Understanding the conflict two years on.
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The United States is still pushing to seize outright all the frozen Russian Central Bank assets it can to help fund Ukraine, even as broader Ukraine funding remains blocked by Republicans in the U.S. House of Representatives. But it is becoming clearer that in Europe, the only politically realistic approach to using Russian money to fund Ukraine is by tapping a much smaller windfall that amounts to about 1 percent of Moscow’s frozen funds.
The United States is still pushing to seize outright all the frozen Russian Central Bank assets it can to help fund Ukraine, even as broader Ukraine funding remains blocked by Republicans in the U.S. House of Representatives. But it is becoming clearer that in Europe, the only politically realistic approach to using Russian money to fund Ukraine is by tapping a much smaller windfall that amounts to about 1 percent of Moscow’s frozen funds.
The big question is whether that relatively small amount can be squeezed even harder to provide a more substantial and ongoing funding stream for Ukraine, which is now worried less about postwar reconstruction than the grim situation of its ammo-starved army on the battlefield.
“There is a massive financing crisis. Europe and the West are not really addressing it,” said Timothy Ash, a sovereign strategist at RBC Bluebay Asset Management and a fellow at Chatham House, a U.K. think tank. He figures Ukraine needs about 100 billion euros a year to fight off the Russian invasion, and another 50 billion euros a year for reconstruction.
On paper, a big chunk of that money is theoretically available. There don’t appear to be any insurmountable legal obstacles to seizing the entirety of the roughly $300 billion in frozen Russian Central Bank assets held by Europe, the United States, and a handful of other countries since Russia’s full-scale invasion of its neighbor two years ago. What’s lacking is political will. Legislation to authorize such a seizure has yet to pass the full U.S. Congress (though a version may get wrapped into the latest congressional effort to fund Ukraine), and Europe, fearing Russian retaliation, has balked at that more aggressive step.
What is gaining momentum in Brussels, however, is a less controversial option that would take the approximately $3 billion a year that accrues from frozen Russian assets and use that money for Ukraine. It’s a fraction of the more ambitious proposals, and faces many of the same legal questions, but seems to have more political backing from key countries such as Belgium (custodian of the lion’s share of frozen Russian assets).
Last month, the European Union formally ordered the accumulating profits from Russian assets to be hived off and kept separate from the underlying balance, with a view to supporting Ukraine at a later date. Last week, European Commission President Ursula von der Leyen went further, arguing that the windfall proceeds could be used not just to pay for Ukraine’s eventual reconstruction but also for its present-day arms requirements. On Monday, Ukrainian Prime Minister Denys Shmyhal said Belgium is ready to allocate some of the proceeds (held largely in Belgium’s Euroclear financial clearinghouse) to fund Ukraine’s defense needs.
“All the signals suggest the Europeans are prepared to make use of the Euroclear windfall,” said Brad Setser, an expert on capital flows and sovereign debt at the Council on Foreign Relations. “The only questions are how assets outside Euroclear are handled, and whether they are willing to get creative to maximize the income stream.”
Setser, like many other economists, advocates a more aggressive approach to managing the captive Russian Central Bank assets—the 3 billion euros or so a year that accrue currently are a floor, not a ceiling, he said.
“The 3 billion [euros] is the lowest possible number that you can imagine. It should be much bigger,” said Setser, who is also a former U.S. Treasury official. Given that the frozen Russian assets are likely to remain that way for some time, he argued for a more proactive approach—for instance, by investing the proceeds that are piling up in Europe in higher-yielding U.S. dollar deposits or in even higher-yielding sovereign debt from different countries.
It’s a view that is gaining adherents among finance professionals, who make both an economic and a moral case for a more aggressive use of Russian assets. Ash suggested investing those Russian proceeds in emerging market bonds that could fetch returns of up to 10 percent a year; another, more audacious idea is to use the money to purchase Ukrainian government bonds directly, thus using Russia’s frozen treasure to underwrite Ukraine’s survival. Still other suggestions include using the trickle of annual proceeds to service debt on future joint EU bond issues that could be used to finance Ukraine in one big lump sum.
For Ash, finding a way to make better use of the frozen Russian funds is a political imperative; European taxpayers have so far supported Ukraine to the tune of tens of billions of euros, while Russians have not, partly out of lingering concerns about violating the sanctity of the Russian state’s alleged property rights.
“Our taxpayer dollars are subordinate to the Russian taxpayers,” he said. “We are willing to pick up the check for Russia’s aggression, but not prepared to charge Russia for it?”
Since momentum began building last year for the seizure of Russia’s frozen assets, the situation has changed in two related ways.
First, as von der Leyen made clear last week, those funds aren’t just thought of as a down payment on Ukraine’s estimated $400 billion to $500 billion reconstruction tab. The lack of artillery shells, advanced jets, and long-range fire handicapped Ukraine’s long-planned offensive last year and enabled Russian forces to shrug off staggering losses and regain the battlefield initiative earlier this year.
“It seems a little early to be talking about full reconstruction,” Setser said. “Ukraine’s in a fight for survival.” He said that one advantage highlighted by von der Leyen’s proposal would be to provide a recurring, predictable stream of funding for Ukrainian armaments purchases, which could help kick-start so far laggard European production of much-needed munitions.
“What I think is clever about von der Leyen’s proposal is that, if you take my view and invest it in 10-year securities, this is actually a stable future income stream for Ukraine and Ukrainian weapons purchases,” he said. “So you could use it to buy arms this year, and next year, and thereby incentivize increased [arms] production.”
More broadly, Europe’s (and the United States’) struggle to outsource the fight in Ukraine at relatively small levels of expenditure means that, if Russia prevails over Ukraine, other European countries would feel threatened—with a much bigger bill to pay in the future than a few score billion euros of Russia’s money today. European countries have increased their defense spending to record levels but are still largely short of the informal threshold of 2 percent of GDP required of NATO members. If Ukraine loses, Ash suggested, Europe would have to ramp up to closer to 3 percent on defense spending—about 400 billion euros a year, every year.
“Is Ukraine’s security a national security priority? I would say absolutely it is. Then how are we going to fund it?” Ash asked. “In the end, you do whatever you have to do to do that, and the only credible source of funding for Ukraine is from Russian assets.”
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