The European Union walked to the chasm’s lip on December 19, peered over, and then stepped back a pace. But any relief at its decision to extend a financial lifeline to Kyiv was soured by the knowledge that financing the war will now be funded by European taxpayers rather than the Russian dictatorship.
It finally agreed on a new €90bn ($105bn) of bonds to cover a large chunk of Ukraine’s €140bn financing gap for the next two years. The hope is that other members of the coalition of the willing, like the UK and Japan, will make up the shortfall. The US is not expected to contribute.
That should send a message to Putin that Ukraine is sufficiently well-funded. It will allow Ukraine to maintain its defenses and fend off Russian aggression. Putin could be heard gnashing his teeth on this and other matters at a year-end press conference in Moscow on December 20.
But while the EU did the right thing (a failure would have led to Ukrainian defeat), it did so in the worst available way. The bloc failed to secure agreement on what should be the morally justified course of action — by making Russia pay.
The bloc and the UK have more than $250bn in Central Bank of Russia (CBR) assets. But the plan to fund Ukraine from CBR assets via a reparation loan — only to be repaid once Russia pays reparations to Ukraine — was ditched.
Actually, the reparation loan itself was a compromise and did not really make Russia pay, as the underlying assets were not to be seized, but simply repurposed for the use of Ukraine. Russian and Western business interests had long lobbied against seizure. So did countries with a friendly view of the Kremlin, and some with ties to the Trump administration, which opposed the idea.
Belgium played a notably ignoble role. It was the target of an intensive Russian intelligence operation to frighten its bankers and government ministers. This had a clear impact. Belgium’s Prime Minister said Russians had told him that using the money would mean, “Belgium, and I personally, will feel the effects for eternity.”
The country houses the bulk of Russia’s frozen assets in the EU, through Euroclear. It pulled out all the stops to defend its business interests — first arguing that using CBR assets to support Ukraine was illegal, then that the issue would damage confidence in the euro, and latterly that it would risk retaliatory action against private Western assets now stranded in Russia.
After weeks of discussion, it has become clear that the legal arguments against the reparation loan were weak, even though this route did not envisage seizure, even if this would be morally right, politically correct, and legally justified under the countermeasures defense.
There is a reason why Russia has not taken legal action in Western jurisdictions since immobilization almost four years ago — any suit would remove its sovereign immunity and open it to Ukrainian counter-suits of up to a trillion dollars. Would courts really put the financial interests of a kleptocratic dictatorship above those of the millions of Ukrainians whose country has been hammered in a war of imperial conquest? Perhaps, but Russia has been notably unwilling to take that risk.
Russia has been no keener to invoke bilateral investment treaties, as they relate only to private sector investments, not sovereign assets. The CBR lodged legal action in the Russian courts since this was its only option. But it lacks jurisdiction or enforcement power in Europe. The legal risks cited by Belgium and its friends were mostly scaremongering.
Similarly, the risks to euro reserve status were overstated, and indeed, the euro has moved barely at all during the Russian asset discussions. Large reserve owners have little option but to invest in G7 jurisdictions; there are simply no large alternative markets.
In the end, I think what swung the pendulum against the reparation loan and the use of immobilized CBR assets to support Ukraine was intensive lobbying by Western business interests who feared retaliatory action by Moscow. This is remarkable and disappointing for numerous reasons.
First, Putin has already been confiscating Western assets pre-emptively. So a move against CBR assets would be fair retaliation by the EU.
Second, CBR assets held in G7 jurisdictions dwarf by multiples those now stranded in Russia, and not already written off by the owners.
Third, owners of assets stranded in Russia made bad investment calls. They long could have concluded that Russia was a bad actor capable of mass theft reminiscent of the Bolshevik regime after 1917. That was the lesson of numerous events — Russia’s invasion of Georgia in 2008, the annexation of Crimea in 2014, and then the first Russian invasion of Donbas in 2014, the use of weapons of mass destruction twice by Russia on NATO soil, in London and Salisbury.
And if all that were not enough, US and British intelligence agencies gave early warning, in public in 2021, stating that the full-scale invasion was imminent. These Western businesses could have exited Russia long before the invasion, but chose to stay as they liked the windfall profits they were earning.
But let’s understand this: if immobilized CBR assets are not being used to fund Ukraine so as to protect Western business interests still in Russia, then Western taxpayers will have to pick up the tab instead. Ordinary European citizens will fund the new €90bn EU borrowing facility.
That means Western taxpayers are again bailing out greedy Western businesses that made bad investment decisions. This is a clear moral hazard play on several levels, not least by signaling that it pays to do business with Putin. What a dreadful message for Western governments to send.
Fourth, it implies that Western national security interests are being held subordinate to the business interests of a few greedy Western investors.
Profit is being placed before national security. And the Western taxpayer is being ripped off again because our politicians are again putting the interests of their populations behind those of well-connected special interests.
Timothy Ash is a Senior Emerging Markets Sovereign Strategist at RBC BlueBay Asset Management. He is an Associate Fellow at Chatham House on their Russia and Eurasian program.
The views expressed here are his own.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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