The European Union is looking at three options for meeting Ukraine's financing needs, including a loan using frozen Russian assets, for next year and the year after, as the bloc tries to help blunt the effects of waning US support for Kyiv.
European Commission President Ursula von der Leyen on November 17 spelled out the three options the bloc is facing in order to provide financing for Ukraine for 2026 and 2027.
In a letter to the 27 EU member states, seen by RFE/RL, the choices include individual loans from EU member states, the EU raising money on the market, and already mooted " reparations loans " in which Brussels would leverage 176 billion euros ($204 billion) of frozen Russian state assets for a loan to Ukraine.
A combination of the three is also possible, according to the document, which states that "clearly, there are no easy options" as "Europe cannot afford paralysis, either by hesitation or by the search for perfect or simple solutions which do not exist."
EU Leaders To Meet In Brussels
EU leaders are likely to decide on a way forward when they gather in Brussels on December 18, having failed to agree on the reparations loan when they discussed the issue in October as Belgium, in which most of the Russian sovereign wealth assets are held, raised legal and political concerns.
According to European Commission estimates, new money must be available at the start of the second quarter next year. With the United States scaling back military and financial support, the EU has pledged to step up and fill the void.
Von der Leyen notes that "without sustained and scaled-up support in 2026 and beyond, Ukraine seriously risks economic impasse, undermining its capacity to defend itself and maintain essential state functions."
The paper estimates that Ukraine is in need of 71.7 billion euros next year, out of which 51.6 billion would be in the form of military assistance, and 20.1 billion in macro-financial assistance such as budget support.
For 2027, military support is estimated at 31.8 billion euros, while 32.2 billion euros would go to macro-financial assistance, assuming the war ends next year.
The first option would entail individual EU member states providing voluntary bilateral contributions such as grants to the union, based on their gross national income (GNI) with the European Commission then transferring that as nonrepayable financial aid to Kyiv.
The paper notes that while this wouldn't create new joint liabilities as the reparations loan would, it would impact the national budgets of member states, especially at a time when many countries are faced with little or no economic growth and populations that are increasingly weary of supporting Ukraine financially from their own pockets.
The very fact that it is a voluntary scheme also makes it difficult to raise all the necessary cash quickly.
Using The European Stability Mechanism
Alternatively, the paper also suggests that the EU can use the European Stability Mechanism (ESM), a vehicle created during the eurozone crisis, to provide financial assistance to struggling euro-area member countries.
This would, however, require a change of the ESM-treaty to expand the scope to Ukraine, create legal liabilities and interest costs for eurozone countries, along with a need to figure out a way of how non-Eurozone EU countries could contribute.
The second option is that the EU would provide a loan to Ukraine by borrowing on the financial markets, using the bloc's triple-A rating. This means that Brussels would require Ukraine to repay the loan, but just as with the reparations loan, this would only happen once Kyiv receives war-damage compensation from Russia.
The text notes that such a loan would require EU member states "to provide legally binding, unconditional, irrevocable and on-demand guarantees, distributed amongst member states according to the GNI key to cover the situation where the borrowing needs to be repaid to investors in the absence of repayment by Ukraine."
Member states would also need to pay interest rates, and with the scheme also being voluntary, more burden would have to be put on participating ones if one or several countries decided to opt out.
One alternative would be that the EU borrowing could be backed by the common EU budget. But current EU rules don't allow the budget to be used in this way for non-EU countries. And a change of rules requires unanimity, which will be hard to achieve given both Hungary's and Slovakia's reluctance to continue spending money on Kyiv.
Utilizing Frozen Russian State Assets
That leaves Brussels with the reparations loan, which most EU member states see as the fairest option as it doesn't require EU borrowing from markets nor direct national contributions. But it is not without perils -- as Belgium has pointed out.
While not directly confiscating the Russian assets, they will be replaced with bonds issued by the European Commission and backed by EU member states. This would mean "a compulsory tailor-made debt contract with central securities depositories" such as the Belgium-based Euroclear in which EU member states provide "legally binding, unconditional, irrevocable, and on demand guarantees to the union, based on the GNI-key."
Belgium is fretting that it might have to repay the money by itself if Russia takes it to court and wins. The European Commission is therefore keen not only to make sure that this undertaking is completely legally sound but also to ensure legal liabilities are spread among member states and not just expose Belgium.
This is, however, not the only worry. The paper does also point out that other third countries might reconsider investing in the euro area as they don't consider it safe.
"As this option would be a financially and legally innovative solution, it cannot be discounted that there are potential knock-on effects, including for financial markets," it says.
"Although the design of this option will ensure full compliance with international law under all scenarios, there is a risk of such knock-on effects if the Reparations Loan is incorrectly perceived by others as a confiscation."
Full Compliance
While no remedy is offered on how this can be mitigated, the document stresses that other international partners such as Britain, Japan, or the United States could follow suit to reduce the perception that Russian sovereign assets simply are appropriated.
Another issue that the European Commission also hasn't addressed is that the sanctions which make the Russian assets immobilized must be renewed by unanimity twice a year.
While this has happened ever since the restrictive measures were imposed over three years ago, there is no guarantee that this unanimity will last, notably as some EU capitals have questioned the usefulness of sanctions and Hungary previously having toyed with the idea of not giving a green light to a rollover.
Russia could reclaim the assets in such a scenario, leaving EU member states to foot the bill.
