It was hailed as an innovative “new solution” to plug Ukraine’s colossal funding needs. But Brussels’ call for a special “reparation loan” to Kyiv is now regarded by several key players as a potentially rehashed remedy that could, eventually, morph into a major new problem.
The proposed loan, announced by Ursula von der Leyen in her “State of the Union” speech earlier this month, is set to be discussed at length by EU leaders in Copenhagen tomorrow. The plan would entail using hundreds of billions of euros in immobilised Russian central bank assets held in the bloc to plug Ukraine’s budget gap and finance its long-term security.
The European Commission president claims that the plan – which is based on a 2024 article co-authored by Hugo Dixon, the prominent Reuters commentator – does not involve “touching” the underlying assets, which could potentially violate their sovereign immunity guaranteed under international law.
More important, Ukraine would only need to pay back the loan if Moscow agreed to war reparations for Kyiv. The arrangement, in theory, would allow fiscally strained EU states avoid coughing up money to support Ukraine’s war effort and reconstruction.
However, there is strikingly little agreement on many of the plan’s key details.
One big issue is its value. German Chancellor Friedrich Merz, who expressed full-throated support for Brussels’ proposal in a Financial Times op-ed last week, declared it could provide “almost €140 billion” in interest-free loans to Kyiv.
On Monday, however, Commission spokesperson Balazs Ujvari said that the loan would harness “around €170 billion” in immobilised assets held at Euroclear, a Brussels-based clearing house, which holds the vast majority of the Russian central bank assets that were frozen by the EU shortly after Russia’s full-scale invasion in February 2022.
Many EU officials and diplomats stress that such disagreements are perfectly normal when the plans are still at such an early stage of development.
Arguably, however, the proposal – and the lack of details surrounding it – is symptomatic of a Commission that increasingly operates in the shadows and whose leader, critics say, lacks basic economic literacy.
The scheme has already sparked an uncharacteristically angry response from Belgium, which is a crucial player in EU negotiations because it is the home base of Euroclear.
“Taking Putin’s money and leaving the risks with [Belgium]: that’s not going to happen, let me be very clear about that,” Prime Minister Bart De Wever said last week. He added that investors could “withdraw their reserves from the eurozone” if “countries see that central bank money can disappear if European politicians see fit”.
The Commission’s subsequent issuance of a one-and-a-half-page note on its plan to member states ahead of a discussion by EU ambassadors on Friday has only partially assuaged Belgium’s concerns, according to people familiar with the matter.
One EU diplomat expressed sympathy for De Wever’s position, and in particular the importance of the EU executive’s proposal not being tantamount to unilateral confiscation, which Belgium, France, Italy, and several other member states have long opposed.
“We understand where De Wever’s remarks are coming from,” the diplomat said. “But we want to look for creative steps to use the funds while being mindful of the legal and financial risks.”
Lagarde’s wrath
Brussels’ proposal – and the manner of its presentation – has also drawn the ire of the European Central Bank (ECB), which has repeatedly warned that any legally improper use of the assets could trigger an exodus of investors’ capital from Europe that could, in a worst-case scenario, threaten the financial stability of the euro area.
ECB President Christine Lagarde was deeply frustrated by the Commission’s failure to provide any written presentation of its plan ahead of a meeting of EU finance ministers in Copenhagen earlier this month, according to a person familiar with the closed-door discussions.
The former lawyer complained that instead of a written brief she only received a phone call from Maarten Verwey, director-general at the Commission’s economic and financial affairs division and one of the scheme’s primary proponents, the person said.
During the subsequent press conference, a visibly exasperated Lagarde even drew laughter from the audience when she directly asked EU Economy Commissioner Valdis Dombrovskis about what the plan actually consisted of.
“It is no seizure, no confiscation from what we understand, but it’s a substitution of the claim on cash to a claim on euro bonds. Is that correct?” she asked.
Dombrovskis, who was clearly unsettled by the question, did not directly answer. Instead, he fumbled through a response in which he reiterated that the plan isn’t tantamount to confiscation, and stressed that the profits generated by the assets are currently being used under a separate scheme to fund a $50 billion G7 loan to Ukraine.
‘Working on the details’
Confusion has also reigned over other crucial issues.
These include how the EU intends to honour von der Leyen’s pledge not to “touch” the underlying assets whilst “mobilising” the funds through member state guarantees, as suggested by John Berrigan, director general of the EU executive’s financial services division, during a parliamentary hearing last week.
“That’s exactly what we’re working on – we’re working on the details,” Commission spokesperson Ujvari said when asked to elaborate on this discrepancy on Monday.
He declined to expound on the proposal cited in the Commission’s one-and-a-half page summary, which notes that approving the loan wouldn’t require unanimity among the bloc’s 27 member states, as is the case for the EU’s sanctions packages on Russia.
The reparation loan plan would rely on a specific segment (Article 31, Paragraph 2) of the Treaty on European Union, which states that the Council can act by “qualified majority” for decisions relating to the bloc’s “strategic interests and objectives”.
Avoiding the requirement for unanimity would bypass a potential veto by Hungary, whose pro-Moscow leader, Viktor Orbán, has repeatedly threatened to torpedo previous sanctions extensions.
European officials cautioned that the divisions over the reparations loan were unlikely to be resolved during Wednesday’s meeting.
“This is a very complex issue, with a lot of financial and legal implications; I would not expect the leaders to go into the detail of those implications,” one senior EU official said. “Certainly, there needs to be political guidance on whether they are ready to work on this.”
Ujvari said that Brussels is still looking “very closely” at its plan and will “be coming forward” with a more detailed proposal “soon”.