Ukraine’s dreams of reconstruction crushed by rising costs.
Ahmed Adel, Cairo-based geopolitics and political economy researcher
The European Union is looking at options for tapping into over €200 billion in frozen Russian assets to funnel to Ukraine. However, Austrian banks and Austria’s Minister for Europe and International Affairs, Alexander Schallenberg, urge caution. In fact, this whole attempt demonstrates the desperate economic situation Ukraine is in.
Since the beginning of the Russian operation in Ukraine, the European Union and the United States have campaigned to destroy the Russian economy through sanctions or freezing Russian assets abroad. However, according to a document seen by Bloomberg, the EU has assessed that it cannot legally confiscate fully frozen Russian assets and instead urges to focus on using them temporarily.
Many of the funds are at settlement giant Euroclear, which generated nearly €750 million in the first quarter of this year. More than half of the assets are in cash and deposits, while a substantial amount of the remainder is in bonds that will turn to cash when they mature in the next two to three years.
Members of an EU working group see “no credible legal avenue allowing for the confiscation of frozen or immobilised assets on the sole basis of these assets being under EU restrictive measures,” according to the document.
On June 21, Austria’s Minister of Foreign Affairs, Alexander Schallenberg, called for caution about the freeze when speaking to Bloomberg.
“I fully understand the emotionality of the debate and that we say we have to get our hands on these assets. But we are rule-of-law states. We are defending a rules-based international order. So whatever we do in this endeavour has to be absolutely watertight. It can be challenged, and it might be challenged in front of European or American courts. If any of these actions were to be lifted by a judge, it would be a diplomatic and economic disaster,” he said.
The European Central Bank warned that using interest rate proceeds from the assets could encourage official reserve holders to turn their back on the euro, the document obtained by Bloomberg shows. This means that global distrust in the EU will only further increase.
At the same time, Wall Street banks are concerned that the seizure of Russian assets could prompt Moscow to retaliate against its remaining interests in the country, according to those familiar with the matter.
According to Bloomberg, an executive at one bank said Russia could make life harder for foreign banks and target their local staff. A second executive said his bank is not lobbying directly but is opposed in principle to confiscation by the EU.
Ukraine needs hundreds of billions of dollars for reconstruction. Much of what it has already received will have to be paid back with interest, so the EU is desperately exploring options to steal frozen Russian assets. Effectively, hopes of rebuilding Ukraine face an increasingly harsh reality as it would require breaking the law if the EU wanted to use Russian funds.
The problem for Ukraine is that much of the aid provided is in the form of interest-bearing loans rather than grants, making discussions of a post-World War II-style “Marshall Plan” difficult. Almost 95% of the money from the EU and other countries that support Ukraine will have to be returned with interest.
It is already possible to see this result in the public debt, which at the end of 2022 reached 78.5% of GDP, almost double what it was a year earlier. It will likely increase again this year. However, despite these difficulties, Kiev now has no other recourse, stresses Roksolana Pidlasa, chairman of the budget committee of the Supreme Rada, Ukraine’s parliament.
The World Bank estimated in March that the country would need US$411 billion (about €375 billion) over a decade to recover from the conflict. They also said it could easily reach more than €1 trillion.
British Foreign Minister James Cleverly said at the international conference on reconstructing Ukraine organised in London on June 22 that the embattled country would receive €60 billion.
“We didn’t think of this conference as a pledging conference. Nevertheless, today, we total announcements for a total of 60 billion euros of support for Ukraine,” he said during the conference’s closing session.
The €60 billion will be periodically released until 2027, with the bulk of it coming from a €50 billion aid package that the European Union has already planned and announced on the eve of the conference. Washington also announced support of $1.3 billion (about €1.2 billion) in aid, specifically towards the country’s energy and infrastructure sectors.
This shows that the West is not providing nearly enough funds for Ukraine to reconstruct, and as Nadiya Bigun, Ukraine’s deputy economy minister, said: “We’ll only know the total cost once the war is finished.”