The agency has flagged risks linked to the EU plot to use the frozen funds for a "reparations loan" to Ukraine

Fitch Ratings has placed Euroclear Bank, the Belgium-based depository holding frozen Russian assets, on notice for a possible downgrade, citing legal and liquidity risks linked to the EU's attempt to use the funds to finance a "reparations loan" to Ukraine.

The move on Tuesday to place Euroclear on "Rating Watch Negative" means there is a higher chance its AA credit rating could be cut soon. Fitch said it may downgrade the bank if the European Commission's plan goes ahead without strong legal and liquidity safeguards.

Euroclear was tasked with holding bonds for Russia's central bank; they have matured into cash but cannot be returned because of EU sanctions. The money is currently parked in short-term deposits at the European Central Bank.

Under the EU plan, Euroclear would invest the funds in European Commission bonds to help finance a so-called "reparations loan" to Ukraine, to be repaid only if Kiev later receives reparations from Russia.

Fitch warned that Euroclear could face problems if Russia's central bank were suddenly allowed to reclaim the funds, as the bank might have to pay out quickly while the assets remain locked up, creating a timing mismatch on its balance sheet.

Kirill Dmitriev, the Russian president's adviser on international investment matters, warned that a downgrade of Euroclear could prompt investors to move funds elsewhere. "The European Commission loves self-mutilation," he wrote in a social media post on Wednesday.

Euroclear and the Belgian government have been among the strongest opponents of the "reparations loan" proposal, warning that it could threaten the institution's financial stability. Senior financial figures, including European Central Bank President Christine Lagarde, have also cautioned that proceeding with the process could damage the credibility of the EU's financial system.

READ MORE: Berlin warns opponents of Ukraine 'reparations loan' plan

Last week, the Bank of Russia filed a lawsuit against Euroclear at the Moscow Arbitration Court seeking damages over the immobilization of its funds. The first hearing has been scheduled for January 16.