EU prepares 'reparations loan' for Ukraine using Russian assets, Reuters reports

According to unnamed officials cited by the outlet, the EU initiative envisions that Ukraine would repay such a loan only after Russia provides compensation for the damages caused by the war.

The concept of the idea was presented last week by European Commission President Ursula von der Leyen. This came against the backdrop of declining direct military assistance to Ukraine from the United States.

Von der Leyen said the loan could be backed by funds linked to the Russian Central Bank’s assets frozen in the West. At the same time, the assets themselves would not be confiscated, as this is unacceptable to a number of EU countries.

Loan from the Coalition of the Willing

According to unnamed officials, if Hungary refuses to participate, the new mechanism could be established by a Coalition of the Willing rather than all 27 EU member states.

"We had a first preliminary discussion of the new loan idea. But so far, many things, including the amounts, are not clear," a senior EU official told Reuters.

Details of the EU’s idea

Under the new proposal, the EU could replace Russian assets with zero-coupon bonds issued by the European Commission. These bonds would be backed by guarantees from all EU countries or only from those willing to participate.

The guarantees are considered the riskiest part, since Russia could make claims once sanctions are lifted. There is also the threat of a Hungarian veto on extending sanctions. However, if sanctions remain in place until Russia fully withdraws its troops from Ukraine, including Crimea, the assets are likely to stay frozen, keeping the risk low.

After being replaced with bonds, the assets could be placed in a special mechanism owned either by all EU member states or only by those providing guarantees. For now, the idea is still at an early stage.

Bypassing Hungary’s veto

According to officials, moving the assets from the Belgian Euroclear depository would provide greater flexibility for investments and allow for higher returns.

"This means it will be possible to invest the Russian assets long-term and at better rates," one of them said.

Officials clarified that Hungary’s refusal to participate in intergovernmental guarantees would have little impact on others, as the country’s economy is too small.

"To avoid blackmailing the EU with a veto by some, an intergovernmental agreement would probably be the way to go," another EU representative said.

Frozen Russian assets

After Russia’s full-scale invasion of Ukraine, European countries froze about €210 billion ($250 billion) in Russian assets. Most of these have already been converted into cash and placed in deposits at the Belgian Euroclear depository.

The EU is already using the interest from these assets to repay a $50 billion loan to Ukraine provided by the G7 members.

Incidentally, on September 17, Bloomberg reported that Germany has changed its stance on frozen Russian assets and now supports their use to aid Ukraine.