The penny, or euro cent, finally seems to have dropped - Europe is realising that the only way to fund Ukraine to survive the war is to fully utilise the $330 billion in immobilised CBR assets sitting, largely dormant, in Western bank accounts.
https://www.politico.eu/article/von-der-leyen-proposes-using-russian-assets-to-fund-new-ukraine-loan/
The advent of the Trump presidency, and its pulling of financial support for Ukraine, and the realisation that the war in Ukraine will go on long into the future, has allowed the realisation to dawn in Europe, that Ukraine is underfunded. The bill is around $100 billion a year just to keep Ukraine in the war, likely nearer to $150 billion for Ukraine to have a chance of winning, or drawing the war to an early end. The US was covering near 40% of this total under Biden, but now Europe plus Japan, Canada et al is having to stump up the full nine yards, or $100 billion pa given Trump has moved from giving to taking money to/from Ukraine. Given Europe’s fiscal woes, it’s hard to see national governments stumping up much more money for Ukraine, hence the realisation that CBR assets have to be utilised.
Some of us - yours truly - have been spelling this out for years but have been ignored. Read my blogs for most of the time over the past 3.5 years for my form herein. I remember here a meeting 18 months ago at HM Treasury. I was invited in, with a number of other fund managers, to talk about helping Ukraine’s financing picture - getting the IMF numbers to add up - by helping a speedy private sector debt restructuring. In the room, while other fund managers were eager to engage, I pushed back and said WTF, this operation will save max $15 billion over the three years duration of the IMF EFF to Q127. It does not touch the sides in terms of filling Ukraine’s $100 billion annual financing needs. I warned that actually worse, by pretending that $15 billion somehow helps fill the gaps, we ignore the elephant in the room that longer term, and on the risk of a Trump presidency, Ukraine faces a finacinal cliff in 2025. As it turned out I was the elephant in the room, and the HMT officials politely tried to brush off my protestations, eager to tick the boxes they had been asked to tick and to cram private sector bondholders into a debt restructuring. The latter did happen, and one of the arguments for was that it would help clear the deck for Ukraine’s early market access once the war ended. But as I said at the time, there is no market access for Ukraine, even after such a debt restructuring, unless we assure Ukraine the financial resources to win the war, and we cannot do that credibly unless we freeze and seize the $330 billion in CBR assets and allocate them to fund Ukraine’s speedy victory. Blank faces in the room.
The debt restructuring happened, IMF boxes were ticked, bonds rallied, bond investors made money, and received some coupons on their debt, but zero real benefit to
Ukraine. Actually, no worse, this was a huge disservice to Ukraine as it took momentum out of the compaign to seize CBR assets, and it ensured Ukraine failed to get the funding the needed to win/end the war quickly. It meant that we were massively unprepared now for the debate we are in about how to now fill huge financing gaps.
An IMF mission is in town for the latest review under the EFF. The Fund had assumed an early end to the war in 2025, hence financing needs dropping markedly in 2026 and beyond. That is no longer the case and the programme is now underfunded by tens of billions of bucks. New money needs to be pledged. The existing €50bn EU MFA and the $50 billion ERA - the latter from the interest stream on immobilised CBR assets - are almost exhausted. European member states face signficant budget constraints and it’s hard to see them putting their hands in their pockets for multiplies in more billions of Euros, Sterling or Yen for new support to Ukraine. Hence the debate is back to using immobilised CBR assets, and VDL’s statements. France and Belgium - which hold the largest share of immobilised CBR assets are unenthusiastic. Both argue that any move to confiscate the assets without a sound legal basis would undermine confidence in the sanctity of property rights in Western jurisdictions, and the reserve currency status of G7 currencies. These risks are overstated. See my various blogs in this regard but also the legal basis for confiscation has been clearly laid out, see the attached piece:
https://newlinesinstitute.org/rules-based-international-order/resolving-accountability-over-russian-state-assets-new-understandings-of-jurisdiction-and-policy-opportunities/
In the end, the harsh reality for Europe is that if CBR assets are not going to be used, how do you propose to fund the $100 billion a year cost of keeping Ukraine in the war, and your frontline against Russian aggression and expansion against/to Europe? And how will you fund the cost of a Ukrainian defeat? That is the costs of supporting the tens of millions of Ukrainians moving West and then the huge and immediate need to increase defence spending as a result. Blank faces again in Belgium and France - someone else’s problems - from Belgium a serial free rider on European defence.
I would argue there is the legal basis for confiscation - “countermeasures” but if not there are numerous other solutions to get the money to Ukraine that it needs for its defence.
First, you can either invest the CBR assets more innovatively to generate higher returns, of $30-40bn pa, that can help fill financing gaps. I have argued in favour of a sovereign wealth style structure - the Agency for Ukrainian Reconstruction and Accession to the EU (AURA) but Martin Sandbu in the FT has proposed a bad bank style structure which could do the same thing.
https://www.ft.com/content/28a975a6-8a17-4321-beb8-b70893d6bb9d
Second, again as I have argued that without confiscation, we could just invest the CBR assets more innovatively, and I have proposed a Victory Bond idea where Ukraine issues bonds and CBR assets are used to buy or fund these. Ukraine gets access to the underlying assets (the full $330 billion, or just the interest) - and so is well and fully funded - and Russia’s property rights are not taken away, it still owns the underlying asset, but instead of holding US Treasuries or Bunds, it would hold these new Victory Bonds. Ukraine could decide to pay these back, or not, depending on the course of peace talks and negotiations about the payment of was reparations.
Bucheit and Dixon have suggested a variant of this whereby the loans or bonds are issued by Europe, but the concept is similar.
https://www.ukrainereparationloan.com
There are lots of ways to skin a cat, as they say.
Now some in Europe might object to these schemes but I would put the ball back in their court - what is the alternative for funding Ukraine, as the current funding model which they have forced down our throats has failed as reflected in the fact that 3.5 years later the war is still on-going? So a message to the finance minister of Belgium direct, how are you proposing to Fund Ukraine, and European defence without using CBR assets? And why are you so comfortable with using your own tax payer Euros before Russian taxpayer dollars?
Now given the West has sat on its hands for 3.5 years on the CBR asset front, and over properly funding Ukraine, all the above will take time. This raises a more immediate and pressing question for the IMF - the current EFF is clearly underfunded. The numbers no longer add up. What kind of financing assurances can the IMF accept from Europe, when the whole issue is totally unclear - and still subject to the need to do a lots of work on the legal, the economics and the political fronts? Is the current IMF programme at risk of going off track/lapsing without any such realistic assurances be forthcoming. Can the IMF be assured by messaging to the effect from Europe “don’t worry, we will just find the money from somewhere”. Not sure it can given these are huge numbers at stake here - we are talking about the need for a multi year commitment from Europe to fund Ukraine at a rate of $100 billion plus per year. Given the European political and fiscal context can any such assurances we seen as realistic without CBR assets being brought into the assurance.