(Bloomberg) -- The US and its European allies say they’re determined to use frozen Russian assets to help Ukraine – somehow. In Brazil this week, they’re arguing about the best way to do it without getting into legal or financial jeopardy.

Western nations have frozen about €260 billion ($282 billion) in securities and cash, more than two-thirds of it in the European Union. They all agree those funds should remain off-limits from Russia unless it pledges to help with Ukraine’s reconstruction. But they’re at odds over whether it’s lawful to cross the Rubicon by seizing the assets outright — so the challenge is to squeeze funds out without depleting them.

With Russia on the front foot militarily as its invasion enters a third year, and aid from the US facing roadblocks in Congress, there’s growing willingness to consider what once were viewed as high-risk moves. The US has been leading the push, with Treasury Secretary Janet Yellen this week saying the legal and moral case is strong, and seeking to assuage European doubts. The UK has also expressed support for seizing the assets. 

France and Germany, along with the European Central Bank, have expressed the most caution. They worry about Russian retaliation targeting European assets there, and also the impact on financial stability and the euro’s status as a reserve currency, according to people familiar with the matter. The danger, it’s argued, is that such a drastic move would set a precedent – pushing other nations to avoid holding their reserves in Western currencies in case they’re one day subject to similar penalties.

“We don’t have the legal basis to seize the Russian assets now,” French Finance Minister Bruno Le Maire said Wednesday after a meeting of Group of Seven finance ministers in Sao Paulo. “We need to work more.”

Non-Collateral Collateral

G-7 officials and lawyers are examining a range of options they can offer to national leaders at their June meeting in Italy, since any move will require a political decision at the highest level, the officials said. 

All proposals carry risks of some kind. Some involve using the Russian assets as collateral to raise cash, via bond sales that would issued by or steered toward Ukraine. While that would avoid the optics of a flat-out seizure, it ultimately raises the same legal objections – because the assets would have to change hands in the first place before they could be used as a basis for new fundraising.

The EU is focused on finding “a legally secure step that can also be implemented in the short term” to use proceeds from the frozen assets to help Ukraine, German Finance Minister Christian Lindner told reporters in Sao Paulo Wednesday. Asked about pressure from the US, he said G-7 leaders have given a mandate “to look at the technical level to see what is legally and financially possible.”

One workaround that’s being floated, and might be more palatable to the doubters, involves using the principal without actually seizing it. The idea — as outlined by the Atlantic Council’s Charles Lichfield — is that G-7 governments would provide a “guarantee” to markets that the frozen assets would not be returned to Russia unless it agrees to pay the cost of Ukraine’s reconstruction.

Essentially, they’d be promising that if necessary they will seize the assets in the future to pay back Ukraine’s loans. That way, they can provide collateral for Ukraine without touching the assets in question — for now – and avoiding that legal minefield. Meanwhile, creditors who put up cash for Ukraine on the basis of the plan would know that the Russian assets were ultimately backing their loans.

This plan kicks the confiscation risk down the road – but wouldn’t remove it entirely. That means it still could still raise the same issues about the role of G-7 currencies as global reserves.

Yellen downplayed that concern earlier this week. Still, such objections are one reason why previous proposals struggled to find favor.

Windfall Tax

In the US view, so-called “countermeasures” offer a legal basis for a future seizure. That term refers to measures that would be unlawful if imposed against a state that hasn’t violated its international obligations — but are permitted if taken against an offending state, with the intent of pressuring it to end unlawful behavior and provide compensation. If pressure fails, the assets in question can then be used to fund the reparations.

Some legal experts have put forward this argument, but several European nations remain unconvinced – just as they’ve opposed a more straightforward seizure that’s seen as a “cleaner” option by the US. 

Other paths considered include leaving the assets untouched and using them as collateral for bonds sold in global markets to raise funds for Ukraine.  

Pending a more ambitious policy, the EU is slowly making progress with plans for a windfall tax on profits generated by the immobilized funds. On Wednesday, European Commission President Ursula von der Leyen suggested using those proceeds to fund weapons for Ukraine.

The profits amounted to €4.4 billion ($4.8 billion) last year. As of December, the World Bank estimated Ukraine’s reconstruction needs at $486 billion.

--With assistance from Stephanie Baker and Kamil Kowalcze.

(Updates with German finance minister’s comment in eighth paragraph.)

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