It will take political shrewdness and accounting skills to arrange a loan for Ukraine. Compared to other options for gaining support, lending the nation money secured by its claim for damages from the war against Russia has a number of advantages. However, the upfront funds would still need to be found by Kyiv's supporters. Here's how to do it.
The heads of the wealthy democracies that make up the Group of Seven are adamant that they will support Ukraine with the $300 billion in assets held by the Russian central bank, which they froze in the early stages of the conflict in 2022. By the moment the leaders gathered in mid-June in Italy, they had instructed their teams to look into all possibilities.
There are generally three choices. Stealing Moscow's assets and sending the proceeds to Kyiv is one option. Alternatively, Ukraine may be given access to the $4 billion in interest that the assets generated last year.
The third idea is for Ukraine to promise a syndicate of its allies a loan in exchange for Ukraine pledging its claim for reparations against Russia. The allies might borrow money against Russia's frozen assets if Russia refused to cover the losses. A well-established legal principle states that a creditor may use the assets of a debtor as collateral against an outstanding debt. This justifies the actions taken.
A "reparation loan" of this kind has several benefits. Compared to merely seizing the assets, it has a more solid legal foundation. Furthermore, it would give Ukraine a lot more money than just siphoning off the interest. Based on last year's profits, even ten years of interest payments would only equal roughly $40 billion.
However, a reparation loan also has some drawbacks that the other options do not. One is that it would need to be financed by the syndicate. Finding investors to purchase $300 billion in bonds is the problem. It has to do with politics and accounting.
Debt and deficit
Concerns have been raised by several allies that any loan to Ukraine would require them to make up-front provisions for potential losses. Their budget deficits would thus increase.
However, Jeff Golland, a previous UK Treasury official, says that there would be no need to take this action in either the European Union or the United Kingdom. A financial transaction such as a loan would not feed into the annual deficit.
Any nation that had to issue bonds in order to pay for the loan it provided to Ukraine would have to take on more debt. The loan to Kiev would be valued by creditors as an asset, offsetting the bonds' obligation. However, most governments use gross debt as a primary financial management tool.
For example, over time, member states of the European Union are expected to reduce their gross debt to below 60% of their national income. Even the UK, which focuses on net debt, only deducts financial assets that are liquid. A loan to Kiev wouldn't qualify.
But if political will exists to contribute to Ukraine, this doesn't have to be an issue. The EU might raise the money by issuing debt of its own, in which case borrowing by member states would not rise. While Germany-led nations oppose the EU issuing bonds to finance spending, borrowing for loan purposes is a different story. In fact, in order to pay for the loans it decided to give Ukraine last month, the EU already intends to raise 33 billion euros.
If every EU member state agreed to issue shared debt, there would be more advantages. Their action would resemble that of a cohesive one rather than a collection of independent nations. The expense of EU bonds, which trade at higher yields than equivalent German government bonds partly due to their lesser liquidity, may also be lowered with extra borrowing.
All for one
The US faces other restrictions. Even if President Joe Biden is eager to help Ukraine even more, he is unable to convince Congress to support it. The Republican candidate for president in November, Donald Trump, has enraged House of Representatives members to oppose legislation that would provide a further $60 billion in funding.
Without US involvement, European nations will not want to lend money to Ukraine as compensation. This is partially due to their desire to share the burden of financing. Furthermore, it would guarantee that in subsequent peace talks, Washington would have an interest in not giving the assets back to Moscow.
Still, there might be a way out of the gridlock in Washington. Trump has stated that he supports interest-free loans, even if he is opposed to "giveaways" to Ukraine. A similar suggestion was made last week by Trump's close ally, US Senator Lindsey Graham, during discussions with President Volodymyr Zelenskiy of Ukraine.
From this point of view, a reparations loan makes more sense because Russia, not Ukraine, would be the one to repay it. Theoretically, the US could take both actions: participate in a syndicated reparation loan and offer a simple loan in lieu of the $60 billion grant that was blocked.
It remains uncertain if these concepts will be adequate to pass Congress. However, Ukraine's friends may choose the less ambitious course of paying it the interest on Russia's assets if the reparation loan fails. And that won't provide Kyiv with the financial boost it needs.