It was disappointing to wake up to the news that EU leaders failed to agree on the Reparations Loan (RL) concept at their meeting in Brussels on Oct.23.
If I were a cynical SOB, I might quip that if you had held your hands to your ears, you might just have been able to hear the champagne corks popping in the Kremlin and the offices of Euroclear in Belgium. But, as I am sure, readers would appreciate, that’s not me.
That said, if I were the Russians, I would not be putting some additional bottles of champagne on ice just yet. Needs must for Europe. And the basic calculation for Europe is this: that if it does not fund Ukraine via the immobilized CBR [Central Bank of Russia] assets route, it faces two much more costly options:
a) Funding the $100-150bn annual cost of supporting Ukraine by tapping their own taxpayers for this sum, or;
b) Not funding Ukraine and risking its defeat and a Russian victory. The latter would mean an existential, and very immediate, threat to European security from tens of millions of Ukrainians moving West, a destabilized and militarized Ukraine, and a rampant and expansionist, and aggressive Russia moving West. And it will move West.
Likely in that scenario, European defense spending would need to move quickly through the gears from the 2% of GDP and change spent at present to the 5% of GDP maintained through the Cold War and set now as a long-term target spend for NATO members.
To put that in pounds, that is an extra €1 trillion per year for Europe. Imagine what that means for budget deficits in Europe. It means higher taxes, larger financing needs, higher interest rates in Europe, lower growth and grist to the mill of the far right. That is the biggest threat to the Euro not the scaremongering by Belgium on the risk from using immobilized Russian assets in the defense of Ukraine and Europe, to the reserve currency status of the Euro.
I still find it astonishing that Belgium, a country that has free rode on other NATO members’ security backstop for years - serially spending far less than 2% of GDP on defense - and is now one of the lowest per capita aid givers to Ukraine, and is still sitting on billions in interest on the immobilized CBR assets for the period since the full scale invasion to the first quarter of 2023, again seems to expect the German taxpayer to pick up the tab for supporting Ukraine in the war by blocking the plan to use immobilized CBR assets for Ukraine.
Apologies to Belgians for my lack of diplomacy, but I am not a diplomat.
Belgium would no doubt respond that it requests for burden and risk sharing are fair - and I kind of agree, which begs the question why the other European countries are balking therein.
To note here that Europe faces the choice of either opting now to spend their own taxpayers’ money to support Ukraine or use frozen assets with the slight, very distant possibility that their taxpayers might have to eventually pay similar totals to compensate Russia. Why would they not take the option of not spending their own taxpayers’ money now? Are they literally idiots?
Now Europe is not awash with leaders at present, but I think the maths as above is so obvious, such a no-brainer decision, that I still think Europe will eventually, kicking and screaming, figure out that there is no other way now but using immobilized CBR assets to fund Ukraine. Without using immobilized CBR assets Ukraine faces a huge financing gap, which cannot be filled any other way, and it risks losing the war. It is that stark a choice now.
Without using immobilized CBR assets Ukraine faces a huge financing gap, which cannot be filled any other way, and it risks losing the war. It is that stark a choice now.
And just saying, but if the full $330 billion in immobilized CBR assets were deployed that would cover three years plus of Ukraine’s defense funding needs. I think that would send a strong message to Putin that Ukraine’s financing is assured, it can better survive a long war, and Moscow faces then a more even playing field. Putin will have to recalibrate his assumptions on the costs of sustaining a longer war, and this might just encourage him to take peace efforts more seriously.
Unfortunately, even under the plans pitched this week it does not look as though the full $330 billion is being made available to Ukraine. The EU is talking about a €140 billion facility. This appeared to represent the €190 billion assumed to be in Euroclear, less I think the €50 billion ERA facility drawn up in late 2024 comprised on the interest stream on immobilized CBR assets.
That appears overly cautious as the €50 billion was the interest flow assumed on the full $330 billion, not just those at Euroclear. A more accurate discount would be 190/330 x 50, or $29bn. Some sums also in the ERA have yet to be at drawn down - albeit maybe the assumption then is the new RL will take some time to put in place, hence by the time it is active, the ERA will be exhausted. Fair enough.
But there is the £25 billion in the U.K., around $30 billion in Japan, and I understand a very significant and comparable sum (or larger) in the US.
The U.K. seems to have signed up to the European RL plan, which should add 25 - ((25/333) x 50) to the European total, or still well over GBP20 billion.
Give or take, that would still be close to two years’ war funding for Ukraine, comprising EU, UK and Canadian monies, excluding the Yanks.
The monies in Japan, I understand, are under the control of the Bank of Japan, which is reluctant to join the scheme. The US could be instrumental in pushing BOJ to join the U.K. and Europe.
Latest reports though, suggest that the Trump administration is dragging its feet in pooling monies in the US jurisdiction into the RL - which might have given the Belgians enough Dutch courage to hold out yesterday against the plan. This is despite the fact that the prior Biden administration had been supportive, and indeed instrumental in the ERA, and that the REPO bill in Congress gives POTUS authority to seize and allocate the CBR assets to Ukraine.
It looks as if Trump is quite happy to let Europe take the risk here, then milk Europe and Ukraine of RL monies to fund US arms purchases. That looks, smells and feels like war profiteering. Maybe that is changing now with news over the past 24H of the new sanctions placed on Lukoil and Rosneft. Perhaps G7 allies have succeeded in persuading Trump that Putin is not serious about peace talks, and he needs to be forced by more aggressive sanctions to come to the negotiating table. The combination of tighter sanctions on the Russian economy, using immobilized CBR assets to fund Ukraine, and better arming Ukraine would all increase the costs of a long war to Putin. Belgium, though scotched, temporarily perhaps one of those pillars.
It looks as if Trump is quite happy to let Europe take the risk here, then milk Europe and Ukraine of RL monies to fund US arms purchases. That looks, smells and feels like war profiteering.
But let’s assume we do get agreement to use the full $330 billion in immobilized CBR assets for Ukraine, the best option is to move the full amount into an SPV, a sovereign wealth fund-like structure. This would disburse the funds in tranches to Ukraine, but invest the balance to earn a higher return, extend the life of the facility, assuming a long war.
I have previously suggested the creation of an Agency for the Reconstruction and Access of Ukraine to the EU (AURA). That still seems logical. So, in my mind, a 30-year zero-coupon instrument would be issued to Euroclear and other holders of the immobilized CBR assets, and all funds would then be transferred to and managed by AURA. It can then issue a loan to Ukraine, as per the RL structure.
The real advantage of AURA is that it helps both manage funding of the war and also eventually the reconstruction. It can help plan, project manage, and coordinate that process, providing due oversight and good governance. It can also borrow on its own behalf, to leverage up the funds deposited as per the RL structure, and, rather like a traditional sovereign wealth fund structure can partner on investment projects, and act as a clarion for reform and for investors in post-war Ukraine. Eventually, say on EU accession, full ownership of AURA would revert to Ukraine.
Reprinted from the author’s @tashecon blog. See the original here.
The views expressed are the author’s and not necessarily of Kyiv Post.