Frozen Russian assets to Ukraine’s rescue
Funding Ukraine’s fightback against Russia’s invasion has gone from a must-do to a political hot potato in nearly two and a half years. The world has already committed $321 bn in aid to Ukraine. But the country clearly needs more. In April, a $61 bn aid package to Kyiv was finally approved by the United States Congress after months of infighting over whether the money could be better spent on domestic issues. Similar themes played up during last weekend’s EU election, which saw the bloc shift towards the hard right.
The US and European Union have also struggled to agree on what to do with some $300 billion in assets from Russia’s central bank that were immobilized as part of Western sanctions shortly after Russian tanks rolled into Ukraine. Washington wanted to use the seized money to bankroll Ukraine’s war effort. As most of the funds seized took place in Europe, Brussels said no, due to the huge legal black hole created by freezing assets when the West is not directly at war with Russia.
“These funds will never be given back to Russia, at least as long as Vladimir Putin is president,” Jacob Kirkegaard, a senior fellow at the Brussels office of the German Marshall Fund think tank, told DW. “However, there is no political or legal willingness to say that out loud.” Instead of spending the $300 billion principal amount, the new plan will utilize the interest made on those assets — estimated to be a few billion a year — as collateral for a one-off loan of up to $50 billion for Ukraine.
“Ukraine runs a huge fiscal deficit in the order of 20-30% of GDP,” Yuriy Gorodnichenko, a Ukrainian economics professor at the University of California, Berkeley, told DW. As a comparison, Greece’s fiscal deficit at the height of its debt crisis reached 13.5%.
“A deficit like Ukraine’s is very hard to finance internally. We don’t have developed financial markets, the economy is not doing well and many asset prices are depressed. We need international support for this war,” he added.
Gorodnichenko noted that Ukraine’s government, which requires $100-150 billion annually to run the country and the war, received almost zero aid in the first two months of the year. That, he said, “created a great deal of uncertainty about how much you have to fund weapons and domestic needs.” Worse still, the Ukraine Support Tracker, compiled by the Kiel Institute for the World Economy, recently revealed that only half of the latest $61 billion committed by the Biden administration will go directly to Ukraine. The rest will boost the US Department of Defense’s coffers. There is also a large disparity about what countries have promised and delivered.
While this additional $50 billion will be most welcome in Kyiv, even the compromise solution has presented challenges for policymakers, as it will require several years of interest payments on the frozen assets to repay the loan. “If you securitise and issue a bond based on those future returns today, you have to guarantee that the underlying assets remain frozen for, say, 10-20 years,” Kirkegaard said. “So someone needs to guarantee that these assets will not be given back to Russia in the meantime. So are we outright saying that Russia won’t get its money back and does that constitute backdoor confiscation?” Kirkegaard added that it could be difficult to unfreeze the principal amount after the war to help fund Ukraine’s reconstruction as it will be used for more than a decade to backstop this new loan.
This article was provided by Deutsche Welle