Burning Boats: Europe’s Financial Point of No Return

You Only Get to Seize Reserves Once

On March 20, the Sudzha gas facility in Russia’s Kursk Oblast was destroyed. The pipeline was the last remaining point at which natural gas flowed from Russia to Europe through Ukraine after the 2022 Nord Stream pipeline sabotage. Ukraine was quick to accuse Russia of staging a false flag attack to pin blame on Kyiv. Moscow dismissed the allegation as “absolutely absurd.”

So much for an “energy ceasefire”

Whatever the truth, the impact is clear. As

Energy Flux

pointed out, Sudzha’s destruction marks a potential tipping point in how European natural gas markets price geopolitical risk. Once again, the EU isn’t just watching this war, it’s getting pulled deeper into it.

As tensions continue to build rather than ease, EU leaders are moving closer to an unprecedented decision: whether to seize €274 billion in frozen Russian assets.

These funds were originally held in short-term sovereign bonds, part of the Russian central bank’s reserve strategy. But those bonds have matured. What remains is cash. Lots of it. Piled up in custodian banks.

Roughly €210 billion sits in EU jurisdictions. The largest chunk, €183 billion, is held by Euroclear, a Brussels-based clearinghouse. The rest is distributed across the UK, Japan, France, Canada, Switzerland, Australia, and Singapore.

This week, UK Foreign Secretary David Lammy and EU foreign affairs chief Kaja Kallas met in London to discuss “innovative initiatives” for boosting European defense capabilities. Including how to achieve the full-scale confiscation of Russian sovereign funds.

Playing checkers | Getty

To be clear, EU member states aren’t completely united on this. Baltic and Nordic countries, along with Poland and the Czech Republic are pushing hard in favor. France, Germany, Italy, Spain, and Belgium are in the opposing camp. But the ground is shifting. According to Politico, both France and Spain are “warming to the idea” and Germany’s recent actions indicate it may be softening its stance as well.

In fact, Lammy hinted that a change of government in Germany may create the political window needed to shift Berlin’s long-standing opposition to asset seizure.

The legality of seizing Russian sovereign assets can be contested. But in international law, that’s mostly an academic exercise. No enforcer or supranational court is going to stop the EU. If the political will is there, the EU can do what it wants. Brussels can pass a regulation to legalize the move within the bloc.

Moscow has already labeled the plan “theft.” Russian Foreign Ministry spokeswoman Maria Zakharova made it clear last year:

Our country has significant amounts of Western funds and property under Russian jurisdiction; all of this may be subject to Russian retaliatory policies… the arsenal of political and economic countermeasures is wide.

Russia will retaliate. That much is guaranteed.

What’s less certain is how painful those countermeasures will be. Asset seizures, company nationalizations, tit-for-tat sanctions may sting, they won’t necessarily be systemic.

But the real risk here isn’t what Russia does next. It’s what the rest of the world does quietly, over time. The third-order effects are the ones that matter. And if the EU goes through with this, they’re almost guaranteed to backfire. Let’s break it down.

You Can Do This Only Once

The scale of frozen Russian assets is unprecedented. According to a study by economists from the ECB and the IMF, Russia’s frozen foreign reserves are over three times larger than those of the median country sanctioned since 1914 relative to global reserves.

Put differently: this is the biggest sovereign asset freeze in modern financial history, the bulk of which is concentrated in Europe.

The only comparable case is World War II. The combined total of all central bank sanctions imposed during that global conflict is roughly on par with the amount currently frozen from Russia.

Seizing assets is a significant step up from just freezing them. Freezing is reversible. It signals pressure without crossing a point of no return. Seizing, on the other hand, is permanent.

And what the EU is planning would set a global precedent. Never in history have non-belligerent countries seized the assets of a belligerent country’s central bank in an ongoing war to the benefit of a third country. And with good reason.

Imagine trying to explain the EU’s plan to him

The global system runs on an implicit contract: sovereign reserves are off-limits.

Which means, if you issue one of the world’s most important reserve currencies, you can play the seizing card just once. After that, you lose the power to hold it again because from then on, no one will ever trust you.

The Last Time This Happened…

These kinds of concerns were present throughout history.

