively granted each member state veto power based on equality. This highly institutionalized constraint enabled the Russian central bank to maintain financial stability to some extent, despite sanctions, through measures such as interest rate adjustments, capital controls and a shift toward Asian markets.
The three-tiered approach
In stark contrast to previous approaches, the EU has devised a three-tiered, progressive plan for the frozen Russian assets. The first tier is the risk profit extraction mechanism. Faced with significant legal obstacles to directly confiscating the principal, in February 2024, the Council of the European Union adopted the “risk-profit” mechanism, which prohibits financial institutions from repatriating interest to Russia and establishes an independent accounting system to redirect it to support Ukraine.
Between 2024 and 2025, the EU used this interest to pay approximately €6 billion to Ukraine. While this “moderate” approach avoids the legal obstacles of “confiscating the principal,” it also reveals a fundamental contradiction: the original trusteeship agreement stipulated that the interest belonged to the Russian Central Bank. That is to say, how can the sanctions override the ownership agreement of the assets?
The second tier: a compensation loan mechanism. The EU proposed providing Ukraine with “compensatory loans” secured by frozen assets, to be repaid only after Ukraine receives war reparations from Russia. Given the loan’s 45-year term, one could reasonably assume that Russia is unlikely to pay war reparations in the foreseeable future. Therefore, the loan is de facto equivalent to a quasi-confiscation of assets. In other words, the EU is attempting to “replace” the permanence of the transfer by extending the timeframe.
The third tier: the resolution to freeze indefinitely. EU’s resolution passed on the 12th of this month constitutes a triple breakthrough: First, it breaks the principle of “unanimity” and adopts a specific majority vote (25:2), this means it directly abolishes the veto power of certain member states; second, it invokes Article 122 of the EU Treaty (originally an internal mutual assistance clause for dealing with natural disasters/epidemics) to deal with the sovereign assets of other countries, which is a distortion of the function of the clause; third, the introduction of the concept of “indefinite” eliminates the legal premise of temporaryity and reversibility, turning it into permanent control.
One of the main reasons that the EU takes such radical measures is to alleviate Ukraine’s financing difficulties. According to the World Bank’s assessment, Ukraine’s reconstruction costs over the next 10 years are projected to exceed $500 billion. Frozen Russian assets can cover only about 60% of Ukraine’s needs, leaving a funding gap of over $200 billion. Therefore, indefinitely freezing Russian assets was seen as the most direct, fastest and most “reasonable” solution.
The financing logic behind the EU’s decision
On a practical level, the EU’s decision undoubtedly poses a systemic threat to the global financial system. The operation of the reserve currency system presupposes institutional trust in the safety of assets by central banks. Freezing and confiscating sovereign assets will destroy this foundation of trust, prompting countries to reassess the foreign exchange reserves held by Western financial institutions. What’s more, it sets a very bad precedent.
Currently, the most important foundation of the international financial order is credit. Central banks around the world store their foreign exchange reserves in Europe and the US, precisely because they believe these assets are absolutely safe.
Historically, no country has taken similar sanctions, even during World War II. Therefore, if a situation arises where Europe uses its holdings of other countries’ assets for other purposes, it could severely undermine confidence in the international financial order, particularly in the European financial system. In other words, if the EU were to utilize frozen Russian assets, especially the principal, the entire Eurozone may face the risk of a collapse in market confidence.
Once trust is damaged, the negative impact could quickly spread to all aspects of the macroeconomy of EU member states. For instance, it could not only reduce global investment in the Eurozone but also severely impact Europe’s future financing needs in areas such as defense, green transformation and digital transformation. Ultimately, it could threaten the euro’s status as an international reserve currency, potentially triggering a liquidity crisis in the European banking system.
Implications for international law and the global order
Beyond its economic implications, the EU’s resolution also represents a challenge to international law and the existing international order by sovereign states (or highly integrated regional organizations): it marks the first time industrialized nations have jointly frozen and utilized the assets of another country’s central bank; the first time domestic emergency provisions have been invoked to address cross-border asset issues; and the first time financial sanctions have been institutionalized in relation to war reparations.
These three factors combined constitute a systemic breakthrough of the existing international order. At a deeper level, this also foreshadows a trend towards a return to the “law of the jungle” in the underlying logic of future international relations.
At the same time, this decision has also put related stakeholders in a dilemma. First, the EU might have won a tactical victory in financing Ukraine, but it may face enormous systemic risks. It sets a worrying precedent — that major powers can break the rules to achieve political goals. Second, for Ukraine, even with short-term financial support, it still faces the risk of a future financing crisis and may ultimately push itself into extremely unfavorable conditions when negotiating with Russia.
Furthermore, Russia’s financial control and international financing capabilities will be significantly weakened, which will simultaneously accelerate its determination to de-dollarize. Even among other developing countries, some may decide to reduce their dependence on the financial system dominated by developed countries.
Russia’s financial response and accelerating fragmentation
According to media reports, the Central Bank of Russia has begun converting its unfrozen foreign exchange reserves from US dollars and euros into gold and other currencies. It is also promoting the use of its own currency for settlements with major trading partners to bypass the US dollar and euro payment systems.
Simultaneously, Russia is continuously improving SPFS (the System for Transfer of Financial Messages, a Russian equivalent of the Society for Worldwide Interbank Financial Telecommunication [SWIFT], developed by the Central Bank of Russia) and exploring the use of central bank digital currencies for cross-border payments. While these measures may be costly in the short term, they represent Russia’s determination to fundamentally counter financial sanctions. They are a response to the “law of the jungle” as well.
The EU’s move to freeze Russian assets and attempt to access their principal demonstrates that when international law and order conflict with the interests of major powers, these powers tend to change or ignore the rules rather than constrain their own interests. Ultimately, these actions will further fragment the international order.
[Kaitlyn Diana edited this piece.]
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.