BRUSSELS (Reuters) -Euroclear plans to seize and redistribute about 3 billion euros ($3.4 billion) of Russia's funds that are frozen at the Belgian clearing firm after Moscow grabbed investor cash in Russia, according to documents seen by Reuters and people familiar with the matter.

The money will be used to compensate Western investors after Moscow seized cash held in Russia in recent months, three people said, escalating attempts by both sides to recoup billions in funds affected by the war in Ukraine.

Euroclear will redistribute 3 billion from a pool of 10 billion euros in cash belonging to Russian entities and individuals hit by European Union sanctions following Moscow's 2022 invasion of Ukraine, two of the people said.

The move, reported in detail here for the first time, marks a new level of reprisal by Europe. The European Union changed its sanctions regime late last year, allowing a disbursement to Western investors in such circumstances.

In the past, the West has engineered loans and payments to Ukraine from the interest on frozen Russian assets, which Russian President Vladimir Putin has denounced as theft.

The planned Belgian payout was triggered by Russian government orders to confiscate billions from Western investors last year. Euroclear has been under pressure from international investors to release money. Reuters could not determine which of them would benefit from payout.

Euroclear in March gained clearance from Belgium, its principal legal authority, to make the payout, according to the people who spoke to Reuters.

Euroclear has notified clients of the upcoming payments in an April 1 briefing document, reviewed by Reuters.

"We received authorisation from our competent authority, to unfreeze the compensation amounts and make these available to our participants," the document said.

Reuters could not establish the identity of the Russian owners whose assets will be seized.

Belgium's government declined to comment, while Russia's finance ministry did not respond to a request for comment.

Euroclear has emphasised that it implements sanctions but the company does not take decisions about the shape of sanctions or their lifting.

The payments to Western investors won't dip into the more than 200 billion euros of Russian central bank reserves that have been frozen in the EU, the two people said.

It will, however, reduce the stockpile of Russian wealth, that includes cash, shares and bonds, held almost entirely at Euroclear that gave the bloc leverage over Moscow. Some hoped frozen Russian assets could be used to rebuild Ukraine.

Western investors have tens of billions of assets stranded in Russia from seized factories to cash.

Europe's decision to release frozen Russian wealth in Europe to investors is viewed critically by some.

"To seize Russian assets and give them to Western investors would be morally reprehensible," said Jacob Kirkegaard, a sanctions expert with the Peterson Institute for International Economics, a Washington-based think tank.

"It would represent a political decision to prioritise Western businesses over the taxpayer. Any frozen assets that don't go to Ukraine's reconstruction will ... have to be covered by tax payers."

BLOCKED

The European Union froze hundreds of billions of Russian assets - including the central bank reserves - following Russia's invasion of Ukraine in February 2022, in an unprecedented move that amounted to its single biggest penalty to Russia.

Euroclear holds the lion's share of sanctioned Russian wealth in Europe - more than 180 billion euros.

Getting that money back is important for Moscow and has prompted roughly 100 court actions against Euroclear, one of the people said. Reuters could not determine the status of those court cases.

Moscow has warned last year that it would retaliate if its frozen assets were seized and used for Ukraine and made a change in the law earlier this year, allowing it to do so.

In past months, Moscow has seized 3 billion euros of cash held by Euroclear at a depository in Russia to compensate Russian investors hit by Western sanctions, two of the people said.

Clearstream, an arm of the German stock exchange that like Euroclear warehouses securities such as stocks and bonds for traders, also found itself in a similar situation.

The Luxembourg-based firm will also make similar payouts from frozen Russian cash to Western investors but on a smaller scale, one person familiar with the matter said.

The sum concerned is several hundred million euros, the person said. Clearstream declined to comment.

Two people familiar with the case said it amounted to a swap of Western money frozen in Russia with Russian cash blocked in Europe, initiated by Moscow.

Moscow's efforts to unlock its frozen assets come as its economy labours under a fourth year of international sanctions imposed because of the war. Russia continues to bomb Ukraine amid talks between Washington and Moscow to end the war, which have left Europe on the sidelines.

($1 = 0.8834 euros)

(Additional reporting by Reuters in Moscow, Alex Marrow in London and Julia Payne in Brussels; editing by Elisa Martinuzzi and Daniel Flynn)