By Jan Strupczewski
BRUSSELS (Reuters) -The European Union is working on ways to finance Ukraine’s defence and reconstruction with Russian central bank assets immobilised in the West after Moscow’s invasion.
The European Commission plan would allow European governments to use much of the roughly $300 billion of frozen Russian assets for Ukraine without confiscating them – a red line for many of them and for the European Central Bank.
HOW WILL IT WORK?
The European Union would issue a Reparations Loan to Ukraine on the basis of cash balances accrued from maturing securities immobilised in 2022 after Moscow invaded Ukraine.
The loan would only be repaid by Ukraine once it receives war reparations from Russia in a peace agreement, effectively allowing Ukraine to spend the money now, rather than wait until Moscow pays up.
No other details have been publicly floated except that the risk associated with the loan would be carried collectively, either just by European countries or by them and non-European G7 members Canada, Japan and the United States.
HOW MUCH MONEY IS AVAILABLE?
The Commission, which is in charge of setting up the details of the loan, said it would wait for an assessment by the International Monetary Fund of Ukraine’s financing needs in 2026 and 2027 before making a decision on its size.
Finland and Sweden estimate the size of Ukraine’s unmet financing needs in 2026 and 2027 at 130 billion euros.
Of some $300 billion in frozen assets, 210 billion euros ($229 billion) is held in Europe, of which 185 billion euros is in Euroclear, a Brussels-based central securities depository; about 176 billion euros of that has become cash as the securities mature. The remaining 9 billion is to mature and become cash in 2026. The 185 billion will be therefore roughly the cash balance the EU could work with.
But the EU would first repay the 45 billion euro ($50 billion) G7 loan to Ukraine agreed to last year, because that loan was to be paid back by the profits generated by the immobilised Russian assets and the assets would now be used differently.
That would leave some 140 billion euros for the new loan.
HOW WOULD THE REPARATIONS LOAN WORK?
To avoid seizing the Russian assets, the idea is to transfer the cash from Euroclear to a newly created Special Purpose Vehicle (SPV) owned by EU governments, or G7 governments as well. In exchange, the European Commission would issue Euroclear with zero-coupon bonds guaranteed by the owners of the SPV.
The EU bonds would cover Euroclear’s risk against Russian litigation while the cash in the SPV could be invested more profitably than overnight deposits in the ECB and thus generate a higher return for Ukraine.
WILL ALL EU MEMBERS TAKE PART?
The EU preference would be to have all of the EU’s 27 member states and non-European G7 countries signing up to the SPV and issuing guarantees proportionate to the size of their economies.
However, because Moscow-friendly Hungary and Slovakia may not want to participate, EU officials have said that the SPV could be set up without these two countries, if necessary.
HOW WOULD THE MONEY BE DISBURSED?
The Reparation Loan would be disbursed in tranches, which in turn would mean that cash balances would be released by Euroclear progressively and in line with needs. Disbursement of tranches would be subject to preagreed conditions. A part of the loan would be related to European defence cooperation, building on the SAFE initiative joint borrowing for defence projects. A part of the loan proceeds could also be used to cover budget needs, according to a Commission paper sent to EU governments.
(Reporting by Jan Strupczewski; Editing by Philippa Fletcher and Mark Porter)
