Last week, by adopting Regulation 2025/2600 of 12 December (Russian Assets Regulation), the Council effectively froze Russian state assets permanently. The assets had already been frozen under the EU sanctions regime established by Council Decision 2014/512/CFSP, which required unanimous approval for renewal every six months. In our view, this de facto permanent freezing of Russian state assets, in its current form under Article 122(1) TFEU, remains primarily designed to address matters of foreign policy and, being based on qualified majority decision-making, violates the conferral of competence under the Treaties. In the long term, given that the frozen assets also serve as a security for the newly agreed loan of EUR 90 billion for Ukraine, this will also jeopardize the enforceability of the said collateral.

What’s new

Currently, Russian state assets are frozen by the EU under Council Decision 2014/512/CFSP and Council Regulation (EU) No 833/2014. These restrictive measures (also known as sanctions) are adopted by the Council within the framework of the Common Foreign and Security Policy (CFSP). A structural weakness of EU sanctions freezing the Russian state assets lies in the fact that they must be renewed every six months by unanimous Council decision. In the past, Hungary in particular has threatened to withhold its consent to renewal.

Since the value of the frozen Russian state assets amounts to up to EUR 210 billion, proposals for how these funds might be used to support Ukraine have existed for some time (see here and here). One such suggestion is a so‑called reparations loan.

The original plan presented by the Commission, though not adopted, essentially envisages the implementation of a bundle of Regulations enabling the Union to lend the frozen assets from the financial institutions in which they are held, and subsequently onward‑lend them as an interest‑free loan to Ukraine. Ukraine would be required to repay the loan only if Russia were to make reparation payments for its war of aggression (see here). This plan failed primarily due to concerns over liability risks and the extensive guarantees that would have had to be provided by the EU Member States. Instead, the Council decided to grant Ukraine a loan of EUR 90 billion within the EU budget. The loan is to be secured by frozen Russian state assets.

However, the plan to use Russian state assets as security for a loan to Ukraine would be jeopardized if a dissenting Member State, such as Hungary, were to vote against the extension of the asset freeze under EU sanctions law. Therefore, to prevent Russian state assets from becoming unfrozen prematurely, and following a proposal from the Commission, the Council issued a Regulation on emergency measures addressing the serious economic difficulties caused by Russia’s actions in the context of the war of aggression against Ukraine (Russian Assets Regulation).

The key innovation of the Russian Assets Regulation does not lie in the asset freeze itself, but in its underlying legal basis. Unlike previous measures, the Russian Assets Regulation relies on Article 122(1) TFEU. As a consequence, unanimity was not required, allowing the Regulation to be adopted by qualified majority under Article 16(3) TEU against the votes of Slovakia and Hungary. Importantly, continuous six‑month renewals are from this point forward no longer necessary.

The scope of Article 122(1) TFEU

Article 122(1) TFEU authorises the Council, on a proposal from the Commission, to adopt “measures appropriate to the economic situation”. This empowerment applies only “without prejudice to any other procedures provided for in the Treaties” (see Article 5(4) TEU) and must be exercised “in a spirit of solidarity between the Member States”.

Historically, the predecessor provision (Article 103(1) EEC Treaty) was limited to economic stabilization measures. However, since the Maastricht Treaty, the provision has been applied more broadly to economic policy measures in general. This expansion in scope has likely contributed to the increased recourse to the said provision in recent years to what has been described as the “new super‑competence” of Article 122 TFEU – long regarded as a “sleeping beauty” (see here and here).

Nonetheless, sanctions have never previously been adopted on the basis of Article 122(1) TFEU.

Strict delimitation of legal bases

This absence is hardly surprising considering the particularly strict delimitation of the legal bases governing measures under the Common Foreign and Security Policy (CFSP). Where measures affect the CFSP (e.g. sanctions), this strict separation is required not only by the principle of conferral (Article 5(1) and (2), and Article 13(2) TEU), but also by the explicit non-encroachment clause set out in Article 40(2) TEU. Accordingly, a legislative act implementing a policy under Articles 3 to 6 TFEU may not contain any provision that could be the subject of a CFSP decision (para. 15).

Given its location in Title VIII, Chapter 1 (“Economic Policy”), Article 122(1) TFEU is likewise subject to Article 40(2) TEU. The rationale of Article 40(2) TEU is to protect the inter-governmentally organized CFSP from encroachments on its competences. Therefore, the provision prevents circumvention of the special CFSP procedures by drawing a clear determination line between CFSP and other EU competences (para. 13). Accordingly, the CJEU’s case law clearly states that CFSP measures may not be based on legal bases outside the CFSP (paras. 45 et seq.). Whether a particular measure falls within the scope of the CFSP or within economic policy under Article 122(1) TFEU must be determined according to the predominant objective of the provision (paras. 19 et seq.).

