Who makes Russia foot the bill? EU's plan for 'reparations loan' to Ukraine

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On September 25, Germany's Chancellor Friedrich Merz published an op-ed in the Financial Times, in which he voiced the need to mobilize additional funds for Ukraine. Germany's voice is traditionally considered the most influential in the European Union.

“I am advocating the mobilization of financial resources on a scale that will secure Ukraine’s military resilience for several years,” Merz wrote, noting that this involves approximately 140 billion euros.

Already on September 30, European Commission President Ursula von der Leyen confirmed that the European Union is working on the idea of providing Ukraine with a loan secured by frozen Russian assets. It is also called a “reparations loan.” How might such a loan work?

At the center of attention is Belgium and the Belgian depository Euroclear. This is an institution that holds securities and keeps records of assets for the needs of international financial markets. It is here that 194 billion euros ($224 billion) of reserves from Russia's Central Bank ended up, frozen at the start of the full-scale war.

Most of these assets were invested in various securities, but as of now, about 170 billion euros ($197 billion) have turned into cash, as the term for the securities expired and payments were made on them. According to the American publication WSJ, Euroclear deposited part of this cash in the European Central Bank.

As early as 2022, the idea emerged of confiscating these Russian funds and transferring them to Ukraine. But the Belgian government and the European Central Bank opposed it, pointing out that such a decision could be challenged in court, and it would undermine confidence in the euro currency — and central banks of various countries would refuse to store their reserves in euros, seeing how Russian reserves were confiscated.

Therefore, to avoid confiscation, the European Union now wants to carry out a different procedure. It will receive the frozen Russian money from Euroclear, and in exchange, deposit interest-free EU bonds on the seized amount with a repayment term of about 20 years in this Belgian company's accounts. Thus, formally, Russian reserves remain on Euroclear's balance sheet, but no longer in the form of cash, but in the form of interest-free EU bonds.

The European Union may have to register a separate legal entity to which the Russian money will be transferred from Euroclear in exchange for European bonds.

Next, the European Union transfers this money to Ukraine as a loan, but with the condition that Ukraine must repay this loan only if Russia pays reparations for the damage caused by the war. Accordingly, if Russia pays reparations, Ukraine can use them to settle the loan with the EU, and the EU will settle with Euroclear, from which the Russians will recover their reserves.

In international law, only the UN Security Council and the International Court of Justice, the UN's principal judicial organ, can impose reparations on countries. Russia can block decisions from both instances. Therefore, it is unlikely anyone expects Russia to ever agree to pay Ukraine reparations. Thus, for receiving the reparations loan, Ukraine will not have to settle with the EU, and the EU will not have to pay on its bonds deposited in Euroclear instead of Russian money.

“Despite the fact that this is a loan, it will not be repaid. At all. That is, it's a formal name — 'loan.' Just to avoid problems with confiscation that could arise for Brussels. Brussels does not want to go for outright confiscation, so they decided to call it a 'loan' that supposedly gets repaid, although it is assumed it will never be repaid,” explains Oleh Dunda, a Servant of the People MP, who recently visited Brussels for talks with Europeans on the reparations loan.

“A rather interesting point arises in that the European Union will effectively be in a situation where it is forced to win this war with Ukraine. Because if it does not win it, it remains in debt to Russia. Accordingly, the European Union will be compelled to press for a resolution until this debt is written off. And press Moscow. It has no other choice,” Dunda adds.

In addition, through the developed mechanism, the European Union also aims to repay the previous $50 billion loan from the G7, issued to Ukraine at the expense of interest income from frozen Russian assets. This leaves Ukraine with about 130-140 billion euros ($150-162 billion) from the reparations loan.

However, this amount still raises questions. Dmytro Boyarchuk, executive director of the expert organization Case Ukraine, recalls that all this time it was said that frozen Russian assets amounted to $300 billion. “For example, from the beginning, I wondered: earlier there were $300 billion, but now this figure of 140 billion euros ($162 billion) appeared,” Boyarchuk says.

