The Frozen Assets Dilemma: Why the City of London Is Warning Against Using Russia’s Frozen Money

Capstone analysis. This article is number four in our series on frozen Russian state assets and asks a simple question: what happens to Britain’s financial system if governments start using money they do not legally own to fund a war?

Since 2022, Western governments have frozen hundreds of billions of dollars of Russian central bank assets. The current plan does not seize that money outright. Instead, it uses the profits generated by those frozen assets to fund loans to Ukraine, and may later rely on the frozen assets themselves as backing.

Supporters say this is lawful, temporary, and justified by Russia’s actions. Critics, including key voices in the City of London, warn that it creates serious legal and financial risks. Their concern is not moral but practical: who legally owns the money, whether courts will uphold the structure, and who pays if lawsuits or retaliation follow.

This piece explains why banks and financial institutions are pushing back, why they want government guarantees, and why they fear this could weaken London’s reputation as a safe and neutral place to hold the world’s money.

This is the fourth article in our investigation. Jump to the three earlier Telegraph Online articles in the series.

The frozen assets dilemma: a quick primer

Since Russia’s 2022 invasion of Ukraine, Western jurisdictions have immobilised roughly three hundred billion dollars in Russian central bank reserves. Around €260 billion is commonly cited as immobilised across sanctioning jurisdictions, with around €210 billion held in the European Union, most of it concentrated in Belgium via Euroclear. What began as a pressure tool has evolved into a financing debate.

In broad terms, the current pathway has been to use extraordinary revenues generated by the immobilised assets, often described as windfall profits, to support Ukraine. The G7 has described a roughly $50 billion loan structure linked to these revenues. The EU has also adopted a loan mechanism and has transferred proceeds to Ukraine. This series tests the risk question that follows: when you blur the line between custody and confiscation, do you erode trust in Western finance where states park reserves expecting safety. Our position is yes, because the market does not treat this as a neat technicality. It treats it as a precedent.

The City of London is not making a moral argument about Ukraine. It is making a balance sheet and litigation argument about property rights, enforceability, and systemic risk. The message, stripped of politics, is this: The UK is trying to build a public policy loan structure on collateral it does not lawfully control, our politicians are attempting to shift the downside onto regulated banks.

First discipline: separate profits from principal

Most of the established framework is profits based, not principal seizure. The G7 and EU pathway has focused on extraordinary revenues generated by immobilised Russian sovereign assets and on loans serviced and repaid from those future flows, rather than on transferring the principal itself. That distinction matters because the legal and market risk profile changes sharply if the debate shifts from using revenues to treating the immobilised stock as functional collateral.

What is the harm, explained simply by telegraph.com

Imagine you are a sovereign wealth fund or a central bank storing billions through London and European settlement rails. You choose those venues because they sell one product better than anyone: predictability. Title is respected. Custody is neutral. The rules are boring. That boredom is the premium.

Now imagine you watch governments redirect profits from one immobilised account to fund a war and then discuss turning the immobilised stock into collateral. You do not need to sympathise with Russia to feel the chill. You ask a different question: could politics reach my assets next if my state is on the wrong side of the next conflict. That is how the trust premium erodes. Not in a dramatic collapse, but through a slow repricing of what was previously assumed safe.

Lets Break the key terms down

The collateral problem

The plan is often framed as using frozen Russian state assets as collateral rather than confiscation. That relabelling does not cure the defect. If Russia maintains a credible claim that the assets remain sovereign property, then any party that takes an enforcement step is exposed to the argument that it participated in an unlawful interference with protected state property.

Indemnity is what the city will now demand of the government

Banks press for an indemnity because they know where loss lands if the structure breaks. If government had clean legal title and clean enforceability, indemnity would be unnecessary. The request is the City stating, politely, that government is asking regulated institutions to carry public policy tail risk without legal certainty.

Euroclear is the stress node

Euroclear reported net interest earnings of €5.5 billion in 2023, of which €4.4 billion related to interest linked to Russian sanctions. That scale explains why Belgium treats liability as a national issue and why the EU keeps discussing guarantees and shields for the host jurisdiction.

Britain will face Retaliation risk from Russia

Once retaliation begins, it does not stay contained. Claims can be brought in multiple jurisdictions, assets can be targeted elsewhere, and counterparties begin to price political confiscation into every future custody decision.

De risk is real, but it is gradual

The IMF’s exchange rate adjusted reserve analysis suggests the headline dollar decline is less dramatic once foreign exchange moves are stripped out. At the same time, central bank gold buying has remained elevated, with 1,045 tonnes added in 2024 according to the World Gold Council. The point is not that the system collapses tomorrow. The point is that weaponised custody accelerates marginal shifts at the edge, and London lives on the margin of trust.

What if scenarios