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The US has proposed raising tens of billions of euros in debt for Ukraine secured against the future profits generated by Russian state assets that have been frozen by western countries.
The G7 group of nations has been split on what to do with €260bn worth of Russian assets put on hold by the west since Moscow launched its full-scale invasion of Ukraine in February 2022.
Washington has backed the idea of confiscating the reserves in their entirety and handing them to Ukraine, an idea European officials fear could violate international law and destabilise financial markets. EU countries would prefer to only give Kyiv the profits generated by the underlying assets.
But the issue of using Russian reserves to help Kyiv has become more urgent in recent months, with the war now in its third year and additional US aid to Ukraine held up in Congress.
“We’re at a point in which we should explore every possible avenue to maximise the value of the immobilised reserves for Ukraine,” Daleep Singh, US deputy national security adviser for international economics, said in Kyiv on Wednesday. “We can’t wait forever, we know that.”
Singh said the US proposal would involve bringing forward the “present value of the future interest stream of the immobilised assets, either through a bond or a loan”.
He noted that Europeans had already shown a willingness to transfer interest from the reserves to Ukraine on a biannual basis. However, there were ways to “supersize the value of these income flows over time”.
“Instead of just transferring the yearly profits from the reserves . . . it’s conceptually possible to transfer the 10 years of profits or 30 years of profits,” he said. “The present value of those profits adds up to a very large number.”
The proposal is due to be discussed by G7 finance ministers on the sidelines of the World Bank and IMF spring meetings in Washington next week, and Singh said the goal would be to reach a decision on the matter at the G7 leaders’ annual summit in June.
Much of the frozen Russian money is in the EU, including roughly €190bn in Russian central bank assets held at Euroclear, a central securities depository based in Brussels. These have generated €3.85bn in profits since the start of the war and EU countries had been discussing deploying these profits to help Ukraine.
Under an EU plan, yet to be adopted by the bloc’s 27 member states, most of the future profits would be used to buy weapons for authorities in Kyiv, while some would go towards reconstruction of the war-torn country.
With the US proposal added to the mix, a possible compromise would be to use part of the profits for weapons purchases and reconstruction, and part of it to back debt.
“Imagine you have €1bn of usable proceeds of these revenues. You can allocate €300mn to reconstruction, €300mn to self-defence of Ukraine, and €300mn to back up the emission of loans . . . You can make small pockets of these amount and distribute it to different needs,” said an EU diplomat, cautioning that talks on all these ideas are still ongoing.
One big advantage of the US idea is that it would generate more funds upfront for Ukraine.
A European official said a bond could deliver between €30bn and €40bn based on the estimated profits from the Russian funds in Euroclear over the next 10 years, and €50bn-€60bn in profits over the next 15-20 years. They cautioned, however, that this was heavily dependent on future interest rates.
“These simulations are more or less reliable for one year and then you have to see. You really have to be careful,” the official said.
But officials in one major EU country have asked what would happen to a bond secured against 10 years of interest payments from impounded Russian assets if the war were to end in a couple of years and the assets unfrozen and handed back to Russia under a peace settlement.
The G7 states could back the bond with a state guarantee, as a way of reassuring private investors, the officials said. But they cautioned that such a move might be open to legal challenge in some states.
Western divisions over how to use the frozen assets matter for Ukraine’s looming talks to restructure debts owed to private creditors this year, which are part of an IMF call to plug holes in a $120bn-plus plan to finance Kyiv over the coming years.
Ukraine is aiming to close a deal on restructuring its debt by the middle of this year, before a payment standstill granted by bondholders in 2022 runs out.
Many bondholders favour a restructuring this year. They see it as a critical step for Ukraine to eventually return to global markets to raise money, which they say could possibly be collateralised with seized Russian assets in the future.
Western partners “must work with Ukraine on private and public debt restructuring. Unlocking the value of Russian assets will reinforce these efforts, not substitute them,” Singh said.
Additional reporting by Joseph Cotterill in London