European Union leaders are currently gathered for a pivotal summit, which began yesterday and continues into today, to make a decision on a significant measure.

This meeting marks a critical juncture for Europe, as internal disagreements over a funding proposal lay bare divisions within the EU. This comes at a time when the bloc is under heightened scrutiny from the United States, which has its own interests in the frozen assets.

The EU has pledged to support Ukraine financially over the next two years, regardless of the proposal’s outcome. However, should the proposal be rejected, European nations will need to source funds elsewhere, amidst increasing war fatigue and strained public finances.

The situation is further intensified by escalating threats from Russia toward Europe, with the Kremlin cautioning that any seizure of these assets will not go without repercussions.

Essentially, the EU aims to utilize frozen Russian assets held in European financial institutions by borrowing against them to provide loans to Ukraine, pending Russia’s payment of reparations.

In simple terms, the EU wants to borrow frozen Russian funds held in financial institutions in Europe and use them to lend money to Ukraine until Russia pays reparations.

Here’s a more detailed explanation: The EU immobilised the local assets of the Russian central bank in 2022 as part of sanctions over Moscow’s war in Ukraine. Until now, the bloc has been using the interest from the assets – which are mostly bonds – to finance some of its support for Kyiv.

But on December 3, the European Commission unveiled a proposal to go further and effectively use the assets themselves to extend a loan to the war-torn country. The EU’s executive arm referred to the assets’ main part, or principal, as well as the interest and other income from them as “cash balances” since, as the bonds mature and become due for repayment, they are turned into cash.

The commission noted that, because of the EU sanctions, any payments of principal and income from the assets to Russia’s central bank are prohibited, and it argued that the resulting cash balances are not the bank’s property.

“We’re taking the cash balances, we’re providing them to Ukraine as a loan, and Ukraine has to pay back this loan if and when Russia is paying reparations,” European Commission President Ursula von der Leyen told reporters.

The Russian central bank assets held in the bloc are worth about €210 billion ($372 billion).

“This is therefore the maximum loan amount we could propose,” said Valdis Dombrovskis, a senior commission official in charge of economic policy.

Over the next two years, the commission wants to lend Ukraine €90 billion ($160 billion) of that amount, covering two-thirds of what the International Monetary Fund estimates the country will need in 2026 and 2027 for civilian and military purposes.

The so-called reparations loan needs to be approved by a “qualified majority,” von der Leyen said, meaning that more than half of the EU’s member states, representing at least 65 per cent of the bloc’s population, will need to vote in favour.

The loan has been proposed at a time when a number of European governments, including Germany, Poland and the Baltic states, are keen to find new ways to finance Ukraine, after years of EU taxpayers picking up the tab.

Also on December 3, the European Commission put forward an alternative proposal: for the EU to borrow money from investors, using the EU budget as a guarantee, and then lend those funds to Ukraine. This measure requires unanimous approval from all member states, which means it could face an effective veto from pro-Russian countries like Hungary and Slovakia.

What are the concerns raised by Belgium and others?

Euroclear, a securities depository in Belgium, holds most of the Russian assets immobilised in the EU. Estimates of the amount in the country vary – in September, the European Parliament put it at €180 billion ($319 billion). An estimated €176 billion of that has now turned into cash.

The Belgian government has raised a number of concerns about the reparations loan. A key one is that Russia will view it as an illegal repurposing of its sovereign assets.

“We have repeatedly said that we consider the option of the reparations loan the worst of all, as it is risky – it has never been done before,” Belgium’s Foreign Minister and Deputy Prime Minister Maxime Prévot said on December 3.

“We keep on pleading for an alternative – namely, the EU borrowing the amounts needed on the markets.”

The European Commission has tried to bring Belgium on board by asking EU member states to provide guarantees for the loan. These will cover “any member state if it is forced to pay the claim from Russia,” Dombrovskis said.

But the Belgian government has deemed those guarantees “too limited,” worrying that they won’t cover its other potential costs, such as those of fighting a lawsuit against Euroclear, said Peter Van Elsuwege, a professor of EU law at Ghent University in Belgium.

“The problem for Belgium is that – under the current proposal – only the repayment of the loan may be guaranteed but those additional costs are not (yet) covered, which exposes Belgium to a risk of bearing those additional costs,” he told CNN.

Belgium has also insisted on protection against any countermeasures Russia may take against Euroclear’s assets in Russia and beyond.

The Russian central bank has already filed a lawsuit seeking billions in damages from Euroclear, saying it is a pre-emptive measure against the European Commission’s plan to transfer the assets “to third parties,” according to Russian state news agency TASS.

The Kremlin could also seize more foreign assets in Russia in retaliation. Around $127 billion is at risk – that’s the estimated value of Russia-based assets belonging to US, EU and UK companies as of 2024, according to the Kyiv School of Economics.

“Panicked EU bureaucrats keep blundering,” the Kremlin’s economic envoy Kirill Dmitriev said on X Monday.

“They know using Russian reserves without CBR consent is illegal,” he wrote, chiming with the central bank’s own adversarial response to the EU proposal.

Other EU countries, such as Italy and the Czech Republic, have also expressed concerns about the plan. The Czech prime minister has said his country will not agree to provide financial guarantees because it needs to reserve its money for Czech citizens.

A broader worry is that using the frozen assets could discourage foreign investment in Europe. A country like China, aware that it could face European sanctions if it invaded Taiwan, might be reluctant to place funds in the region, the argument goes.

What is the US position on Russia’s frozen assets?

The US-backed, 28-point plan for ending the war that was leaked last month called for investing $100 billion of the Russian assets frozen around the world “in US-led efforts to rebuild and invest in Ukraine,” and for the United States to receive profits from those investments. The assets frozen in Europe account for the majority of Moscow’s immobilised assets globally.

After multiple rounds of negotiations, the latest iteration of the peace plan is unknown, but the European proposal to use the bulk of the global assets for the reparations loan is at odds with those US investment ambitions. US officials said they had discussed Monday the use of frozen Russian assets to finance reconstruction in meetings with the Ukrainian delegation and Europeans.

But the EU’s indefinite freezing of the assets it holds, agreed last week, means the bloc holds an important trump card in the negotiations, according to Ghent University’s Van Elsuwege.

“The future of these assets cannot be decided by the United States or Russia alone but requires the involvement of the EU.”

America’s financial backing for Ukraine dropped off a cliff this year as the Trump administration halted new support packages for the country.

Since January 2022, Ukraine’s European allies have allocated a total of $US221 billion ($334 billion) in military, financial and humanitarian aid for Ukraine, compared with the US allocation of $US134 billion ($203 billion), according to data compiled by the Kiel Institute, a European economic affairs think tank.

“The frozen assets could balance certain declines in certain countries’ support,” Ukrainian President Volodymyr Zelensky said Tuesday.

“Without such support, I don’t see the possibility for Ukraine to hold on, or to stand tall economically. I don’t see us being able to cover such big deficits with other vague promises or unclear alternatives.”