However, there are caveats to this entire scheme. First, Russia can challenge in court—for example, in Belgian jurisdiction—the European Union's actions regarding the seizure of Russian money from the Euroclear system. Second, if the European Union deposits its own bonds in Euroclear instead of Russian money, what happens if it still has to settle on them? Who will pay the Russians?

European Union leaders discussed these questions at a meeting in Copenhagen in early October. Concerns were expressed by representatives of France, Luxembourg, and, quite expectedly, Belgium.

Belgian Prime Minister Bart De Wever once again raised legal issues surrounding the reparations loan. He asked other leaders to provide firm guarantees on the distribution of risks in case of using frozen Russian assets to finance the loan for Ukraine.

Thus, guarantees are needed from other EU member countries. First, there must be guarantees that all these countries will share the risks of possible future court decisions against the reparations loan. Second, if the European Union still needs to settle its bonds deposited in Euroclear, the burden of these settlements must be shared by all EU countries.

The European Commission plans to discuss this issue with the G7 to involve other countries in guaranteeing the loan for Ukraine, and possibly to increase the amount of funds provided, since Russian assets are also in other countries.

A quite logical question arises: what if this whole good intention is blocked by its veto from the Ukrainian-unfriendly government of Hungary or Slovakia? By the way, the freezing of Russian assets also needs to be extended every six months.

“This does not require unanimous voting ('Hungary clause'),” MP Oleh Dunda says about the procedure for providing Ukraine with the reparations loan.

In turn, German Chancellor Friedrich Merz notes on this matter: “This decision should ideally be unanimous, but if this cannot be achieved, the decision should be made by a majority of EU member countries that firmly want to help Ukraine.” Merz expects the decision to be made in the coming weeks.

“The chances of getting the reparations loan are very high. Just very high. In principle, this issue is agreed upon. They promise that in 2026, namely in the first months of 2026, this loan will be provided,” noted MP Oleh Dunda following his trip to Brussels.

“I think we will start receiving these funds at the beginning of next year,” predicts Illia Neskhodovskyi, head of the analytical direction of the ANTS network.

Is there a strategy for using the provided funds?

European Commission President Ursula von der Leyen explained that the loan will be provided in tranches, subject to certain conditions.

“The directions for using the funds must be specified. They are working on it now: which directions, in what amount the financing should take place,” MP Oleh Dunda says.

German Chancellor Friedrich Merz, one of the ideologists of providing Ukraine with the reparations loan, believes these funds should be used only for Ukraine's defense needs, not for the general needs of the Ukrainian state budget. “EU member countries and Ukraine will jointly determine what exactly will be purchased. In my view, such a large-scale program should also help strengthen and expand the European defense industry. This aligns with the goal of having collective security and European sovereignty,” Merz says.

“Perhaps this statement was not for our ears, but for the ears of the German chancellor's voters. Framing the issue as requiring a significant amount of money and predicting even more later is very demotivating for voters and political circles. So this view on defense spending is easier to sell to voters,” says Dmytro Boyarchuk from Case Ukraine.

So, the idea is that a significant portion of the reparations loan would be spent on purchasing military equipment in Europe. But it could go even further. It could involve the joint construction of defense plants in Europe. In addition, European Commission President Ursula von der Leyen was very fond of the idea of a so-called drone wall on the EU's eastern border. Ukrainian President Volodymyr Zelenskyy also discussed Ukraine's participation in creating a drone wall in the context of the reparations loan at a recent meeting with Europeans in Copenhagen.

