The West is using Russian money to arm Ukraine. Many more can follow

The West is using Russian money to arm Ukraine. Many more can follow

Money generated by Russian financial assets frozen in Europe will soon begin flowing into Ukraine, giving Kyiv a boost as it struggles to resist an advance by Moscow’s military. Now, the West is trying to turn that cash flow into a flood.

Finance ministers from the Group of Seven advanced economies are discussing new ways to use the proceeds of some €260 billion ($282 billion) of Russian foreign currency reserves frozen by the West after a massive invasion of Ukraine in February 2022.

The G7 meeting in Italy comes just weeks after Russia launched a surprise attack in Ukraine’s northern Kharkiv region. As the Russian offensive intensified, Western leaders were increasingly pressured to deliver military aid to Kyiv’s armed forces.

“It is important and urgent that we collectively find a way forward to unlock the value of immovable Russian sovereign assets in our jurisdiction for the benefit of Ukraine,” US Treasury Secretary Janet Yellen said during a speech Tuesday in Frankfurt, Germany.

The proposal that reportedly has the broadest support among US and EU officials involves a $50 billion loan to Ukraine, using future windfall profits from Russian assets held in the European Union as collateral.

The plan “will essentially bring forward the flow of interest from assets… (through loans) given to Ukraine,” Yellen told broadcaster Sky News in an interview this week. “Ukraine has a great need, and being able to gather great resources to help Ukraine is important,” he said.

G7 finance ministers hope to agree on a way forward that could be signed when President Joe Biden and other leaders meet for a summit in Italy next month.

The plan stops short of seizing assets outright. The European Union (EU) fears that such a move will prevent other countries from keeping their assets in the bloc. Most of the frozen Russian money is kept in Europe, and the euro is the second most important currency in the world after the US dollar.

The proposal “is halfway to a full confiscation,” Lee Buccheit, a veteran government debt expert and emeritus professor at the University of Edinburgh Law School, told CNN.

From $3 billion to $50 billion?
About two-thirds of Russia’s immovable assets, or about €210 billion ($228 billion), are in the EU, most of them in Euroclear, a Belgium-based financial institution that keeps assets safe for banks, exchanges and investors.

After months of discussions, the EU formally adopted a deal on Tuesday that capitalizes on Euroclear’s windfall profits by reinvesting cash generated by those assets — such as coupon payments on bonds. Western sanctions mean coupon payments and maturing assets cannot be sent to Russia.

Under the EU agreement, between €2.5 and €3 billion ($2.7-3.3 billion) of these profits will be sent annually to Kyiv. The first payment will be made in July, with 90% earmarked for weapons and military equipment.

The allocation of funds will be reviewed annually starting in January 2025, with the option to shift spending toward rebuilding Ukraine’s war-torn economy as its needs change.

“The EU has chosen a path forward that is legally strong, and flexible so that support can adapt to Ukraine’s most urgent needs,” European Commissioner for Trade Valdis Dombrovskis said in a statement Tuesday.

Unlike the drip feed of funding agreed by the EU, the proposal being discussed by the G7 could provide a larger lump sum, immediately.

Reuters reported Yellen as saying on Thursday that the $50 billion figure had been discussed by G7 ministers but there was no agreement yet on how large the secured loan should be.

A bigger check?
Apart from confiscating asset reserves, or lending Kyiv money backed by the interest they earn, there is a third option the West might consider – so-called compensation loans.

Under this approach, Ukraine would borrow money from a syndicate of allies, including G7 members, and pledge it as collateral for its claim for compensation — or reparations — against Russia. This would give Kyiv access to larger sums of money than using future or current windfall profits from Russian assets.

“Ukraine has a claim against Russia for compensation – legally, that cannot be doubted – and it will actually finance part of that claim by

pledged it to get this loan from the G7,” said Buchheit, the debt expert.

If Russia fails to pay reparations, then the G7 will be in a position to use a pool of frozen assets to recover the value of its loans to Ukraine, he added.

This mechanism also ensures that Russia foots part of the huge bill for rebuilding Ukraine, which the World Bank has put as much as $486 billion over the next decade.

“Short of regime change in Russia, Putin will never pay reparations,” said Buccheit. “This $300 billion may be the only contribution that Russia will give pay reparations for what he has done to Ukraine.”

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