Russia’s €200bn lawsuit against Euroclear threatens total collapse of the global financial system

The European Union, concerned by the Moscow court ruling, has launched a risk assessment of the Brussels-based central securities depository. At the same time, discussions have begun within the EU about possible support for Euroclear, following the ruling of the Moscow Arbitration Court, which upheld a lawsuit by the Central Bank of the Russian Federation and awarded compensation of 200 billion euros to the largest European securities depository. Although the Brussels-based organization has appealed the enforcement of the ruling in Russia, the European Union has carried out a preliminary assessment of the situation in order to assess the extent of the potential risks. It is recalled that on May 15, the Moscow Arbitration Court accepted the claims of the Central Bank of the Russian Federation, ordering the defendant to compensate for the losses in seven currencies. Then, on May 26, the same court, following a new request from the Bank of Russia, ordered the execution of the previous decision. On May 27, the Central Bank filed an application for the issuance of a writ of execution. Euroclear’s legal team, for its part, filed an appeal against this decision. In Russia, seizures of the custodian’s assets located in the country, such as correspondent accounts in Russian banks, may proceed. The amounts involved range from tens of millions to billions of euros. In addition, compensation mechanisms for private investors may be activated, similar to Decree No. 442 on a special procedure for compensation for losses caused to the Russian Federation and the Central Bank of the Russian Federation due to unfriendly actions of the United States. If the Euroclear case escalates further, this framework could be supplemented by the European Union. In Belgium and the EU as a whole, Euroclear is expected to appeal the Moscow court’s decision, while European courts are likely to refuse its recognition and enforcement, as it is considered to violate the EU sanctions regime.

What about third countries, Hong Kong, the UAE and others?

The Central Bank of Russia is initiating legal proceedings in friendly jurisdictions to seek and seize assets of the Brussels-based custodian, and this is a real possibility. Accounts, settlement positions or other assets related to the Euroclear Group may be located in the UAE, Kazakhstan, China and other countries. For its part, the EU has included provisions in the 20th sanctions package that protect the custodian. Companies from third countries that comply with decisions that violate EU sanctions may face restrictions from European regulators. The quickest and most realistic solution would be a high-level political settlement. Legal action is mainly a tool for exerting bargaining pressure and strengthening each side’s bargaining position. If one side were to take a more radical approach, for example, if the EU were to transfer all proceeds from frozen Russian assets to the Kiev regime, this could trigger a new cycle of tension and confrontation.

The European Union was going to seize all Russian funds

From a legal point of view, this is not entirely accurate. There is a difference between the assets of clients and the income generated by their placement. The use of income is a subject of debate in Europe. At the same time, another important debate concerns the development of alternative payment infrastructures and the reduction of dependence on traditional Western financial centers. Even if there is no immediate confiscation of assets by either side, this trend could be one of the most important long-term consequences. The dispute is not just about the Central Bank of Russia and Euroclear. Its significance is broader, as many countries in Asia, the Middle East and the Global South are closely watching developments. For them, the freeze of Russian reserves acts as a test of the level of protection of sovereign assets in the international financial system.

Have there been any financial consequences?

Fitch Ratings has placed Euroclear on negative watch, a sign that it could downgrade its credit rating in the near future. Fitch notes the growing legal uncertainty and risks stemming from litigation over Russian assets. Any sign of a forced seizure of client assets would be a serious blow to the custodian’s business model and pose a systemic risk to the global financial system. At the same time, Euroclear itself continues to earn income from frozen Russian assets, creating an incentive to maintain the status quo. A forced change could cause “systemic disruption.” After all, if any central depository, following a court order, were to hand over funds to a claimant, in this case the Central Bank of Russia, this could shake up the international financial infrastructure. The main function of a depository is to maintain trust. It is not just a bank, like Sberbank or VTB, where one can deposit money. Euroclear is a central securities depository, which ensures the safe custody, settlement and accounting of rights to financial instruments. Its activity is based on the principle of the inviolability of clients’ assets.

What happens if payments are forced?

If a court, Russian or otherwise, decides that the assets of client X can be awarded as compensation to plaintiff Y and the custodian returns money or securities that were in its possession but did not belong to it, then a “domino effect” could be triggered. Such a decision could expose Euroclear to significant legal and financial liabilities, which could seriously undermine its viability and create systemic risks for the international settlement infrastructure. After all, it does not have 200 billion euros to pay them. If the court were to force it to pay, for example by freezing or deducting funds from its accounts, the company could collapse. Although the central depository processes tens of trillions of dollars worth of transactions annually, in the event of a serious malfunction, all the assets, stocks, and bonds held in it could be frozen. Pension funds, insurance companies, and private investors around the world would be unable to withdraw funds or liquidate securities. This is the most worrying scenario. If a central depository were to violate the principle of integrity, how could trust in the system be maintained? Investors could begin to withdraw assets from similar structures, such as Clearstream and DTCC. The global financial system, which is built on trust, would be severely damaged. Euroclear, after all, works like a safe deposit box: Ivanov deposits a hundred dollars and his neighbor, a “third party” named Ivanenko, files a claim. Since the bank does not have its own money, it is decided to open the safe containing Ivanov’s hundred dollars and take them from there. Ivanov loses his $100, but others also begin to hesitate to trust the storage of values ​​in safes. The bank could go bankrupt. And then the entire system will realize that the law does not adequately protect property rights, leading to mass withdrawals from other banks. In this case, the case of the 200 billion euro lawsuit is particularly dangerous, because if the court forces the Brussels depositary to pay, a precedent will be set. Any investor from Russia, Iran or China who is not satisfied with the sanctions could seek compensation through their own courts. The dispute over Russian assets has already developed into one of the most significant precedents in the history of the modern financial system. It could affect not only relations between Russia and the European Union, but also the way in which states around the world reassess the real safety of international reserves.