Instead of providing military aid bilaterally, the German government would like to rely on the G7 and EU countries jointly supporting Ukraine – using Russian money. More precisely: earnings from Russian assets frozen abroad are to finance a 50 billion loan, as agreed at the G7 summit in June. But Chancellor Olaf Scholz (SPD) is met with opposition when he announces that politically everything has been “settled” and that only “technical questions” remain. Doubts are being expressed by everyone from the EU’s foreign policy chief to German opposition politicians and members of the traffic light coalition.
The deputy spokesman for the Union faction in the Bundestag, Johann Wadephul, accuses the government of working with “unsecured bills of exchange”. Nobody can guarantee today that the proceeds from the frozen Russian assets will really “be available”. The faction’s European policy spokesman, Gunther Krichbaum, adds that in view of the unresolved questions, it is “irresponsible” for the government to want to “rely solely on these funds” to finance future aid for Ukraine.
The chairman of the Foreign Affairs Committee, Michael Roth (SPD), also stressed that it is “unclear when and to what extent these funds will actually be available”. Therefore, Roth believes that the income from Russian assets should “not be used instead of, but in addition to, the existing bilateral military aid”. The Green politician and chairman of the German-Ukrainian parliamentary group, Robin Wagener, does not go quite that far. But he also says that as long as there is no final agreement on how to deal with the frozen funds, “Germany must live up to its responsibility for Ukraine in the same way as before”.
Josep Borrell is “very concerned”
There is also considerable unease in Brussels. The chairman of the Foreign Affairs Committee in the European Parliament, David McAllister, told the FAZ that the “implementation” of the plan would be “legally and technically difficult to implement”. It is questionable whether the promised financial aid could come “this year”. Last but not least, the EU’s foreign policy chief Josep Borrell is warning of the consequences of failure. A reduction in German support would be “very worrying”, Borrell said on Friday.
The debate about the further financing of German aid to Ukraine has flared up after the Frankfurter Allgemeine Sonntagszeitung revealed last week that Berlin only wanted to deliver bilaterally what had already been promised and was relying on the interest income from Russian money for future military aid.
Chancellor Scholz can take credit for his optimistic assessment that a lot has actually been achieved politically. The G-7 group of the most important industrial nations decided at their summit in Italy to make part of the 260 billion euros from the Russian central bank’s funds, which were frozen worldwide after Russia’s major attack on Ukraine, available to Kiev.
Technical questions? It’s more about fundamentals
The Russian assets themselves are to remain untouched, but part of them, 173 billion, which are held by the Belgian institute Euroclear, are to be used to skim off the capital gains (“windfall profits”) that Euroclear makes with the money over many years – how much depends on the market situation, three billion euros a year is considered realistic. These three billion annually are to be “leveraged”, in other words: the G7 and EU countries are to take out loans totaling 50 billion dollars and cover the costs over many years with the income from the Russian money. The loan is to be available at the end of the year.
So much for what Scholz considers to be “settled”. The “technical questions” are, however, in reality very fundamental. It starts with the distribution. Who will pay what share of the 50 billion? There is a variant circulating according to which the EU and the United States should each shoulder 20 billion dollars, while Japan, Great Britain and Canada – or other friendly states such as Norway – divide the remaining 10 billion between themselves.
But first a big hurdle has to be cleared. The Russian central bank deposits at Euroclear in Belgium, on whose earnings the plan is based, are frozen by an EU decision that has to be renewed every six months. If all 27 members of the Union do not agree to an extension every six months, all sanctions against Russia will be lifted in one fell swoop. Vladimir Putin would get his frozen billions back, and the countries that wanted to use the earnings to finance the loans for Ukraine would have to use their own funds to repay the loan instead.
How Orbán and Fico can block
In the worst case, a no from the pro-Russian heads of government Viktor Orbán from Hungary or Robert Fico from Slovakia is enough. The USA and Great Britain are therefore demanding that the EU change its rules and remove the risk by limiting the sanctions. The Scholz government knows this, of course. In a so-called wire report from the German representation to the EU in Berlin dated July 24, which the FAZ has obtained, it is stated unequivocally that the “G-7 partners” (i.e. primarily the USA) would only participate in the joint 50 billion dollar project if “sufficient legal assurances” were made that the income from Russian assets would be available “long-term and reliably”.
