Under tremendous pressure to come up with billions of dollars to support Ukraine’s military and backfill its members’ own dwindling arsenals, the European Union said Wednesday that it had devised a legal way to use frozen Russian assets to help arm Ukraine, just as it was considering other mechanisms to bolster its defense industries.
The developments are an important milestone, with U.S. funding for Ukraine remaining stuck in Congress and Ukraine’s defenses sagging as shortages of ammunition, artillery shells and missiles force battlefield rationing.
Though the E.U. is looking at a number of different ways to find cash for defense purchases, they all face hurdles.
The goal to “make Russia pay” for Ukraine’s arsenal and for its reconstruction has made for a popular slogan among the allies, but parlaying it into actual policy has proved difficult, largely because of legal concerns around liquidating Russian state assets frozen under sanctions.
Now, following months of political wrangling, the European Commission, the E.U. executive branch, has found a way to use the profits from those frozen Russian assets for Ukraine’s benefit, with most if it going to military support for Ukraine.
How the plan will work
Set for approval by E.U. leaders meeting in Brussels on Thursday, the plan could provide Ukraine with up to 3 billion euros, or about $3.25 billion, a year, or as much as 15 billion euros ($16.3 billion) from 2023 to 2027, depending on market conditions. The first payment to Kyiv could be made as soon as July, the commission said on Wednesday.
After Russia’s invasion of Ukraine more than two years ago, Western nations took the unusual step of freezing more than $330 billion in Russian central bank assets held overseas. The bulk of them — over $217 billion — is in the European Union. With payments to Russia blocked by sanctions, Moscow has been unable to access those assets, sell them or benefit from interest earned on them.
As such, cash generated from the assets has remained stuck overseas, with a vast majority held in Belgium by Euroclear, a financial services company. Under the E.U. plan, 97 percent of profits generated by those assets as of Feb. 15 would go to Ukraine. Companies like Euroclear would retain 3 percent to fund ongoing and future litigation by Russia trying to claw back its assets and revenues.
This year, 90 percent of that windfall would go to funding weapons for Ukraine, the commission said, with the rest reserved for the bloc’s fund for the reconstruction of Ukraine.
“The Russians will not be very happy,” Josep Borrell Fontelles, the top E.U. diplomat said this week. The amount of money, he added, “is not extraordinary, but it is not negligible.”
An earlier version of this plan was delayed twice in the course of 2023 over disagreements among member states and European Central Bank concerns. The bank, the Eurozone’s version of the U.S. Federal Reserve, warned that using assets from another country’s central bank could harm Europe’s reputation as a safe place to store money, which could harm the bloc’s aspiration to increase the international use of its common currency, the euro.
As Mr. Borrell had predicted, the Russians were outraged about the proposal. “This is outright banditry and theft,” said the Russian Foreign Ministry’s spokeswoman, Maria Zakharova, on Thursday, Russia’s TASS news agency reported.
The Kremlin spokesman, Dmitri Peskov, was more restrained. “The Europeans are perfectly aware of the damage that such decisions may cause both to their economy and to their image, their reputation as reliable guarantors of inviolability of property,” Tass quoted him saying.
How else can the E.U. raise money for the war and weaponry?
The revenues from the frozen Russian assets are a start, but the E.U. will need billions more to continue supporting Ukraine and bolster its own defense, particularly with the looming possibility of a complete rupture in American aid to Ukraine under a Trump presidency.
Arsenals across the bloc’s 27 members have been depleted after two years of weapons and ammunition transfers to Ukraine. Just as important, the European defense industry says it needs more certainty and upfront investment before it can ramp up production.
Building an integrated military industry is new territory for the European Union, which from its inception has been primarily an economic and trade alliance.
But the need for Europeans to invest in defense has grown more urgent after recent remarks by former President Donald J. Trump, the presumptive Republican presidential nominee. He said last month that he would oppose NATO’s defense of European members who underpaid toward the alliance’s joint defense needs, and that he would “encourage” Russia to “do whatever the hell they want” in Europe.
Europeans took note. “For decades, Europe has not invested enough in its security and defense,” said Charles Michel, the president of the European Council, which sets policy priorities, in a letter to the E.U. leaders meeting in Brussels Thursday. “Now that we are facing the biggest security threat since the Second World War, it is high time we take radical and concrete steps to be defense-ready and put the E.U.’s economy on a “war footing.
“This means spending more, and buying more jointly, thus more efficiently,” he added. “We must also help the defense industry access private and public funds.”
At the Thursday summit, E.U. leaders will discuss the idea of having the bloc’s development and climate bank, the European Investment Bank, venture into defense purchases — a major shift in its strategy and purpose from climate change and green energy, highlighting the urgency felt across the E.U. to bolster military capabilities.
Some E.U. nations would like the bloc to jointly issue bonds to raise cheap funding for defense. But this is not popular among the richer E.U. nations, most notably Germany. The bloc also maintains the European Peace Facility, an off-budget pot of money that it has been slowly tapped for defense purchases for Ukraine. France wants this fund to pay only for made-in-Europe equipment, which is seen as a major limitation given that the European defense industry says it’s unable to produce enough quickly to satisfy growing needs.
Meanwhile, E.U. countries operating outside E.U. strictures and structures have been able to act faster to support Ukraine, underscoring the bloc’s rigidities. The Czech Republic has been leading a buyers’ group with other E.U. allies and has already secured 300,000 shells for Ukraine as its stockpiles run dangerously low.
Biden administration officials have made frequent trips to Europe to discuss using Russian assets to aid Ukraine. At a gathering of finance ministers in Brazil last month, Treasury Secretary Janet L. Yellen said that seizing assets outright was a possibility and suggested that there was a legal justification for doing so.
But the meeting was marred by divisions among the policymakers. Some, such as the French finance minister Bruno Le Maire, argued that taking Russian central bank assets directly would violate international law.
Eshe Nelson contributed reporting from Frankfurt, and Alan Rappeport from Washington.