The Ukrainian government is ready to join the drone wall project — this drone wall may geographically include the western region of Ukraine. The desire of Europeans to have such a wall is quite understandable. When Russian drones entered Polish airspace in September, F-35 aircraft were used to shoot them down — a rather expensive technology. And classic air defense systems are also very expensive. For example, while one NASAMS air defense missile costs over $1 million, the Ukrainian Sting interceptor drone costs only $2,100.

hromadske asked Artem Vyunnyk, co-founder of Atlon Avia, a company that manufactures military drones, what he thinks about the idea of a drone wall. "I believe that such a wall should have been created long ago, but on the border between Ukraine and Russia, on the demarcation line, and not on the border between Ukraine and Poland. But this is no longer a technical issue, but a political one, because we are closing off, for example, Poland and not only Poland, but what about Ukraine — let them bomb us? Not great, I don’t think. But I understand that there are no ideas or technical concepts for this at the moment. We are aware of this initiative, and we are trying to understand how we can be useful here. But so far, there are no technical ideas or any product vision for how we will provide the drone wall. Whether it will be drones or some kind of automated systems. In short, there is no understanding. And it seems to me that no one has it at the moment," says Vyunnyk.

Regarding the use of interceptor drones, Artem Vyunnyk says: “Today, it looks like this: highly trained specialists hunt drones almost manually. The problem is that if a thousand drones are flying at us, we do not have enough calculations and qualified personnel to shoot down a thousand drones at once. Therefore, of course, we need to work on making all technical means as effective as possible, i.e., homing, detection, etc. As for the physical manufacture of interceptor drones, I do not see any problems there."

In any case, a significant part of the reparations loan provided to Ukraine will indeed have to be shared with Europeans. “Of course, Ukraine demands to receive the entire reparations loan. But, unfortunately, this loan will be divided between Ukraine and the EU because the EU bears legal risks. But even so, it will be good because the EU will direct these funds to financing defense and, accordingly, supplying weapons to Ukraine. It should be noted that in the main EU countries, a de facto budget crisis exists. So they are trying to use this money not only to help Ukraine but also to support themselves a bit,” explains MP Oleh Dunda.

Should we consider that the reparations loan of about 140 billion euros ($162 billion) will solve all of Ukraine's financial problems for the coming years? First, it is worth recalling that Ukraine's need for international financing next year is $45.5 billion. Finance Minister Sergii Marchenko also estimates the need for external financing over the next four years at $150-170 billion.

“This does not fully solve our problems. We need to understand that $140 billion with our appetite is for three years. And that is it. And we also need to understand that earlier the status of frozen Russian assets was such that they were to go toward reconstruction,” says economist Dmytro Boyarchuk.

There will probably be further discussion on whether all these funds should be directed specifically to defense needs. Dmytro Boyarchuk forecasts that more than half of the reparations loan funds will go to military spending. “Everyone understands that there is somehow a desire to hold elections, finance election preparations at the EU's expense. I think Europeans have no such readiness, nor readiness to finance any special bounties,” Boyarchuk says.

In Ukraine, discussions have been ongoing since 2022 about how best to obtain and use Russian assets, but only now have Europeans developed the political will to actually provide this money. “There were many options. They talked about a fund coordinated from Berlin or Warsaw under supervision, other options. We can discuss options, but that is not the subject of our decision,” economist Dmytro Boyarchuk says.

If the Ukrainian government does not propose a clear strategy for using the reparations loan to international partners, then most likely the partners themselves will dictate how to spend this money. And the question of how to finance Ukraine's postwar reconstruction is now extremely uncertain. Especially since the World Bank preliminarily estimates the cost of reconstruction at over $500 billion.

“These reparation loan funds will simply be spent, and then we will be left with a destroyed economy, absence of competitive institutions, absence of business that will move to better conditions because we have problems with the law enforcement system, judicial system, tax system. The question is whether the government is capable of effectively managing funds to create conditions for Ukrainian business development and thereby, when these funds run out, not ask for new ones. Because I am convinced this is the last tranche they will give us. There will be no more funds,” says Illia Neshodovskyi from the ANTS network.

“Without receiving sufficient financial aid, Ukraine will be forced to 'print' hryvnias, which will lead to hryvnia devaluation,” warns Dmytro Churin from Eavex Capital.

President Zelenskyy, in turn, stated on October 6 that skepticism among international partners regarding the use of frozen Russian assets to support Ukraine is decreasing. He considers the purchase of weapons a priority direction for spending under this program, although he adds about the possibility of using funds “for some social things.”