Ukraine’s due, Russia’s debt: How to use Moscow’s money against itself

Ukraine has received about $100bn a year in external support to fund its resistance to Russian aggression. America and Europe have largely footed the bill. But the Trump administration is now slashing financial support—and European countries will struggle to fill the gap. Their budgets are already strained and they need any spare cash to shore up their own defences.

The obvious solution is for Europeans to use Russia’s $300bn (€255bn) of frozen sovereign assets, of which about €210bn is held in the European Union. The snag is that outright confiscation is a political non-starter because many countries have legal qualms. They are also worried about Europe’s reputation as a safe place for states to hold their reserves. To help Ukraine, Europeans should find another legally solid way to deploy the assets.

Fortunately, there is such an alternative: a “reparation loan”. This is a way to use Russia’s money against itself by lending it to Ukraine. Moscow only gets its money back if it pays reparations. The loan is effectively a downpayment on the Kremlin’s obligation to pay war damages.

This idea builds on the UN General Assembly’s call for Russia to pay for reparations.  In response, some governments have started formal negotiations to set up a claims commission for Ukraine. Virtually all international legal scholars who have considered the issue agree that Russia is obliged as a matter of international law to pay damages. The trouble is, it will be years before the claims commission issues a ruling—yet Kyiv needs cash now. A reparation loan would bridge this timing problem.

The frozen Russian assets would be deployed in loans that would only be repaid if Russia pays reparations after the claims commission’s ruling. From a legal standpoint, it is therefore “incestuous”: If Moscow meets its obligations, the loan will be repaid in full. If not, the only party that will be injured by that default is Russia itself. 

A coalition of willing European and other countries should make the loan. The EU and Britain should be core members of the coalition. The other G7 members—America, Canada, and Japan—could also be invited to join. If Donald Trump does not wish to take part, the coalition should move ahead without him. America’s involvement is not critical as it has frozen only around $5bn of Russian sovereign assets.

The coalition countries could then take the following steps:

1. They would instruct the current custodians of the assets, such as Belgian clearing house Euroclear, to move the money into new depositaries.
2. The new depositaries would invest those funds in reparation loans to Ukraine. The loans would be structured as “limited recourse” obligations, meaning that Kyiv would only have to pay them back if Russia pays reparations. Ukraine would assign its entitlement to receive reparations as collateral for the loan. 
3. The coalition countries would pass enabling legislation to authorise these two steps. They would also provide an indemnity to the current custodians to cover their legal risks.

Importantly, a reparation loan is not a confiscation of the assets. Moving the reserves to new depositaries is merely a change of custodianship. The Russian Federation and the Russian Central Bank would continue to have legal title to the money. Investing Russia’s assets in reparation loans is not confiscation either. Moscow would continue to have the sole interest in the investments made with its money. 

The Kremlin would complain that its assets were being invested in loans to Kyiv rather than safer assets. But the only way it would lose money is if it refused to pay war damages after the claims commission ruled that it must do so. This would not be because anyone confiscated the funds, but solely because it failed to pay reparations. Russia would thus be the author of its own losses. 

Loans with leverage

To exert pressure on Vladimir Putin, the coalition countries should provide the reparation loan in instalments, stopping only if Moscow ends its war. The first part should be disbursed as soon as possible. It could be used to repay the $50bn loan that G7 countries agreed to give Ukraine last year and which is secured on the interest accumulating on the frozen assets.

If the Kremlin agrees to a ceasefire, the coalition should pause making loans. If it then breaks the ceasefire, the coalition should disburse another instalment. This way, every time Putin drags his feet, more and more of Russia’s assets would be channelled to his enemy.

The size of the instalments would depend on Ukraine’s needs and what other sources of cash are available to support it. Assuming Kyiv needs $100bn a year in external support and European countries provide half from their own coffers, the $300bn would keep Ukraine in the fight for another six years. Until they are disbursed, the funds should be held in trust in the new depositaries and prudently invested—with clear instructions about how, when and for what purpose reparation loans can be made.

The best outcome would be that Putin concludes he cannot win a war of attrition and agrees to a decent peace deal with Ukraine. He would presumably insist on the return of Russia’s frozen assets as part of such a pact—but with the reparation loan, Russia would not be able to recoup its assets unless it paid damages.

An Orban workaround

A reparation loan would also side-step the “Hungarian problem”. The EU’s sanctions regime against Russia—including freezing its sovereign assets—is renewed every six months. This requires the approval of all 27 member states. Hungarian prime minister Viktor Orban, who is close to Putin, has several times threatened to withhold his support for renewing the sanctions. Other EU leaders have so far managed to persuade him not to, and the bloc renewed the sanctions for another six months in July.

But the possibility that Hungary might veto an extension of the assets freeze remains a sword of Damocles which could throw the EU’s sanctions policy into disarray. The reparation loan would avoid this problem. Once Russia’s assets had been deployed in loans, it would not matter if they were unfrozen as they would still only be repaid if the Kremlin paid damages to Kyiv.

Just in case

Russia should only lose money if it refuses to pay reparations. The sponsoring governments would therefore need to cover off some remote scenarios: that the claims commission does not complete its job; that it does not find in Ukraine’s favour, for example concluding that Russia’s invasion was legal; and that its award for damages was smaller than the reparations loan (even though the estimated cost of reconstructing Ukraine reached $524bn by the end of 2024).

The sponsoring governments could protect the current and new depositaries from any losses they might incur as a result of participating in the reparation loan. They could also reassure Belgium, where the majority of the assets are held, that it would not face outsize risks. Governments will only have to pay if these unlikely events happen, so they would not count towards their debts or deficits.

Getting the politics right

Many analysts have argued in favour of seizing Russia’s assets and handing them over to Ukraine. But Germany, France and Belgium would not agree. This is partly because they doubt that confiscation would be legal. They also worry that other sovereign investors such as China might shift their assets out of the euro because they don’t think they are safe.

A reparation loan has a much better chance of flying as it does not involve confiscation. After all, the German coalition is committed to exploring with allies ways to use Russian assets to support Ukraine. Meanwhile, Belgium would be happy if the Russian assets were removed from Euroclear provided the risks also were taken away. The reparation loan does exactly that.

It is also hard to see why the reparation loan should damage the euro. China hasn’t moved its assets despite the G7 saying the Russian reserves will be frozen until Moscow pays reparations. It is not as if Beijing is going to shift its euros into roubles or rupees if Europe makes a reparation loan. It will not be keen to switch them into dollars either given that Trump is doing a good job of trashing the greenback’s status as a reserve currency.

Ukraine’s fate is intertwined with Europe’s. With transatlantic support in doubt, Europeans need to do something big to help Kyiv that does not require Trump’s permission. A reparation loan may be the biggest and most effective thing they can do.