For example, in an internal memo from February 24, 1942, then Assistant to the U.S. Treasury Secretary Harry Dexter White informed Treasury Secretary Henry Morgenthau about “a pronounced shift from dollar deposits to gold by foreign governments and central banks” that occurred in the six months following the U.S. asset freeze imposed on June 14, 1941. A reason he identified for this shift was:

The feeling that earmarked gold historically has a preferred legal status compared to dollar deposits.

That same logic is resurfacing today. The recent wave of central banks buying gold has been partly attributed to the freeze on Russian assets.

Nevertheless, people like Joseph Stiglitz insist this move is necessary to hold Russia “accountable.” Proponents like him see a quick win: money for Ukraine, pressure on Russia. But that’s a big gamble. The odds for success are low but the downside is almost guaranteed:

First, it’s far from clear that seizing the assets would contribute to ending the war. Russia claims total gold and foreign exchange reserves of around $627 billion (€579 billion). Yes, the frozen portion is significant. But depending on how Russia values its war aims, it may be willing to absorb the loss. And clearly, Russia doesn’t need access to the frozen assets to keep funding the war.

Second, Europe is losing the long game. It’s signaling its willingness to break every future promise that European custodians are safe. In game theory terms, seizing the assets treats a repeated game like a one-shot play. And the price for that mistake will compound over time.

“De-Euroization”

Countries like China, India, the Gulf states, and Brazil won’t panic. They’ll just reposition—quietly, but permanently—because they plan for tomorrow. Once the taboo is broken, it’s a slippery slope. The threshold for the next seizure gets lower and the moral justification easier to invent.

Prepare for “de-euroization” headlines and a gradual rebalancing of sovereign wealth funds. Gold, neutral currencies, and apolitical financial hubs will be the winners.

The losers will be European banks, clearinghouses and government bonds:

The aforementioned study estimates that seizing Russia’s sovereign assets could raise U.S. government bond interest rates by 60 basis points, assuming the U.S. participates in such sanctions. The mechanism is simple: reduced demand for bonds from the sanctioning country pushes up its borrowing costs.

Let’s engage in a bit of speculation on how this mechanism could play out in Europe.

The Experiment is Gonna Cost

Suppose sanctions raise interest rates on government bonds by just a third of what the study estimates for the U.S.—20 basis points. With the EU’s general gross debt at €13.86 trillion in 2023, this would translate to €28 billion in additional interest payment per year. In less than seven years, the extra interest would outweigh the value of the assets seized held by Euroclear.

Quite the price-tag for a simple lesson:

You don’t get to seize a sovereign’s reserves and keep global trust. Pick one.

Of course, it’s highly unlikely that Trump would ever participate in such a move. He’s actively trying to normalize relations with Russia, whatever the results so far. But the real mystery is why the EU might be willing to go through with it.

Signaling Through Self-Harm

From the outside, it looks less like strategy and more like a naive fixation on schoolyard fairness: “Russia did something wrong. They should be punished. We have their money. So we take it.”

But geopolitics doesn’t operate on playground justice. So don’t EU officials have consultants? Of course they do. They’ve seen the memos. They understand reserve flows, legal precedent, bond spreads, and reputational risk. They know exactly what message this sends to the rest of the world. So why press forward anyway?

Because it seems like the EU is now engaging in a stratagem rarely used in rational statecraft: Inflict injury on oneself to send a signal. In theory, this can work. There’s a logic to burning your own boats: “Look how serious we are. We’re willing to absorb pain. We can’t retreat.”

But burning boats only works if your opponent cares. If they don’t, all you’ve done is weaken yourself, while your rivals quietly reposition for the long game. Sadly, the most plausible explanation is this:

A Tragic Performance

In Europe, Ukraine’s fight against Russia’s invasion is constantly framed as the fight for Democracy—with a capital D. Not just a war in Europe but a war for Europe. That kind of narrative leaves little room for pragmatism.

It turns everything into a moral referendum. And anyone who questions the cost becomes suspect. The EU has shifted from pragmatic actor to ideological vessel. And ideologically driven actors don’t optimize. They perform.

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Who needs financial credibility when you’ve got vibes? | APA