Since the US has effectively halted its financial assistance to Ukraine, it has fallen to the European Union to support the Kyiv government financially. And this aid is urgently needed — Ukraine’s funds are expected to run dry as early as April. The idea of using the frozen reserves of the Russian Central Bank (CBRF) as reparations payments to Ukraine has been circulating for quite some time. Now, as Kyiv faces the impending depletion of funds, it seems that a group within the EU leadership is working tirelessly to bring this plan to fruition, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen notes.

Euro could face long-term risks if confiscation plan advances

"Such a move could undermine the attractiveness of the euro zone as an investment destination and, in turn, cause long-term damage to the euro itself. Some even fear that the euro’s safe haven status could be at risk. The reasoning is straightforward: an investment is considered safe only if there is a sufficiently high likelihood of recovering your money. If the state in which it is invested confiscates it without recourse, then clearly, this safety is compromised. It’s no coincidence that safe havens are not found in authoritarian countries where the rule of law is a vague concept."

"Of course, the impact on the euro will depend on how the plan is implemented. The EU leadership is presumably also aware that it must make every effort to avoid this step being perceived as a blatant violation of rules. Ultimately, it will depend on whether state or state-affiliated investors interpret the action as a one-time measure or as a blueprint for future sanctions. If it’s the latter, it’s likely that investors from countries that anticipate conflicts with the EU will become more hesitant to invest in Europe in the future."

"This could intensify a trend already observable in recent years: while the share of the US dollar in global foreign exchange reserves has been declining for years, the euro has seen little benefit from this. In fact, the euro has even been surpassed by gold as one of the world’s most important reserve assets. The sovereign debt crisis and Brexit may have left a bitter aftertaste. But certainly also the fact that the reserves of the Russian Central Bank, most of which are located in Europe, have been frozen as a result of the Ukraine conflict."