Slow unfreezing: why the plan to loan Ukraine funds secured by Russian assets is being hampered

Ursula von der Leyen brought a breakthrough decision to Kyiv as part of the previously announced "reparations loan". However, not everything is so simple... On September 20, during her visit to Kyiv, European Commission President Ursula von der Leyen announced that Ukraine would receive EUR 35 billion as part of the previously announced "reparations loan" secured by proceeds from frozen Russian assets.

This statement was a symbolic confirmation of the promise made by the EU leader almost two years ago, at the end of November 2022, when she stated her intention to "use these proceeds for Ukraine". However, even after this statement, more questions remain about the loan, the fate of the assets themselves, and the reimbursement to Ukraine than answers. Advertisement:

Over time, an increasing number of factors are influencing their resolution, including those that, at first glance, seem unrelated to this topic. Among these factors are the continued blocking of Russian assets and the United States presidential election.

Insurance against the lifting of sanctions

The decision of the Group of Seven in July 2024 at the Puglia summit to provide a USD 50 billion "reparations loan" to Ukraine, to be repaid from the proceeds of the frozen reserves of the Central Bank of Russian Federation, was a real breakthrough. Only a few months earlier, the EU had decided to use the proceeds from these assets in the interests of Ukraine (about USD 3 billion a year), and this loan was a guarantee of financial support for Ukraine in the face of war for at least the next year.

However, the decision still needed to be technically formalized, in particular in terms of the distribution of funding shares among the G7 countries, loan repayment terms, and, most importantly, the fate of the Russian assets themselves. It is known that the largest share of reserves of the Central Bank of Russian Federation - approximately USD 210 billion - is blocked in the EU in two clearing institutions: Euroclear in Belgium and Clearstream in Luxembourg. Currently, sanctions in the form of blocking Russian assets are renewed by the European Union unanimously every six months.

The Group of Seven countries understandably want to have guarantees that these sanctions will not be lifted at some point.

This means that there will be no risks to the return of the funds they have allocated. This is especially important for the USA, which is expected to make the largest contribution of about USD 20 billion, with the same amount planned by the EU and the rest by the UK, Canada, and Japan. The scenario of non-extension of sanctions is not unrealistic.

Both Hungary and Slovakia, as well as other EU member states, may veto the decision to continue blocking the reserves of the Central Bank of Russian Federation, depending on the political situation and legal circumstances. It is to Brussels' credit that almost immediately after the G7 decision, European institutions began working on solving this problem. In September, the European Commission presented two main options to the ambassadors of the member states, which had been previously agreed with the USA: a five-year block on Russian reserves, reviewed every 12 months with the support of a qualified majority, or a 36-month extension with a unanimous vote.

The final decision, or at least its consideration, can be expected at the next meeting of the European Council, which will take place on October 17-18 in Brussels. However, the speed of resolving this issue is influenced by another global factor - the United States presidential election.

Factor of Kamala Harris

The United States presidential election affected the issue of confiscation of Russian assets almost from the beginning of 2023. For almost a year, the draft law on confiscation of Russian assets - REPO Act - had been pending.

Democrats feared that they could give a possible Trump administration additional powers, while Republicans worried that if their candidate was elected, this Act would limit their ability to mediate between Ukraine and Russia. Although Donald Trump did not speak directly about the confiscation of Russian assets, there are reasonable fears that he will oppose such decisions, citing political and economic arguments.

After all, his vice presidential candidate, J.D. Vance, is an outspoken skeptic of such initiatives.

In his memorandum to the Senate on the REPO Act, Vance explicitly states: "seizing the assets of one of the world's largest central banks (the Central Bank of Russian Federation - Ed.) poses a significant threat of exacerbating the perilous financial situation of the US by making US Treasuries less attractive to foreign buyers". Therefore, it is logical that after the G7 decision, Brussels and the Biden administration began actively working to agree on the details of the future loan to guarantee support for Ukraine even if Trump is elected. However, the start of Kamala Harris's election campaign unexpectedly slowed down this process.

As Politico noted, the rise of the Harris USA presidential candidate's ratings raised hopes for her victory and slowed the pace of preparations. Moreover, Harris's team was allegedly working on an alternative option for supporting Ukraine, which would change the configuration previously agreed upon by the G7 in Puglia. The statement of Ursula von der Leyen in Kyiv about a significantly larger share of the EU - EUR 35 billion - was probably intended to demonstrate the EU's commitment to the current plan regardless of the USA decision.

Even before her visit to Kyiv, there were reports of an EU plan "B", according to which the share of blocked reserves could reach as much as 40 billion. However, all the vicissitudes of recent weeks and the fact that the critical breakthrough between the Democrat and the Republican has not happened, seem to have moved the process forward, and an agreement is expected to be reached soon. However, this does not remove the main question: what will happen next?

Two scenarios for Russian assets

The peace initiatives and plans that have been actively voiced in recent months can be viewed differently.

However, they definitely increase the chances of starting a political settlement process. And the fate of Russian assets will undoubtedly be one of the key issues in these discussions. The Kremlin has repeatedly stated its disagreement with the sanctions and the confiscation of reserves of the Central Bank of Russian Federation.

There is no doubt that Moscow will refuse to compensate Ukraine for the damage caused by the aggression. In this case, given that Ukraine has received a "reparations loan", confiscation will be perhaps the only way to ensure compensation to victims and survivors under the international compensation mechanism.

However, there is a need to reconcile the confiscation with the fact that these reserves are in fact "collateral" for the loan. There are two possible solutions to this issue:

1. The reserves remain frozen until the creditors receive all their funds.

   The G7 member states may choose this option also to maintain pressure on Russia to make compensation payments.

2. Assets are confiscated, and the entire amount of assets minus the loan amount is transferred to the future Compensation Fund.

Currently, these issues are not being discussed publicly, but they are certainly being "kept in mind". In particular, the author discussed the risks of the first scenario in private with representatives of the Ukrainian government. One thing is clear: the coming weeks - the decision of the European Council, the Ramstein meeting, the United States presidential election and various "negotiation initiatives" - may become a turning point for many issues related to the Russian aggression against Ukraine.

And the issue of confiscation of Russian assets should be among them.

Ivan Horodysky

Ph.D., Director of The Dnistrianskyi Center 

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