The impact of the sanc­tions against Rus­sia and Rus­sian coun­ter­mea­sures

Euroclear Bank played and continues to play an important role in the implementation of international sanctions against Russia. A large share of the assets affected by these sanctions were safeguarded and, following the imposition of the sanctions, effectively frozen or immobilised in the accounts of Euroclear Bank. This article focusses, on the one hand, on related impacts on Euroclear Bank as well as, on the other hand, on the mechanism set up in that context to redirect a financial contribution to the European Union, used to support Ukraine.

Since 2022, the National Bank of Belgium is closely monitoring the impact of the geopolitical crisis that resulted from Russia’s invasion of Ukraine on financial market infrastructures under its supervision. A lot of focus has been on Euroclear Bank which, due to its global footprint in securities markets, has been impacted by the implementation of international sanction packages against Russia as well as measures enacted by Russia in reaction to the international sanctions.

Euroclear Bank is an International Central Securities Depository (ICSD), operator of a securities settlement system (the Euroclear System), with as main business securities settlement and related services. Euroclear Bank is an important market player in terms of size, holding securities deposits worth an equivalent of 18.3 trillion euros⁽¹⁾ denominated in more than 100 currencies and counting more than 1,800 participants from 110+ different countries, including many Central Banks. This international footprint also results from Euroclear Bank having set-up links with CSDs in more than 50 countries worldwide thereby providing access to international investors. In the case of Russia, as Euroclear Bank maintained a link with the Russian CSD and had the Central Bank of Russia as participant long before the geopolitical crisis starting in 2022, the ICSD has been instrumental in the implementation of international sanctions enacted amongst others by the EU against Russia, requiring it to immobilise or freeze securities and related cash balances held in the Euroclear System. This has resulted in important risks, including further exposure to measures enacted by Russia in reaction to the international sanctions.

At the same time, with the ICSD having a banking license, cash deposits form part of its estate. As the claim in restitution of cash balances subject to sanctions is blocked, the reinvestment of cash balances has resulted in important revenues for the ICSD. In view of the unexpected and extraordinary character of these revenues and with a view to supporting Ukraine, the EU recently enacted a regulation establishing a mechanism for a financial contribution of net profits related to the reinvestment of cash deposits of the Central Bank of Russia in CSDs. The remainder of this chapter focusses on both those revenues and risks.

Transformation of sanctioned securities into cash

In application of decisions taken amongst others by the European Union⁽²⁾, Euroclear Bank has frozen, or immobilized securities and cash balances held in the Euroclear System. In legal terms, for as long as related sanctions are in force, the underlying entitlement (for securities) or claim in restitution (for cash) is suspended which implies that:

• for securities, those do not enter the estate of Euroclear Bank and sanctions do not affect underlying entitlement of the immobilized or frozen securities;
• for cash deposits, those enter the estate of Euroclear Bank and the latter is liable to ensure restitution of sanctioned cash upon lifting of sanctions.

Over time, sanctioned cash balances in Euroclear Bank grow resulting in a significant increase of its balance sheet, as securities generate cash due to coupon or dividend payments flowing therefrom and some securities, typically bonds, transform into cash due to redemption payments at maturity. With the implementation of new international sanctions in 2022, the balance sheet of Euroclear Bank has grown significantly, and - as of end Q1 2024 – around 160 billion euros of this increase is related to Russia. Euroclear Bank must manage the cash on its balance sheet for risk management purposes. It therefore reinvests cash balances as per conservative regulatory requirements for financial market infrastructures (minimising redeposit and credit risks), with the related revenues contributing to Euroclear Bank’s P&L. In light of the interest rate environment of 2023, Euroclear Bank reported 4,4 billion euros of interest revenues arising on cash balances from Russian-sanctioned assets.

Application of sanctions also results in important risks

For a balanced picture, it is important to highlight the risk perspective, meaning the increase in exposure to certain risks as a result of the application of sanctions.

• Firstly, the ICSD is exposed to risks resulting from measures enacted by Russia in reaction to international sanctions, as the ICSD is the primary place of deposit of international securities issued by Russian issuers and its link to the Russian CSD.
• Secondly, there is an increase in operational risks and costs. This is due to operational complexities from international sanctions and measures taken by Russia which lead to a higher reliance on manual processes. As certain day-to-day straight-through processes in the Euroclear System are broken, there is an increased risk of errors and an increased risk of inadvertently violating sanctions, implying so-called compliance risk.
• Thirdly, different legal risks weigh heavy. For example, international sanctions are deemed against public order in Russia, opening the door to litigation to seek compensation for frozen or immobilised assets as well as for lost opportunities and damages.

In 2023, Euroclear Bank recorded 62 million euros of direct costs related to Russian sanctions and measures enacted by Russia in reaction to the international sanctions. It is expected that the risks resulting from proceedings will further emerge and will remain for long. All this increases Euroclear Bank’s risk profile leading to, amongst other, additional costs of capital.

Financial contribution

In the first half of 2024, the European Union adopted legal acts⁽³⁾ that established a mechanism for the transfer of net profits gained from the reinvestment of sanctioned cash of the Central Bank of Russia. Accordingly, starting 15 February 2024, 99,7%⁽⁴⁾ of net profits related to the reinvestment of sanctioned cash of the Central Bank of Russia shall be redirected to the European Peace Facility (90%) and the Ukraine Facility (10%), to provide support to Ukraine. Since the financial contribution only relates to reinvestment revenues of sanctioned cash balances, forming part of Euroclear Bank’s estate and such cash not being remunerated for participants (the Central Bank of Russia in this case), we are speaking of a financial contribution of a CSD, and importantly not a seizure of Central Bank of Russia assets. As indicated before, Euroclear Bank continues to be liable to ensure restitution of sanctioned cash upon lifting of the international sanctions.

As a financial buffer to cover Russia-related expenses, risks and losses, CSDs may provisionally retain 10% of the financial contribution. However, a CSD can request⁽⁵⁾ its national supervisory authority to approve an additional buffer, which the supervisory authority shall only grant where needed from a risk management perspective. The approval can be reviewed by the European Commission, after consulting the European Central Bank.

Concluding remark

There remain considerable uncertainties in the present geopolitical environment. For example, recent political discussions have shifted from the financial contribution in the form of a payment to the European Peace Facility and the Ukraine Facility to the use of profits as a means of repayment of a 50-billion-dollar loan. In addition, litigations continue in Russia, having uncertain outcomes, and measures enacted by Russia in reaction to the international sanctions have an impact on the future amounts of immobilised and frozen assets and related net profits. In this environment, it remains crucial for the National Bank of Belgium as supervisory authority of Euroclear Bank to monitor these and other evolutions and to respond where needed to any concern in the safety or soundness of a systemically important CSD like Euroclear Bank and thus the global financial stability.

Notes:

⁽¹⁾ Of this, 16.7 trillion are fixed income securities, which are ultimately reimbursed.

⁽²⁾ Council Decision 2014/512/CFSP and Council Regulation 833/2014 of 31 July 2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine, as amended since the start of the war in Ukraine in February 2022

⁽³⁾ Council Regulation (EU) 2024/576 of 12 February 2024 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine and Council Regulation (EU) 2024/1469 of 21 May 2024 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine.

⁽⁴⁾ As per Council Regulation 2024/1469, 0.3% can be kept by the entity subject to the financial contribution, to ensure efficiency of its work in the handling of immobilised assets.

⁽⁵⁾ Based on Council Regulation (EU) 2024/1469.