4 days ago
Russia's frozen $245 billion can pay for Ukraine's arms
The mood in Kyiv early this year was upbeat. Many hoped a new U.S. president dedicated to "peace through strength' would produce a more robust American approach to ending Russia's invasion. Few believed Donald Trump would be duped into handing over Ukraine's best negotiating cards by Vladimir Putin's professions of peace. Yet it happened and the effect on Ukrainian morale has been devastating.
Now, finally, there's a glimmer of hope. In his comments from the White House on Monday, Trump made it clear that the worst possible outcome for Ukraine — a U.S. refusal to go on supplying air defense and other critical weapons — has been avoided. But as always with Trump, there are conditions. He will continue sending Kyiv weapons only if other nations pay for them. And although he threatened Russia with 100% secondary tariffs, these would take effect only after 50 days, giving Putin the rest of the summer to press his offensive with impunity.
Trump's new policy remains a net loss for Ukraine compared to the situation before he took office, because Europe will struggle to foot the U.S. share of the bill for Kyiv's defense as well as its own, and that means fewer arms. Still, the plan he cooked up with Mark Rutte, the secretary general of the North Atlantic Treaty Organization, is in one respect defensible.
The U.S. agreed long ago to confiscate Russian central bank assets that were frozen at the start of the war. Europe — where $245 billion of the roughly $330 billion is held — continues to debate legal niceties. If Washington was ready to make Russia finance the defense of its own victim, even if the U.S. held only $5 billion of the total, why should the Americans pay for Europe's hesitation?
France, Germany and Belgium worry about the impact such a breach of sovereign-immunity norms might have on faith in the euro as a reserve currency. Others are concerned it would take years to get the funds released once seized, because of the legal challenges that Russia would certainly mount in international courts — and might even win.
To date, there have been attempts to satisfy everybody. First it was using only the interest on the Russian assets to support Ukraine, producing an initial biannual payment of €1.5 billion ($1.75 billion) in July last year — a rounding error on Ukraine's needs. Then, in October, the Groupd of Seven countries agreed to leverage those interest payments by using them to service $50 billion in loans. This still falls short of the scale needed to tilt the field against Putin.
Replacing the U.S. military and financial aid provided by President Joe Biden's administration would cost about $45 billion a year for the duration of the war. This is objectively affordable and also rational, given the much higher cost of dealing with a vengeful Russia that takes control of Ukraine.
On top of that, Europe will need to do more than pay Trump to continue U.S. aid, if it's to persuade Putin that he has no chance of achieving his maximalist goals in Ukraine. One useful baseline as to how much more is the unused arms-manufacturing capacity that Ukraine has available, but can't to put work, because the government lacks funds to place the orders. This year, the shortfall is $19 billion, according to President Volodymyr Zelenskyy's strategic adviser, Oleksandr Kamyshin. So now we are talking in the range of an extra $64 billion a year for Europe to find, which is not politically sustainable.
There are several proposals for getting around the legal hurdles involved in using all of the frozen Russian assets to fill this gap. One elegant solution recently published would allow the entire pool to be offered to Ukraine as loans. These would be repayable to Russia, but only if and when it abided by the restitution award that a postwar international tribunal will most certainly make, given the clear illegality of Putin's invasion.
And since the World Bank estimates Ukraine's reconstruction bill at $524 billion and counting, any such award is highly likely to cover the full $300 billion of Russian assets.
I can't be sure how a court would view this plan. Yet the logic of its proponents — Lee Buchheit, an American lawyer who spent a career specializing in sovereign debt, U.K. journalist Hugo Dixon and the French European Parliament legislator Nathalie Loiseau — is clear. The Russian assets would not change ownership, but merely custodianship, unless Moscow refused to pay duly awarded damages. At that point, a court order would seize them with full due process.
The loans would be made in tranches to ensure not only that Ukraine gets money at a rate it can efficiently use, but also to give Putin one more reason to halt his invasion. Should he do so, the loan system also would reduce the future fatalities and destruction for which Russia must compensate.
Whether this particular proposal is adopted isn't the critical point, which is that a nontaxpayer source for funding Ukraine's defense has long been hiding in plain sight. It's time to fully use Russia's frozen assets if all the lofty talk of urgency from European leaders — most recently at last week's Ukraine recovery conference in Rome — is to have meaning.
Putin's no fool. He knows it isn't politically viable for the Europeans to finance the war on their own for long and that he can outwait them. The best way to turn Trump's commercialization of U.S. foreign policy into a strategy for ending the war is if the additional financial burden it creates does not depend on the lasting goodwill of European taxpayers, but rather on the Kremlin's own central bank reserves.
Marc Champion is a Bloomberg Opinion columnist covering Europe, Russia and the Middle East.
