Exclusive-Ukraine hits out at Europe's payout from frozen Russian cash

By Tom Balmforth and John O'Donnell

KYIV/BRUSSELS (Reuters) -Ukraine's government has criticised a decision to take billions of euros of Russian wealth frozen in Europe and hand it to Western investors, warning that it weakened Europe's stand against Moscow.

The criticism follows a move last month by Belgium's Euroclear to take 3 billion euros ($3.4 billion) of Russian investor cash held at the clearing firm to pay Westerners who lost out when Moscow seized their money held in Russia.

Now Ukraine has warned that it sends a wrong signal and threatens to weaken Europe's hand when dealing with Russia, while it debates using the entire $300 billion of Russian wealth stranded in Europe to rebuild and defend the battered country.

"If private investors are compensated before the victims of war, it won't be justice," said Iryna Mudra, a senior official in Ukrainian President Volodymyr Zelenskiy's office, in Kyiv's first public comments on the move.

"It creates a perception of inconsistency, of Europe wavering in its resolve," Mudra, a deputy head of Ukraine's presidential administration, told Reuters.

"International law requires that the aggressor is to make full reparation to the victim and not to investors who ... entered a high-risk jurisdiction," said Mudra, who is in charge of legal affairs in Zelenskiy's administration. 

The criticism comes at a critical time for the Western alliance backing Kyiv, with U.S. President Donald Trump's administration distancing itself from Europe and casting doubt over its commitment to Ukraine's defence and Russian sanctions.

Mudra, one of a small circle of officials that set policy, also stressed the importance of maintaining control of the frozen Russian assets, which chiefly belong to its central bank with the majority held at Euroclear.

The central bank assets were frozen at the outset of war in the single most powerful sanction directed at Russia over its full-scale invasion of Ukraine, a penalty that is deeply resented in Moscow.

Euroclear in March gained clearance from Belgium, its principal legal authority, to make the payout, people familiar with the matter have told Reuters, after the European Union changed its sanctions regime last year to make this possible.

A spokesperson for the Belgian government said: "This is not a Belgian decision but the application of a European regulation decided unanimously by the member states."

Euroclear has emphasised that it only implements sanctions and does not take decisions about lifting them. 

'MIND BOGGLING'

Three Russian sources recently told Reuters that Russian President Vladimir Putin's conditions for ending the war include the resolution of the frozen assets issue.

Ukraine, meanwhile, is campaigning fiercely against any return of the money to Moscow. Euroclear alone held 195 billion euros of cash in March - mainly Russian central bank funds, with some belonging to Russian investors.

"If it is returned to Russia, it will be converted into tanks, missiles, drones, training of new troops," said Ukraine's Mudra. "The world ... must demonstrate that unlawful war brings irreversible financial consequences."

Some see the frozen Russian wealth as a lifeline for Kyiv. 

In the past, the West has engineered loans and payments to Ukraine from the interest on the stranded Russian stockpile, which Putin denounced as theft. 

Ukrainian officials fear the Euroclear payout, even though it does not affect the central bank money, could undermine their efforts to secure an agreement on using the wider pool of Russian assets to help their country.

Mykola Yurlov, an official at Ukraine's Ministry of Foreign Affairs, said the payout set a bad precedent, while Kira Rudik, a Ukrainian parliamentarian, was also critical.

"Western companies were operating in Russia at their own risk. Why are these companies basically asking their societies to compensate for this risk?" Rudik told Reuters. "We need this money to rebuild and defend Ukraine."

Last month's move also drew criticism abroad.

"It is mind boggling that the priority is to reimburse corporate interests rather than spend the money defending Ukraine," said Jacob Kirkegaard, a sanctions expert with the Peterson Institute for International Economics, a Washington-based think tank.

While the payout to investors left frozen Russian central bank reserves untouched, it made a dent in the stockpile of Russian wealth that gives the EU leverage over Moscow.

More importantly for critics, it sets a worrying precedent.

European Union leaders are expected to renew sanctions, including a freeze of Russian assets, at a summit meeting in June, although they could yet face an attempt by Hungary to derail those efforts.

(Reporting by John O'Donnell and Tom BalmforthEditing by Tomasz Janowski)