The agency has pointed out risks associated with the EU’s plan to use the frozen funds for a “reparations loan” to Ukraine
Fitch Ratings has put Euroclear Bank, the Belgium-based depository holding frozen Russian assets, on notice for a potential downgrade, citing legal and liquidity risks related to the EU’s attempt to use the funds to finance a “reparations loan” to Ukraine.
The move on Tuesday to place Euroclear on “Rating Watch Negative” indicates a higher likelihood that its AA credit rating could be cut soon. Fitch said it might downgrade the bank if the European Commission’s plan proceeds without strong legal and liquidity safeguards.
Euroclear was assigned the task of holding bonds for Russia’s central bank; they have matured into cash but cannot be returned due to EU sanctions. The money is currently held in short-term deposits at the European Central Bank.
Under the EU plan, Euroclear would invest the funds in European Commission bonds to assist in financing a so-called “reparations loan” to Ukraine, which would only be repaid if Kiev later receives reparations from Russia.
Fitch warned that Euroclear could encounter problems if Russia’s central bank were suddenly permitted to reclaim the funds, as the bank might have to pay out rapidly while the assets remain locked up, creating a timing mismatch on its balance sheet.
Kirill Dmitriev, the Russian president’s adviser on international investment matters, warned that a downgrade of Euroclear could cause investors to shift funds elsewhere. “The European Commission loves self-mutilation,” he wrote in a social media post on Wednesday.
Euroclear and the Belgian government have been among the strongest opponents of the “reparations loan” proposal, warning that it could endanger the institution’s financial stability. Senior financial figures, including European Central Bank President Christine Lagarde, have also cautioned that proceeding with the process could harm the credibility of the EU’s financial system.
Last week, the Bank of Russia filed a lawsuit against Euroclear at the Moscow Arbitration Court seeking damages for the immobilization of its funds. The first hearing has been scheduled for January 16.