One of the main expected decisions of the upcoming G7 summit is the determination of a mechanism to use the frozen assets of the Russian Central Bank to provide financial assistance to Ukraine.
The decision to use the profits from investing Russian assets, estimated at €2.5–5 billion per year, has already been made. However, a new idea promoted by the US is to allocate Ukraine a loan of $50-75 billion, which would be repaid using the profits from investing the frozen Russian assets.
Such a scheme would guarantee a sufficient level of aid to Ukraine in 2025 regardless of the outcome of the US elections and the position of the Republicans in Congress. Moreover, Europe would avoid the risk of financing the support alone.
All G7 leaders agreed to the idea in principle, but the question remains as to who will provide such a loan – the US or the EU. Both options have advantages and disadvantages and significant legal and political obstacles.
But if a decision is made, it will put an end to discussions about the possibility of direct asset confiscation.
One of the main tasks of the G7 summit, which will be held in the Italian town of Borgo Egnazia, on 13-15 June, is to finalise the mechanism for using the frozen reserves of the Russian Central Bank to provide financial assistance to Ukraine. The summit's agenda, of course, is much broader, but this is likely the most practical and historic decision the summit can make, especially as this is apparently the last time the G7 will meet in this composition, with three summit participants (Biden, Sunak and Macron) preparing for dramatic national elections, says Josh Lipsky, Senior Director of the Atlantic Council's Centre for Geoeconomics.
Frozen Russian assets are estimated at around €260 billion. About €200 billion of these are held in the Belgian depository Euroclear, which continues to invest them. The decision to use the profits from these investments, which experts estimate at €2.5–5 billion per year, to help Ukraine was made by the Council of Europe on 21 May. The first tranche of €1.5 billion through the European Peace Fund is expected to be received by Ukraine in July.
However, the US, represented by Joe Biden, is lobbying for a more ambitious and forward-looking plan, with which, according to Reuters, all G7 members agree in principle. €2.5–5 billion per year does not seem like a serious support — this is roughly the monthly amount of necessary international aid to Kyiv. Moreover, next year, Ukraine risks being left without American assistance altogether if Donald Trump becomes the new American president. Even in the event of Joe Biden's re-election, the approval of the next aid package is far from guaranteed, given the difficulties encountered in approving $61 billion in aid this year.
To ensure Ukraine's financing in 2025 in advance, the US proposes using the profits from investing the frozen Russian assets to make payments on a loan of at least $50 billion provided to Ukraine (according to Politico, the amount could be higher — €75 billion). European G7 leaders are also highly interested in this plan, as they fear being left alone with the problem of financing Ukraine. According to sources from Bloomberg and Reuters, EU finance ministers have generally approved the plan, but some fundamental issues still cause disagreements.
The main issue is who will raise the funds for the loan to Ukraine — the US or the EU. Most European countries, led by Germany, insist that the US should provide the loan. This option does not impose additional debt obligations on the EU but raises questions about guarantees and risk mitigation. For example, Washington is not satisfied that, under current rules, the decision to freeze assets by the 27 EU members must be unanimously renewed every six months. Consequently, a veto by any member — such as Hungary — could theoretically lead to the unfreezing of assets. Hungary is predicted to resist any changes to the rules for renewing sanctions, according to Mujtaba Rahman from Eurasia Group in a column for Politico. Moreover, he notes, Washington's condition is also opposed by other countries because there is little difference between permanent freezing and confiscation.
If Europe raises the money for Ukraine, loan repayments could be guaranteed by reserving funds in the EU budget. Hungary would not be able to influence such a decision because the approval of EU Macro Financial Assistance programmes requires a qualified majority. The most serious drawback of this approach (besides the fact that EU countries do not want to take on all the financial risks) is that it requires the approval of the European Parliament. The newly elected parliament (→ Re:Russia: European Balance) will start working in July and will first deal with the approval of the new head and composition of the European Commission. In August, the Parliament will go on recess until October, and the approval of the composition of the European Commissioners will stretch into the autumn, as it did in 2019. All this would not be the best context for the EU to take on new obligations.
At the same time, the content of the aid package will depend on who ends up becoming the creditor. If it is the US, the emphasis will be on financing American arms, if it is the EU, it will be the opposite, Mujtaba Rahman predicts.
Moreover, the approval of the debt scheme will put an end to discussions about the confiscation of Russian reserves. The participants of the G7 summit are once again being urged to do this by experts from the American Center for Strategic and International Studies (CSIS). At the end of April, the Parliamentary Assembly of the Council of Europe (PACE) issued a resolution calling on European authorities to confiscate Russian assets. A week earlier, Joe Biden signed a law allowing the transfer of Russian assets seized in the US (valued at only $5 billion) to Ukraine.
CSIS experts argue that the PACE resolution is feasible and appeal to the experience of the UN Compensation Commission, which was established to compensate for the damage caused by the Iraqi invasion of Kuwait in 1990. The Commission began its work in 1991 and concluded on February 22, 2022, two days before Russia's invasion of Ukraine. During this period, it secured compensation payments totaling $52.4 billion. As in Kuwait, the mechanism for paying compensation to Ukraine should consist of three elements, the CSIS experts write: a registry of claims (already created by the Council of Europe), an international commission to review them, and a compensation fund to hold the money intended for damage reparations. The legal foundation for this mechanism was established by a UN resolution adopted in November 2022.
The operational mechanism of the compensation commission is a separate legal issue. However, Europe will not agree to the scenario of confiscation, fearing long-term economic consequences for its financial system (→ Re: Russia: The Case of Three Hundred Billion). If the G7 leaders agree on the use of profits from the investment of Russian assets, the issue of confiscation (as well as unfreezing) will become irrelevant at least until the loan is fully repaid. Previously, European officials criticised this idea as well. For example, some experts worry about the reputation of the Euroclear depositary. The CSIS analysts call these fears unfounded: Russian assets have been frozen for more than two years, but Euroclear's position has not been affected.