The International Monetary Fund has estimated that Ukraine will have a €65 billion shortfall in its budget over the next two years without financial aid. About two-thirds of Ukraine’s government revenues are now devoted to the war effort. It desperately needs more cash.
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A stumbling block to a EU plan to use the Russian assets as collateral for a €140 billion loan to Ukraine has been Belgium’s unwillingness to expose itself to Russian litigation if there is a peace deal, sanctions on Russia are lifted and Moscow demands the return of its money, which Euroclear would have a contractual obligation to comply with. That could leave Belgium on the hook for the funds, and facing insolvency.
Russia has, indeed, threatened 50 years of legal warfare against Europe if its assets are touched. It would also probably seize Western financial assets (the amounts aren’t known) that it froze in retaliation for the G-7 sanctions.
The latest EU proposal would involve Euroclear making an interest-free loan equivalent to the value of the Russian assets it holds, which would be used to repay EU countries for money already lent to Ukraine, with the rest lent to Kyiv.
Ukraine wouldn’t be required to repay the loan unless and until it received compensation – reparations – from Moscow for the damage the war has done to its infrastructure and people.
The cost of remediating the damage that the war has inflicted on Ukraine has been estimated at close to the equivalent of a trillion Australian dollars.
An option that has been considered in response to Belgium’s concerns is that some or all of the EU member states provide guarantees that they would underwrite the repayment of the “reparations” loan should Russia refuse to pay for the damage it has done.
Alternatively, the EU could just borrow the money itself and lend it to Ukraine, hoping that repayment would be secured in future peace negotiations.
While a loan to Ukraine, whether backed by Russia’s assets or not, would give the Europeans a direct stake in the outcome of the peace negotiations being undertaken by the US (with minimal involvement by Ukraine), it could also place the guarantor nations at financial risk if the US forces Ukraine into a deal on Russia’s terms.
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That could happen. Under the 28-point plan that the US presented to Russia last month (with, it seems, considerable input from the Russians), apart from ceding Ukrainian land that Russia doesn’t currently control along with that it does occupy, an exclusion from Ukraine joining NATO and reducing the size of its military, all sanctions on Russia would be lifted.
The agreement specifically said that frozen Russian funds would be used in US-led efforts to rebuild Ukraine, with the US receiving 50 per cent of any profits. The EU would contribute $US100 billion ($150 billion) to the reconstruction funding. The rest of the frozen funds would be invested in a separate US-Russian investment vehicle for joint projects.
While the Russians rejected the proposals, the Trump administration has made it clear that it views the ending of the war as a commercial opportunity (surprise, surprise) and is less concerned about Ukraine’s interests – and those of the Europeans – than it is in its own and in Donald Trump’s desire to have his name on a peace deal, regardless of its quality.
If Ukraine’s interests are to be protected, it will be by the EU, not America. That the bulk of Russia’s offshore reserves are held within Europe does give the EU leverage to participate in any settlement, though it is extremely difficult, indeed near-impossible, to obtain a consensus from with a 27-member bloc that contains some pro-Russian voices.
If the EU can agree on a mechanism for funnelling, directly or indirectly, the value of the Russian assets held within Europe to Ukraine, it would give it a place at the table because it would signal to Russia that Ukraine would have the money to sustain its defence for at least the next two years.
Russia might have had some successes on the ground in Ukraine, at considerable cost in lives and equipment, but the war is taking an increasingly severe toll on its own economy, which is in the grip of stagflation, on the brink of recession and where the government’s focus on military spending is causing significant economic stresses in regions not benefiting from the war effort.
A recent tightening of US sanctions on Russia oil exports, targeting both Russia’s major oil producers and, critically, their customers, will cut further and harder into Moscow’s revenues and its ability to fund the war without risking more domestic economic hardship and social unrest.
The Trump administration cut off funding to Ukraine that the Biden administration had been supplying, which means the Europeans have been left to finance its weaponry.
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It’s in their own interests to do so, given that Vladimir Putin has been threatening to widen the conflict into mainland Europe.
There would be some justice in using Russia’s own funds to strengthen Ukraine’s capabilities and its ability to threaten to prolong the war and increase the pressure on Russia’s stretched economy.
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