One of the key topics of support for Ukraine in 2024 was the confiscation of the frozen reserves of the Central Bank of the Russian Federation.
“Ukraine has not yet seen a tangible result from the use of frozen assets of Russian terrorists… to be honest and fair, we need powerful legislative steps at the EU level,” Volodymyr Zelenskyy said at a meeting with the President of Lithuania in January this year.
Eventually, this step was taken. The EU’s decision to transfer interest in Russian assets to Ukraine was the step that the President of Ukraine had been talking about.
However, the 3–5 billion euros a year that Ukraine could receive under this model is obviously only a small amount compared to the total amount of frozen Russian assets, which is $300 billion.
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Therefore, the issue of their confiscation has not yet been resolved. Although many difficult decisions still need to be made to implement it, the Group of Seven made an important step in this direction at its last summit in Italy, following the EU.
Guarantees for Europe
Although the topic of confiscation of Russian assets has been discussed since the first weeks of the full-scale invasion, alternative ideas have been put forward in parallel, at least since the end of the fall of 2022, primarily regarding the use of the income generated by these assets.
After lengthy discussions, in February 2024, Brussels formalized a proposal to transfer 90% of the income earned from the placement of the Russian Central Bank’s reserves on deposit accounts with European banks Euroclear and Clearstream after February 15, 2024.
This step, under current conditions, could bring in about EUR 3–5 billion a year for the entire period when Russian assets are frozen. This was the first real decision to support Ukraine at the expense of Russian assets rather than funds from allies and partners.
However, the delay in the allocation of the US aid package and expectations of a possible victory of Donald Trump, accompanied by relevant statements, have raised concerns about long-term support for Ukraine.
As a result, discussions began on other options that did not involve the confiscation of Russian assets.
Back in January of this year, a Reuters article discussed the possible issuance of “reparation bonds” to secure future reparations from Russia. Subsequently, British Foreign Secretary David Cameron announced the possibility of a “syndicated loan or bond” secured by Russian assets.
This was evidence that the idea is no longer being discussed only at the expert level.
The decision to provide Ukraine with a loan of about $50–60 billion, guaranteed by Russian assets or income from them, was announced as one of the key decisions to be made at the Group of Seven summit in June in Italy.
However, already on the eve of the summit, there were discussions that questioned its final adoption.
First of all, they discussed the division of responsibility for lending between the US and the EU. The United States, which has become the main lobbyist for this process, controls only a few billion dollars of Russian sovereign assets, unlike the EU, which has about 200 billion.
Therefore, the EU demanded guarantees from the United States regarding the political and economic consequences of such a step, which are significantly higher for the European Union and, in particular, for Belgium, where Euroclear is located.
In addition to the risks, the issue of loan repayment was also acute: what would happen if the CBR’s reserves were returned to Russia before the loan expired? Or, in the case of revenues, will they be lower than the projected $3–5 billion per year (this is also a possible scenario)?
These doubts persisted almost until the start of the summit, but at the end of the meeting, the G7 made the necessary decision.
A decision with many unknowns
“Today’s step is a fundamental political step… it is an unexpected result of which I am particularly proud,” Italian Prime Minister Giorgia Meloni said on the evening of June 13 at the end of the first day of the summit.
She added that the decision “will need to be worked out quickly from a technical point of view, clearly taking into account the regulatory framework already adopted at the EU level.”
The last thesis and the content of the summit communiqué itself in this part indicate that the G7 leaders chose a strategy of first making a framework decision in principle and then working out the technical details.
The communiqué announced the launch of a special program, Extraordinary Revenue Acceleration (ERA) Loans for Ukraine, and announced its size at $50 billion. The loan will be repaid using the proceeds from Russian assets in the EU “and other relevant jurisdictions.”
This means that Ukraine will immediately receive the funds that should have been transferred to it over the next 15–20 years.
Accordingly, with a forecast of EUR 3–5 billion in asset returns per year, we can expect the loan to have a maturity of 15–20 years. However, if these incomes are lower (which is not impossible), the term will be longer.
These revenues may be even larger – the communiqué suggests that not only the proceeds from assets frozen in the EU but also from other countries will be used for repayment, while recognizing the need to “obtain authorization in those jurisdictions to use…these extraordinary revenues for loan servicing and repayment.”
However, amending the legislation of non-EU members of the Group of Seven can be a lengthy and complicated process.
The G7 countries plan to start disbursing the loan itself by the end of the year, through “several channels,” to support Ukraine’s reconstruction, budgetary, and defense needs.
Obviously, many technical details need to be finalized, but the issues that need to be addressed are already obvious.
For example, it is not yet clear who will act as the lender. On the eve of the summit, there was talk of the World Bank or the creation of a special fund, and after the summit, a solidarity loan from the United States, Britain, Canada, and Japan “within the limitations of our respective legal systems.”
The latter phrase is more applicable to Japan, which, according to the Constitution, cannot directly finance the military needs of other states, but its contribution can be used for humanitarian and economic purposes.
However, this decision is a radical turnaround and is intended to ensure long-term support for Ukraine. However, it also creates a number of challenges.
New challenges for Ukraine
The devil, as you know, is in the details. It is not for nothing that the G7 leaders’ statements contained warnings that the decision on the loan was a matter of principle and that the specific mechanisms for granting the loan needed to be further developed.
What are the technical issues that may be the subject of discussion, and what should be Ukraine’s position on these issues?
An important point is the amount of interest on such a loan.
Indeed, given the significant legal and political risks of the proposed structure, the interest rate on this loan is unlikely to be symbolic (as with EU or US sovereign loans) or discounted (as with quasi-sovereign loans from the International Monetary Fund or the World Bank).
We can assume that lenders may be guided by the EU’s existing decision on the transfer of income from Russian assets, under which the EU reserves 10% to cover legal risks.
One of the most sensitive aspects from a legal point of view is the issue of collateral for such a loan. After all, in the event of insufficient income from frozen assets or the hypothetical immobilization of such assets, the loan will not be able to be serviced in the future.
This raises the question of whether the lenders will require additional loan guarantees from Ukraine in the form of, for example, a pledge of part of the rights to future reparations.
In this regard, one of the most discussed challenges is that this “reparations loan” could block further confiscation of Russian assets: since it is secured by the revenues they generate, they will remain immobilized until sufficient revenues are generated from them.
Skepticism about the confiscation of Russian assets is also present among a wider circle of Ukraine’s allies – participants in the Swiss Peace Summit. Although reparations were not discussed there, in particular, Kenyan President William Ruto noted in his speech that “the unilateral appropriation of Russian assets is illegal and unacceptable, it contradicts the UN Charter.”
This position illustrates well why the issue of reparations was not included in the summit agenda.
And this creates a major challenge: the issue of compensation for victims of Russian aggression is still unresolved.
The $50 billion loan will be used for the current support of Ukraine, which is certainly an important and necessary goal. However, it is unclear whether there will be real sources of compensation in the medium term, which calls into question efforts to establish an international compensation mechanism.
And in light of this, the only guarantee of compensation is the G7’s repeated statement, which is also contained in this year’s statement: “Russia’s sovereign assets in our jurisdiction will remain immobilized until Russia pays for the damage it has caused to Ukraine.”
Ivan Horodyskyy
PhD, Dnistrianskyi Center, Director
The material was prepared with the support of the International Renaissance Foundation within the framework of the project “Compensation4UA / Compensation for War Damages for Ukraine. Phase III: Advocating for steps to ensure a sustainable compensation strategy.”
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