How EU learned from its mistakes and proposed a new scheme of financial support for Ukraine
The discussion of the reparations loan for Ukraine in recent months has increasingly resembled talk of building a bridge over an abyss: everyone sees the need, everyone recognises the importance, but no one can find a structure that will not collapse at the first blow of political winds.
The European Commission has long been balancing an ambitious plan to use the frozen reserves of the Russian Central Bank for this purpose with the fears of member states regarding the legal consequences.
Read more about the new financing model for Ukraine, which now stands a real chance of being approved, in an article by Serhiy Verlanov of Dnistriansky Center: Second attempt to find funding for Ukraine: can the EU unlock frozen Russian assets?
The old model, which has already faded into the background, was based on the idea that frozen Russian assets should become a source of liquidity.
The EU planned to issue special bonds, which Euroclear would have to purchase, using the cash balances in its accounts after the immobilisation of Russian reserves and the liquidation of investment assets.
It was a skillfully assembled financial structure: the European Commission essentially proposed exchanging idle assets for a working mechanism to help Ukraine, with future reparations acting as a natural way to return the funds.
But such a scheme could work under at least three conditions.
In other words, this model failed not because it was flawed, but because it relied on the participation of parties who were not willing to implement it.
Against this background, a new proposal emerged, much simpler in terms of technical ambitions but politically more stable.
Under this proposal, the EU abandoned the idea of turning Russia’s frozen assets into a source of cash. Instead, funding for Ukraine will come from the market, through the traditional mechanism of issuing European bonds, similar to the NextGenerationEU programme.
The European Union approaches investors, sells them debt instruments, and receives funds, without requiring the participation of the ECB or the intervention of Euroclear.
Russian assets do not disappear; they become political and legal collateral.
They are neither transferred, converted, nor sold. They simply remain where they are, and their immobilisation serves as a guarantee that when Russia is eventually subject to international reparations obligations, these assets will be used to repay the loan.
The entire logic of the instrument is deferred to the future, but without any harm to Ukraine, which is receiving the necessary funding now.
In this new mechanism, financial guarantees from member states, distributed in proportion to their GDP, play a key role.
Germany, which is estimated to cover more than a quarter of this "insurance policy," provides political and financial weight to the entire structure. In fact, its participation makes this mechanism not only a financial but also a strategic decision for the EU.
In return, Belgium receives the necessary insurance against the risks associated with the storage of Russian assets, thus removing its own veto, which had previously blocked any progress.
An important aspect that radically changes the political logic of the process is that unanimity among EU countries is no longer required to adopt this model.
The active promotion of this model in Brussels suggests that it has a much higher chance of being supported at the upcoming European Council summit on 18-19 December.
However, risks still remain.
Thus, the new mechanism moves away from a precarious dependence on individual states and institutions, becoming an instrument in which the members of the European Union take responsibility.
It is based on the market, not on financial creativity, and uses Russian assets not as a direct source of liquidity, but as legal collateral today and a lever of political influence in the future.
For the first time, it makes the reparations loan not just an idea, but a realistic solution.