(Bloomberg) — In an about face, German officials are ready to support a US plan to leverage the future revenue generated from frozen Russian assets — mostly stranded in Europe — to back $50 billion in aid to Ukraine, according to people familiar with the discussions.
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Germany’s assent could be a crucial step that brings Washington and its allies closer to securing a substantial new aid package for Kyiv and ensuring US engagement regardless of the outcome of the November election.
US and EU officials say momentum is gathering behind the US proposal, which is expected to dominate talks between finance ministers and central bank governors from Group of Seven nations gathering in Stresa, Italy, for their annual meeting starting Thursday.
But German officials don’t expect any final agreement until G-7 leaders meet June 13-15, nor implementation to take place until next year, said the people, who spoke on condition of anonymity.
At stake is whether Ukraine’s government can remain financially viable — funding its defense and servicing its debt — through 2025. With the war showing no signs of abating and Russia’s military offensive gaining ground, Ukraine’s staunchest backers are keen to secure medium-term financing for the embattled country and send a signal to Moscow that support for Kyiv among G-7 allies is not faltering.
Making some use of the frozen assets has become more urgent given the uncertainty surrounding the US election. Political divisions in Washington have already made it difficult for President Joe Biden to extend more aid to Ukraine, and his challenger, former President Donald Trump, has expressed skepticism about support for the embattled country.
G-7 countries have immobilized about $280 billion of Russian central bank assets in response to the February 2022 invasion of Ukraine. The majority of those assets is held in Europe at the Belgium-based clearinghouse Euroclear.
For months, the US has led a push to use those assets to help Ukraine. Options have ranged from outright seizure and giving the money to Ukraine, to securitizing them to issue bonds, or using them to back some form of loan.
The proposals have been met with skepticism by several European countries. Governments led by France and Germany have voiced concerns over the impact such moves would have on financial stability and the euro’s appeal as a reserve currency, as well as over their legality.
The latest US proposal has been received more positively in European capitals, including Berlin, officials said, because it would involve merely using the interest being generated by the assets without seizing the principal.
EU countries have already agreed to use that income stream by taxing it at close to 100%, and to transfer those proceeds to Ukraine twice a year. A G-7 accord would replace that arrangement.
The assets are expected to generate about €5 billion annually. Under the proposal being discussed, the G-7 would estimate how much that income would generate over a given number of years and make that amount available to Ukraine up front.
Hurdles Remain
The ultimate size of the aid package would depend on the length of the repayment terms and how long the assets will be immobilized, but officials say it could be as much as $50 billion. How this amount would be managed and by whom are among the details still being discussed, officials said.
The US is hoping all G-7 governments – or at least a subset of the group – will participate in providing the up-front loan, but officials said Washington is prepared to shoulder the entire loan on its own, as long as there’s sufficient commitment from the EU that the assets will remain immobilized and the loan repaid.
There are still long-term uncertainties.
Should the war come to an end and Russia agree to pay for Ukraine’s reconstruction, that would raise questions over whether the assets would remain frozen and what guarantees would be provided for repaying the loan.
The European Central Bank and EU member states are also concerned about protecting Euroclear from any financial risk, for example from Russian lawsuits or possible retaliation from Moscow.
Also, if the EU is required to implement the agreement as a sanction, it may need to renew its decision on freezing assets every six months, a procedure that demands unanimity. While unlikely, that raises the risk that a single EU nation could throw loan repayments into doubt by blocking a continued freeze.
–With assistance from Alberto Nardelli.
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