European governments and the EU should give the European public, which remains resolute in their support of Ukraine, an additional direct channel to contribute financially to Kyiv’s victory via European Ukraine Sovereignty Bonds, writes Jacob Kirkegaard.
Jacob Kirkegaard is a senior fellow at the German Marshall Fund of the United States in Brussels.
The ability of states to wage war and their ability to raise money has been intimately linked since at least the emergence of the modern state and especially more industrialized warfare in recent centuries.
The US federal government’s Liberty Bonds or the UK government’s War Bonds during War World 1 showed the power of patriotism as investment advice to retail investors. A war perceived as just and necessary often commands the direct financial support of the public.
Large majorities of Europeans today approve of the financial aid granted to date to Ukraine.
As Kyiv’s financial needs increase to fight Russia, and not least with an eye towards rebuilding first the free parts and then all of the country, the European Union and/or individual European countries should directly financially tap their populations’ goodwill towards Ukraine.
It is time for Europe to follow Canada’s lead and issue Ukraine Sovereignty Bonds directly targeted to European retail investors.
The war in Ukraine is entering a critical phase. On the battlefield, Russia’s progress has been blunted and partially reversed and Ukraine today has modern air defence systems rendering Russian missile and drone attacks against civilian infrastructure increasingly impotent.
Tough fighting remains, but there is hope that the reconstruction and economic normalisation of large parts of Ukraine untouched by direct warfare can now accelerate.
Western powers’ commitment to delivering heavy weapons is meanwhile a clear signal of their belief in Ukraine’s fighting prowess and ultimate victory.
Russia cannot sustain a war against a combined economy perhaps 30 times its own sanctioned size. It is therefore appropriate today to begin the planning also for the full reconstruction of Ukraine.
As the EU has agreed to commence full membership negotiations with Ukraine and the United States carries the largest military support burden for Ukraine, the bulk of the future cost of rebuilding Ukraine will fall on the EU and its member states. New ideas for European financial assistance are needed.
The EU recently pledged €18 billion to support the Ukrainian economy in 2023, of which it is planned to raise about €10 billion in the form of “EU bonds”, as part of the European Commission’s total bond issuance of €80bn in the first half of 2023.
The Commission relies on a primary dealer network of 41 banks to market EU bonds to the broadest possible institutional investor base. The Commission should, however, utilize the broad public support of the European public to expand its investor pool to also include retail investors.
The Canadian government showed the way in late 2022. It issued its own 5-year C$500 million Ukraine Sovereignty Bond, explicitly in denominations as small as C$100, targeted at retail investors through a network of 10 participating Canadian financial institutions.
The proceeds from the Canadian Ukraine Sovereignty Bond goes directly, via the International Monetary Fund, to supporting Ukraine, but investors otherwise purchase the equivalent of a corresponding regular Canadian government bond, backed by Ottawa’s AAA rating and upon maturity to be repaid by the Canadian government.
As the European Commission already continues separate Green Bond issuance, there is no technical hindrance for Brussels to also arrange with its own primary dealer network, many of which have large retail bank operations in Europe, to market to individual European investors an EU Ukraine Sovereignty Bond directly backed by the EU.
The European Commission should announce this new financial initiative for Ukraine now.
Of course, all common European debt is politically controversial and some member states’ governments and treasuries may dislike a European institution adopting the traditional sovereign state characteristic of issuing debt to retail investors in a time of war.
If so, individual member states should replicate the Canadian retail bond for Ukraine idea.
Proceeds from such national Ukraine Sovereignty Bonds could then be pledged bilaterally directly to the Ukrainian government or other recipient entities in Ukraine, or could, like the Canadian bond routed via the IMF, be earmarked as a direct voluntary member state contribution to the EU budget for Ukraine.
