EU Heads of State Called Upon to Use Immobilized Kremlin Assets to Finance Ukraine’s Defence

EU leaders are facing urging to determine on tapping into Russia’s frozen assets to support the Ukrainian defence, during unprecedented calls from the US.

At a pivotal summit in Brussels, European Union leaders will be asked to make good on a promise to secure urgently needed funds for Ukraine, as Kyiv is under pressure to cede territory as Russian forces eke out gains on the battlefield.

“We cannot envision a greater act of European defence than supporting Ukraine’s fight,” stated the head of the EU executive, who went on to say that “the next days will be crucial in securing this.”

She further stated that Europe must assume ownership for its own defence in a world she characterized as “dangerous and driven by deals,” stating: “This is not an option. It is a necessity.”

Funding Options on the Table

Recently, a pair of main options were suggested to fund Ukraine’s urgent military and reconstruction needs for the coming years:

• Collective European Union issuing of debt.
• A so-called “reparations loan” backed by Russia’s frozen assets within the Union.

Legal and Financial Hurdles

Belgium, which holds the bulk of the €210 billion in immobilized Russian assets within the EU, has expressed apprehensions. It argues it lacks adequate assurances that other EU countries would come to its aid if the scheme were to fail, possibly sticking Brussels with a multibillion-euro liability.

Adding to these worries, the Russian central bank announced it was pursuing significant compensation from the Brussels-based clearing house which holds most of these funds. Belgium also is concerned that courts in countries allied to Russia could move to seize European assets in response.

Key National Stances

The Italian government has positioned itself as an significant voice of caution. The prime minister argued that using Russia’s frozen wealth without a solid juridical foundation would give Moscow a significant political victory. Similar to Belgium, Italy argues that joint EU debt issuance would be a safer method.

“Italy, naturally, consider fundamental the principle that Russia should primarily pay for the reconstruction of the country it invaded, but this result must be accomplished with a robust foundation in law,” the Italian leader informed parliamentarians.

Germany expressed determination to render up to €90bn in Russian funds “available for Ukraine’s defence.” He put the chances of reaching an agreement at “50/50.”

He told lawmakers the sum could finance the Ukrainian army for “a minimum of another two years,” and its deployment would send a powerful signal to the Russian president.

The Suggested “Compensation Loan” Mechanism

According to the envisioned scheme, the EU would grant Kyiv with a substantial loan financed through issuing bonds. This loan would only be repaid if and when Moscow was forced to pay reparations to Ukraine.

European officials maintain that Russia’s ownership claim on the immobilized funds would not be affected. Moscow, however, argues the move amounts to confiscation and has vowed to respond in kind.

Political Hurdles and Consensus

Officials engaged in the negotiations have indicated the reparations loan is the only feasible option, as using the Union's common budget would necessitate the agreement of all members.

The Hungarian government, which is hostile to aid for Ukraine, has promised to block any attempt to use the EU budget as security for a Kyiv loan. The reparations loan, however, would require only a qualified majority of EU member states.

“A vast number of member states favour the compensation loan,” stated one senior EU official. “Any potential alternative that would demand unanimity, I don’t think is achievable so we are left with the compensation loan.”

Last week, the EU used special legal measures to permanently freeze the Russian funds, averting the risk of losing control on them due to a potential veto from a Kremlin-friendly government when sanctions come up for renewal.

Belgium has suggested that such emergency powers could also be used to create an EU loan for Ukraine secured against the budget, bypassing the need for full agreement. But, other countries argue that would be a juridical stretch beyond acceptable limits.