The argumentation of the Commission and the Council

Against this background, the Commission, in its Proposal, strives to establish an adequate link to the protection of the Union’s economic situation. Similarly, in the recitals of the Russian Assets Regulation, the Council devotes considerable argumentative effort to demonstrating that the permanent freezing of Russian state assets serves to safeguard the Union economy.

Substantively, the argumentation amounts to the assertion that the Union’s economic and security policies are inextricably intertwined. The European economy is said to be already suffering from Russia’s war against Ukraine (see Recitals 3 and 4). Member States are thus reported to have incurred significant fiscal costs in mitigating these effects (for instance, compensatory measures for increased energy costs) and in strengthening their defence capabilities (see Recitals 5 and 6). Moreover, Russia’s hybrid attacks against the Member States are – according to the recitals of the Regulation – reported to constitute not only a threat to security but also to the Union’s economic situation (see Recitals 15 and 16).

In essence, the Council’s and Commission’s main argument is the following: Should Russia regain control over its frozen state assets, it would likely deploy those funds to intensify both its war efforts in Ukraine and its hybrid attacks against the Member States, thereby further jeopardising the Union’s economy (see Recital 13). Henceforth, the Commission and the Councill argue that Russian aggression poses not a direct but an indirect threat to the EU economy.

Economic policy or sanctions policy

While a coherent and firm stance against Russia’ unlawful aggression may indeed yield long-term economic benefits for the European Union, from a purely competence-law perspective, the chosen indirect approach is not convincing.

First, it is an open secret that the Commission’s proposal for the Russian Assets Regulation was not primarily aimed at protecting the economy, but rather at circumventing the unanimity requirement in CFSP decisions. This approach prevented Hungary and Slovakia from blocking the measure. However, an asset freeze is a typical restrictive measure, a characterisation that the Commission itself recognizes in its own sanction’s guidelines. The Russian Assets Regulation therefore serves at least dual objectives: sanctioning Russia for its unlawful war of aggression and protecting the Union’s economy.

While pursuing such mixed objectives is not, in principle, problematic and would ordinarily require recourse to all relevant legal bases (para. 11), this approach, which has already been criticised in light of the SAFE Regulation, is precluded in the CFSP context by Article 40(2) TEU (see para. 7 and para. 5). According to the CJEU’s case law, the strict delimitation of competences to protect the intergovernmental nature of the CFSP expressly prohibits circumventing CFSP procedures through recourse to alternative legal bases (para. 76). In the present case, however, circumventing the unanimity requirement was precisely the Commission’s objective (see also here).

Moreover, the assertion that the protection of the Union economy constitutes the primary purpose of the Russian Assets Regulation appears unconvincing. The asset freeze laid down in Article 2 of the Russian Assets Regulation is, both in its wording and in substance, virtually identical to the provision set out in Article 1a(4) of Council Decision 2014/512/CFSP. The Russian Assets Regulation thus effectively reclassifies a measure previously adopted under the CFSP as an act based on Article 122(1) TFEU. It remains unclear why an asset freeze should, in one instance, primarily serve to sanction Russia and, in another, to protect the European economy.

Furthermore, the context in which the Russian Assets Regulation was adopted indicates that it primarily serves foreign policy objectives. After all, the Commission presented its proposal for the Russian Assets Regulation within the framework of a five-step plan to establish a reparations loan for Ukraine. The remaining instruments of the plan, however, are based on Article 212 TFEU, a legal basis situated within the Union’s external action and foreign policy framework. Ultimately, the Russian Assets Regulation arguably pursues sanctions policy rather than economic policy.

This conclusion raises concerns not only under Article 40(2) TEU. Article 122(1) TFEU is itself an exceptional provision. Where more specific legal bases are available, the principle of lex specialis derogat legi generali requires that they prevail. Consequently, a measure that is primarily intended as a sanctions instrument – such as the one adopted here – cannot be validly founded on Article 122(1) TFEU.

Conclusion and outlook

Given reports that Ukraine may soon be unable to cover its financial needs, the European Union’s chosen course of action is comprehensible. Supporting Ukraine in its defence against the unlawful Russian invasion is without doubt politically justified. It is equally understandable that, in light of the obstructionist stance of Hungary and Slovakia, those Member States determined to provide further support to Ukraine were ultimately left with no realistic alternative but to invoke Article 122(1) TFEU as the legal basis.

Nevertheless, from a purely competence‑based perspective, Article 122(1) TFEU is not the appropriate playing field for long‑term foreign and security policy strategies which lack prospects of political acceptance within the Counsil and are therefore advanced under the guise of economic policy. Previous legal analyses of the reparations loan plan have largely overlooked the issue of competence (see here, here, and here). This omission is particularly risky, as, while the likelihood of a successful challenge by Russia is rightly considered very low (see here and here), a successful claim by an overruled EU Member State (e.g. Hungary) could overturn the Russian Assets Regulation and thereby tear down the very foundation of the loan now adopted. Therefore, the contested legal basis may ultimately prove counterproductive.