Von der Leyen puts forward three options to guarantee Ukraine 130 billion over next two years

Brussels – A month ago, the EU heads of state and government wavered in the face of Ukraine’s monstrous economic needs over the next two years and requested that the European Commission study a range of options to support it. Today (17 November), in a letter sent to the capitals, Ursula von der Leyen put forward three options. First, she met the Belgian Prime Minister, Bart De Wever, to try to convince him that the only way forward is to use the frozen assets (mostly in Belgium) of the Russian Central Bank. The only option that would not burden national budgets already compromised after three years of conflict.

According to estimates of the International Monetary Fund—and assuming the end of the war by the end of 2026—Kyiv currently has to cover a gap of around €135.7 billion for the next two years. A gap that must be filled immediately, because Ukraine must be equipped to “fight tonight,” emphasised von der Leyen. In addition to being timely—the decision must be taken by the end of the year at the latest—the financial support should be “highly concessional”, given Ukraine’s “current debt sustainability situation,” flexible, and distributed fairly among member states and with international partners.

The first option—the most straightforward—would involve the member states paying bilateral subsidies to the Union, which in turn would provide non-repayable support to Ukraine. An option—the Commission points out—that “does not entail new joint liabilities and does not require additional guarantees or compensation,” but that “has an immediate impact on the budgets of the Member States.” A minimum annual support target of €45 billion should be set, with the G7 partners contributing to finance the remaining needs. The respective impact for EU countries would be between 0.16 and 0.27 per cent of GDP per year.

The alternative route is the tortuous one of resorting to joint debt. This second option would consist of the “granting by the Union of a loan with limited recourse, financed by the Union through borrowing on the financial markets,” as explained in the document sent to European chancelleries. A loan that Ukraine would repay only in the event of compensation from Russia, and which would be backed by “legally binding, unconditional, irrevocable and on-demand guarantees,” provided and distributed among the member states according to their Gross National Income (GNI). Capitals would have to pay back the interest and—”in the spirit of burden-sharing”—proportionately increase their contributions if any of the 27 decided to back out.

Again, the interest to be paid by the Member States would “directly affect their deficit and debt.” Not to mention the guarantees themselves, which are also “likely” to burden national budgets. One way out would be for the loan to be guaranteed by the EU’s budgetary leeway, in which case “no such impact would be expected,” the Commission notes. To put €90 billion into the EU budget for the next two years, including related interest, it would be necessary to amend the Multiannual Financial Framework regulation, which currently “does not allow borrowing for a third country.”

The barricades that several Member States would erect in the face of these two options make Brussels lean towards the third and last card, the ace up the sleeve, however risky it may be. It is a loan financed with Russian state assets frozen on European soil, amounting to over €200 billion. The option has been under consideration by the EU executive’s legal experts for months: the EU would enter into a compulsory debt contract with central securities depositories holding Russian assets frozen in “several member states” at zero interest, and then lend the cash to Ukraine in several tranches. Kyiv would repay the loan only once the war is over and Russia has paid reparations. Only then would Brussels in turn repay the financial institutions.

It is a slippery slope; the EU would risk “repercussions” if the loan were “wrongly perceived by others as a confiscation.” Not only legally, but also economically: “One cannot exclude that there are potential knock-on effects, also for the financial markets,” von der Leyen again admitted, while reiterating that “the structure of this option guarantees full compliance with international law in all scenarios.”

But above all, domestically, there is the strenuous opposition of Belgium, the country where Euroclear, the company that holds some 185 billion belonging to Moscow, is located and is already using the interest generated by these assets to support a separate €45 billion loan for Ukraine. The member states would ensure that the EU could repay Euroclear even without receiving any compensatory payments from Kyiv. “The exact scope of the risk coverage should be defined to ensure the necessary protection of exposed member states, as well as sufficient certainty for other member states providing voluntary guarantees,” the paper points out.

In addition, “in view of the necessary solidarity among Member States, the guarantees may also have to cover the costs and financial consequences arising from arbitral awards or other judicial decisions or proceedings against a Member State arising from the freezing of Russian sovereign assets.” And the loan to Ukraine “should be designed in a manner that preserves the financial stability of financial institutions holding the fixed assets.”

Von der Leyen, and with her almost all the member states—except those who are generally opposed to new financing for Ukraine—are hoping to chip away at Belgian resistance, because for many chancelleries the only viable option is to call on the resources of the Russian Central Bank. This is also because, unlike borrowing on the markets, the member states’ guarantees would in this case be considered “as contingent liabilities,” thus not affecting national debts.

 

English version by the Translation Service of Withub