Stay informed with free updates
Simply sign up to the War in Ukraine myFT Digest — delivered directly to your inbox.
EU governments will have to provide bilateral grants or raise new joint debt to fund Ukraine if they are unable to agree a deal to use frozen Russian assets for a €140bn loan to Kyiv, Brussels has warned.
In a letter to member states on Monday seen by the Financial Times, European Commission president Ursula von der Leyen said Ukraine needed €135.7bn over the next two years to cover its military and fiscal needs. She laid out three options available to EU capitals: national grants, new joint debt or leveraging the immobilised Russian assets.
The letter is aimed at raising the pressure on governments to agree to a €140bn “reparations loan” proposed by the commission earlier this year, which Belgium has so far blocked for fear of legal and financial repercussions. Neither bilateral grants nor more joint EU debt are palatable options for most member states.
About €190bn of Russia’s central bank assets are held at Euroclear, a Belgium-based central securities depository, prompting the Belgian government to ask for other governments to share the risks and include assets immobilised in their jurisdictions.
Under the proposed “reparations loan”, Euroclear would invest the Russian central bank’s maturing securities into a special loan agreement with the EU. The EU would, in turn, issue a “limited recourse loan” to Ukraine, which Kyiv would only have to repay if Moscow started paying war reparations.
To assuage Belgium’s concerns and pave the way for an agreement by the end of the year, von der Leyen pledged to explore “additional legal safeguards”, including other member states potentially sharing the costs of international litigation.
But she also said that “risks cannot be fully eliminated” and that it was an “open question” for how long risks should be shared among member states. Despite all the safeguards, “it cannot be discounted that there are potential knock-on effects, including for financial markets . . . if the reparations loan is incorrectly perceived by others as a confiscation” of the Russian assets, von der Leyen admitted.
Belgian Prime Minister Bart De Wever has also called for Russian assets frozen in other European countries to be used. About €19bn has been immobilised in France and is largely held at commercial banks, according to the French government.
In a nod to that request, von der Leyen expressed openness to “expanding” the scheme to Russian sovereign assets held by commercial banks in other parts of the EU. This would “increase the total maximum to roughly €210bn”, she added.
She said the risk of the loan being seen as confiscation could be reduced if other non-EU countries also followed suit. The UK and Canada have said they were considering replicating the EU’s reparations loan in their jurisdictions.
The commission noted that a further €42bn was immobilised outside the EU in G7 jurisdictions. While the US holds about $5bn, Japan holds the equivalent of about $33bn, according to people familiar with the matter.
Another country reticent about using the frozen Russian assets is Luxembourg, citing its bilateral investment treaty with Russia, which could open it to litigation. Belgium has a similar treaty. Von der Leyen advised the countries to “withdraw from the relevant bilateral investment treaties” in order to limit those legal risks.
A spokesperson for the Belgian prime minister’s office did not immediately respond to a request for comment. Euroclear declined to comment.
Additional reporting by Leo Lewis in Tokyo
Read the full article here