“The European Commission (EC) has prepared an innovative if complex plan to mobilize seized Russian assets to fund Ukraine. This initiative is critical given the absence of any credible alternative.”, — write: www.fxempire.com
No Viable Alternative to Support Ukraine’s Long-run Financing Needs Activating more of the frozen Russian funds is critical because Western funding options for Ukraine are becoming increasingly constrained. The initial expectations of the IMF that the war would wind down by 2024 have proven too optimistic while Western governments have already allocated EUR 321bn to Ukraine. Ukraine still faces a hefty financing requirement of around USD 50bn a year and more than USD 200bn by the end of the decade.
Western governments, which have increasing debt and military spending commitments of their own, appear less willing if not less able to continue funding Ukraine indefinitely. EU member states, collectively Ukraine’s largest single financier, risk domestic backlash should they shoulder more of the burden at the expense of cutbacks in domestic spending.
As a result, attention has shifted to using the frozen Russian assets. This ensures Russia pays for the war it started, easing the strain on Western taxpayers. The G-7’s Extraordinary Revenue Acceleration (ERA) loan program, which uses the interest from these reserves, marked the beginning of this shift, but its resources are nearly exhausted.
Short of outright defeat, it is unlikely that Russia would compensate Ukraine so the zero-coupon loans to Ukraine would serve effectively as grants, minimizing the adverse impact on Ukraine’s public-debt sustainability and repayment capacity (Figure 1).
In addition, the EC wants to facilitate the renewal of the immobilization of the frozen assets by a qualified majority of EU member states rather than the unanimity currently required, to preclude potential future vetoes that could scupper the program.
Inviting global partners that also have frozen Russian assets to participate in the suggested instrument is a prudent approach. The British government has already presented a scheme that repackages around GBP 25bn of Russian assets as loans.
One suggestion from German Chancellor Friedrich Merz that the funds should only be used by Ukraine for procuring military equipment, and not for general budgetary purposes, may be too restrictive.
Ukraine faces a significant financing gap for non-military expenditure – such as covering the costs of pensions, public-sector wages and humanitarian aid – alongside that for military expenses.
The EC Proposal May Prove a More Indirect Yet Effective Channel of Funding Ukraine Under the plan, guarantees provided by the participating governments would act as a contingent liability and increase the implicit financial liabilities of participating central governments.
Nevertheless – given Ukraine’s significant funding requirements, if the EU does not find a way to mobilize the frozen Russian reserves, it would likely have to resort to alternative arrangements potentially calling even more on already stretched budgetary resources.
Such a contingent liability would prove a more indirect channel of financing Ukraine than relying on bilateral loans, grants from EU member states or EU-level loans absent the recourse to Russian money – potentially curtailing the ultimate liability for member states.
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Dennis Y. Shen is the Chair of the Macro Economic Council and Lead Global Economist of Scope Group. The rating agency’s Macroeconomic Council brings together the company’s credit opinions from multiple issuer classes: sovereign and public sector, financial institutions, corporates, structured finance and project finance.