European Commission outlines reparation loan details, risks, guarantees and timeline
The European Council, after the first discussion in Copenhagen at an informal meeting on 1 October on the possibility of providing Ukraine with a reparations loan from frozen Russian assets, will continue the discussion on this topic on 23-24 October at a formal meeting of the Council, after which official proposals will be made.
As journalists were informed at a technical briefing at the European Commission, the realistic deadline for completing all procedures with subsequent implementation is currently the beginning of the second quarter of next year.
It was noted that, according to preliminary data from the International Monetary Fund (IMF), Ukraine needs about $60 billion, or EUR 52 billion, in budgetary support for the period 2026-2027, to counter Russian aggression, and this is without taking into account the significant needs for military assistance. The absence of such support will most likely lead to the collapse of Ukraine, which, in turn, will carry serious risks for the security of Europe. In addition, the EU no longer expects the United States to provide significant amounts of aid to Ukraine.
In this situation, the European Commission has once again considered the possibility of financing Ukraine using frozen Russian assets, in full respect of sovereign immunity and without violating international law, in addition to the ERA Extraordinary Revenue Acceleration for Ukraine (ERA) mechanism launched last year, under which Ukraine will receive $50 billion from the proceeds of these Russian assets. The European Commission believes that this method - without confiscating the assets themselves - has been found.
The European Commission recalled that, according to the decision of the European Council of October 17, 2024, Russian assets should remain blocked until the Russian Federation ceases its aggressive war against Ukraine and compensates for the damage caused. The main volume of frozen Russian assets at the beginning of the war was the assets of the Central Bank of the Russian Federation in the accounts of the European depository Euroсlear in Belgium, mainly in the form of bonds. Over time, these bonds were repaid, and today the cash in Euroclear’s account with the ECB is around EUR 175 billion, and in a few years, when the remaining bonds mature, this amount will increase to EUR 185 billion.
The essence of the European Commission’s proposal for a reparations loan is that EuroClear invests this cash in a dedicated special debt instrument or debt contract of the European Union. The EU will use this money to provide Ukraine with a limited recourse loan, which means that Ukraine will only have to repay it after Russia pays war reparations. That is, the EU is borrowing from Euroclear, not from Russia.
However, unlike the ERA mechanism, the implementation of this mechanism requires additional guarantees from member states for the total amount of such a reparations loan, in order to provide additional protection to Euroclear. The guarantees will have to be provided on a bilateral basis: this requires a decision by each participating member state. The EC hopes that all or almost all Member States will participate in this, in which case the absence of a guarantee from one country will not be an economic problem.
The EC considers the risks under these guarantees to be actually limited, because as long as the Member States implement the decisions of the European Council and do not lift the sanctions on Russian assets, as long as Russia does not pay for the damage it has caused, this risk will not materialize. So, if Russia pays reparations to Ukraine, Ukraine will use them to repay the EU loan, and the EU will return the money to Euroclear.
In addition, the EC considers it important to change the sanctions regime in such a way as to minimize the risk of accidental release of assets. Currently, sanctions must be renewed every six months, and therefore the immobilization of assets must be renewed unanimously every six months. The sanctions regime must be changed in such a way as to ensure a more predictable and reliable immobilization of these assets, while maintaining the possibility of their lifting if the necessary conditions are met. The EC notes that the Treaty on European Union, in the so-called Article 31.2, contains provisions that allow, in extreme cases, to adopt implementing acts by qualified majority, and the circumstances that have arisen require this. So there is confidence that this will work.
Regarding the use of the loan by Ukraine, in addition to budgetary support, which has traditionally been the focus of European funding, support for the development of Ukraine's defense-technological and industrial base as part of the European defense base is also being considered, in particular through the purchase of defense materials. The design is that the EU will provide support to the industry, in particular through the conclusion of contracts for the purchase of weapons. How exactly the distribution between the two areas will be carried out has not yet been decided.
Currently, we are talking about a total of EUR 140 billion, but it is also necessary to discuss the conditions for providing loans and the control mechanism.