It’s time to unlock Russian assets to help Ukraine

Ukraine’s security is critical to Europe, but the continent can no longer rely on the United States to support the country’s war with Russia. Donald Trump keeps blowing hot and cold about whether he is willing to tighten sanctions on Moscow to force Vladimir Putin to agree a ceasefire. The US president could even cut a deal with his Russian counterpart behind Europe’s back.

The European Union, the United Kingdom and other willing countries such as Canada therefore need a way to support Ukraine that does not require Trump’s permission. The best option is to unlock Russia’s $300 billion of frozen central bank assets, the lion’s share of which are in Europe. With Germany’s new government endorsing the move, the political stars may be finally aligning.

European leaders thought they had a deal with Trump two weeks ago to pile extra pressure on Putin if Russia refused a ceasefire. But the president changed his mind last week after speaking to his counterpart and suggested he would no longer play a central role in peace talks.

Europe is therefore casting around for things it can do on its own. Ukraine, for its part, will this week urge the EU to impose aggressive sanctions independently, Reuters reported, citing a previously unpublished white paper.

The EU and UK last week did tighten sanctions on Russia’s “shadow fleet”, which exports some of the country’s oil in defiance of a price cap imposed by the Group of Seven (G7) large industrialised nations. While this is useful, it will not scare Putin.

There are two ideas that might cripple Russia’s hydrocarbon-dependent economy: imposing sanctions on countries that buy Russian oil and gas; and slashing the G7 price cap. But the idea that Europe will unilaterally impose tariffs on China and India, the two biggest buyers of Russian oil, is fanciful. Meanwhile, although the UK has urged the G7 to cut the price cap, it would be hard to enforce this if the United States is not on board.

By contrast, Europe does not need Washington’s approval to use the sovereign assets that were stranded in the West when Russia invaded Ukraine in 2022. Around 210 billion euros, ($238 billion) is held in the EU, with the bulk at Euroclear, the Belgium-based clearing house. Another 25 billion pounds ($34 billion) is in the United Kingdom. Only $5 billion is in the United States.

REPARATION LOAN

The UK and Canada have long been open to using Russia’s frozen assets to support Ukraine. But France, Germany and Belgium have been against confiscating the funds. These countries worry such a move might be illegal and could frighten other sovereign investors, such as China, from stashing foreign currency reserves in the European single currency.

The G7 did agree last year to lend Kyiv $50 billion with the money to repay the loan coming from the interest that is accumulating on the frozen assets. Joe Biden, then US president, pushed the move.

Now the tables have turned. While the United States is cooling on using Russian assets, EU states are warming to the idea. The clearest sign of the shift is that the new German government, led by Friedrich Merz, said in its coalition agreement that it will explore with allies ways to use the frozen assets to support Ukraine.

Key European officials are still against confiscating the reserves and handing them to Ukraine. But there is an alternative, legally solid, way to use the assets for Kyiv’s benefit: a “reparation loan”. This is based on the fact that Russia owes Ukraine reparations as a result of its illegal invasion.

Governments are setting up an international claims commission to rule on Kyiv’s demand for compensation at the behest, of the United Nations General Assembly. But this will take years to reach a judgment, and Ukraine needs cash to defend itself now.

A reparation loan, an idea I have developed with co-authors, is a way for a coalition of willing countries to advance money to Ukraine immediately. In return, Kyiv would pledge as collateral its claim for reparations. When the claims commission rules, Moscow will have a choice. Either it pays the reparations, or it loses its assets.

This mechanism avoids the problems associated with confiscating the assets. For example, it is hard to see why a reparation loan would cause China to avoid using the euro as a reserve currency. Besides, Beijing is hardly going to sell euros and buy US dollars now that Trump has launched a trade war against it and undermined faith in the US currency.

LEVERAGE

A good time to launch this reparation loan would be at next month’s G7 leaders’ summit in Canada, hosted by its new Prime Minister Mark Carney. The way to get maximum leverage would be to link it to progress in the peace talks.

Ukraine needs about $100 billion a year in external financial support. So the coalition of willing countries could make a $50 billion loan every six months.

If Russia agrees to a ceasefire, the allies would stop making loans. But if Moscow then broke the truce, the coalition would make another $50 billion loan. Every six months that Putin refused peace, he would see $50 billion going to fund his enemy’s war effort - with the money ultimately coming from the Kremlin’s own assets. European countries would gain some leverage over Putin to get him to agree to a decent peace deal.

It would, of course, be even better if the United States was part of the coalition making the reparation loan - and if the G7 simultaneously cut the oil price cap. So European leaders should invite Trump to take part in the loan.

But Ukraine’s future is so vital to their own that it would be wise to exercise some strategic autonomy. If Trump is not willing to join in, Europe and its allies should act on their own.

[Hugo Dixon is Commentator-at-Large for Reuters. He was the founding chair and editor-in-chief of Reuters Breakingviews]