According to Politico, the European Commission is proposing to swap some €140 billion of frozen Russian assets for zero-coupon bonds, which would then be used to finance Ukraine. According to the proposal, the funds would be provided to Kiev in tranches in the form of loans, according to an internal proposal to be discussed at an informal EU summit in Copenhagen on 1 October.

The idea follows an earlier statement by European Commission President Ursula von der Leyen. In early September, she said that the Commission was not planning to confiscate Russian assets directly, but wanted to use their balances to create a loan mechanism for Ukraine. This procedure, she said, would make it possible to secure funds without formally violating property rights.

The technical core of the proposal is that frozen assets held primarily in the Belgian depository Euroclear would be "replaced" by zero-coupon bond liabilities. In practice, the cash would remain intact, but Ukraine would obtain liquidity through borrowing. These would be repaid in the future from funds that Russia would have to pay out as reparations. The total value of Russia's frozen reserves in the EU is estimated at around €176 billion, Bloomberg reported.

However, the proposal faces a number of legal and political obstacles. Some member states - such as Hungary - have announced that they may veto action on Russian assets. The European Central Bank and other financial institutions have warned that this could undermine the credibility of the euro as a reserve currency and set a precedent that would deter foreign investors. There are also questions about who would bear the risk of any default and how legal guarantees would be secured.

On the other side are the states that support the proposal. According to Reuters, Germany and other large member states have indicated a willingness to seek a "legally safe" solution. The aim is to help Ukraine quickly, but in a way that does not violate the EU's own legal obligations and international norms.

The details of the mechanism - i.e. the number of tranches, their schedule and the specific design of the bonds - are not yet known. They will be discussed at the forthcoming summit and subsequently at the level of national finance ministers.

The European Commission's proposal represents a creative financial construction that could provide Ukraine with significant resources. However, its implementation depends on reaching a political consensus, resolving legal issues and ensuring that the move does not cause undesirable spill-over effects on financial markets and monetary stability. According to AFP, the issue can be expected to become one of the main items on the EU agenda in the coming weeks.

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