How will the EU’s $136b loan to Ukraine work without frozen Russian assets?

Summary

• EU leaders will borrow €90 billion to loan to Ukraine for defence over two years, avoiding using frozen Russian assets for now.
• Concerns over financial and legal risks, especially for Belgium, led to the rejection of using frozen Russian assets.
• The EU will keep Russian assets frozen, seeking reparations from Moscow as a potential repayment source for the loan.

BRUSSELS - European Union leaders decided on Dec 19 to borrow cash to lend €90 billion (S$136 billion) to Ukraine to fund its defence against Russia for the next two years, rather than deploying an unprecedented plan to finance Kyiv with frozen Russian assets.

This is how ‍the loan ​will work and why the bloc dropped the idea of using Russian sovereign assets. 

How will Europe lend Ukraine the money?

The EU will provide interest-free loans for the years 2026-2027
based on EU borrowing on capital markets backed by the EU budget headroom, the difference between the maximum amount ​the EU ​can ask EU members to contribute and the amount it needs to cover foreseen expenses.

The €90 billion should cover about two-thirds of Ukraine’s needs for the next two years.

Initially, the idea had been for Britain to provide much of the rest, using its frozen Russian assets.

The idea of EU borrowing ‍had initially seemed impossible as it requires unanimity and faced opposition from Hungary's Russia-friendly Prime Minister Viktor Orban. But Hungary, Slovakia and the Czech Republic agreed to ​let the scheme go ahead after EU leaders agreed it would ⁠not impact the three financially.

Why did using frozen Russian assets fail?

The European Commission had put forward a plan, which many EU members backed, to allow EU governments to use up to €165 billion - most of the €210 billion of Russian sovereign assets currently frozen in Europe. 

This would not involve confiscation, which contravenes international law. Instead, the cash would be invested in zero-interest ​bonds issued by the Commission, which would help cover Ukraine's needs for 2026 and 2027. 

However, Belgium, where €185 billion of the total Russian assets in Europe are held, resisted. Italy, ‌Malta and Bulgaria also expressed reservations.

The main difficulty was providing Belgium with open-ended ​guarantees against financial and legal risks from potential Russian retaliation or legal action for the release of the money to Ukraine.

The leaders still gave the European Commission a mandate to keep working on this "reparations loan".

Will Europe be repaid and what is the financial impact?

The EU leaders said Russian assets, totalling €210 billion in the EU, will remain frozen until Moscow pays war reparations to Ukraine. If Moscow ever takes such a step, Ukraine could then use the money to pay back the loan.

That does not look likely.

German 10-year government bonds, which serve as a benchmark for the wider euro zone market, came under modest pressure, which pushed up yields, albeit below a Dec 18 nine-month ‍high, while the euro held steady against a firmer dollar.

Using frozen Russian assets could have cheapened European government bonds, raising market borrowing rates further ​and deterring investors. To some, borrowing €90 billion is a relatively small price to pay to help Ukraine and keep creditors happy.

Mr Carsten Brzeski, global head of macro research at ING in ​Frankfurt, said he thought there should be enough investor appetite for the new loan.    

“The nice thing about the ‌current solution is that it establishes this idea that, well we’re not allowed to call it a Eurobond, but we’re getting very close. The project bond has clearly become a tool in Europe’s toolkit.” REUTERS