Brussels insiders explain the concerns of the Americans and others in the G7 group as follows: These countries would otherwise have to involve their parliaments before giving Ukraine loans. If there was a theoretical threat of a default every six months, the USA, for example, would become dependent on Hungary. If, on the other hand, it was clear that the money would flow reliably in the long term, there was no need to involve parliaments in America and elsewhere. This was particularly serious in Washington. In the middle of the election campaign, the Biden administration believes it would be difficult to “get the green light from Congress”. There, at least in the House of Representatives, Donald Trump’s Republicans are in charge, and they blocked a support package for Ukraine for months last year.
The debate about how the EU can allay the USA’s worries is in full swing. Shortly before the summer break, at the end of July, the EU Commission presented a “non-paper”, a kind of discussion paper. It contains two options. The first envisages the EU freezing Russian central bank money “indefinitely”. The lifting would be linked to the end of Russian aggression and to Russian compensation payments. This would mean that money would be available to service the Ukraine loan either way. The second option does not go quite as far, but the assets would still be “immobilized” for a longer period of time. The paper speaks of 18, 24 or 36 months. The Commission is confident that a solution can be found on this basis. The debate has gone relatively smoothly so far, it says.
Compromise difficult to reach
However, that is only half the truth. As the internal report of the German EU embassy on the ambassadors’ discussion of the paper shows, both proposals met with support. The Baltic states, Poland, Romania and the Czech Republic supported the first option. Germany, along with France and others, supported the second. The first option was legally difficult, they argued. That would be closer to expropriating Russia, and Russia could take legal action against it in the European Court of Justice.
But there is a catch: The report states that Slovakia did not take a firm stance, but instead emphasized the need to “stick to the unanimity system.” “It is about a strong legal position of the Council,” it continues. That sounds innocent, but can be interpreted as Slovakia not wanting to shake up the six-month deadline. At least that is how some diplomats read it. This would mean that the change to the sanctions regime demanded by the USA would be off the table, because according to EU rules it can only be decided unanimously. The position of Hungary, which has repeatedly blocked the EU’s sanctions against Russia, would no longer be decisive. So far, the government in Budapest has not made a clear statement. But diplomats are expecting “stray fire” from there. In Brussels, it is said anyway that it can be assumed that Hungary and Slovakia have coordinated.
Getting both on board with a compromise will not be easy. The number of options is limited, says a Commission spokesman. In Berlin and Brussels, the importance of extending the six-month deadline is being played down. In the end, the renewal of sanctions always goes through, they say. Moreover, it would not be in the interest of the Hungarians or Slovaks to torpedo the financing of the 50 billion loan from the capital gains from immobilized Russian assets. Because then they would also have to pay for the European share of the financial gap.
The EU also has to clarify how it will specifically structure its share of the 50 billion loan and how it will make the capital gains available for the loan. It is also still unclear how liability and repayment will be structured. The EU Commission will present proposals in September, according to Brussels. This is quite technically demanding, as Scholz says. The legal basis for skimming off capital gains has actually been in place since May. On July 26, the EU made 1.55 billion euros available to Ukraine for the first time. But if the money is now to be used to service a 50 billion loan, it must be re-allocated.
The Biden administration insists on speed
There are still some pitfalls here. France, for example, is demanding that Ukraine use the loan to order weapons from the EU. Unlike the six-month deadline, however, this aspect poses little political risk. This is because the re-allocation – as the Commission’s proposal will provide for, according to information from the FAZ – can be carried out by qualified majority on the basis of the EU budget. Hungary and Slovakia could therefore not simply block it.
However, the enormous time pressure could become a problem. The USA demanded clarity before the presidential election on November 5, diplomats report. However, the Commission’s proposal has already been delayed. Diplomats had expected a proposal at the end of August so that it could be discussed immediately after the summer break, at the meeting of EU ambassadors on September 4. This timetable is probably no longer feasible. Accordingly, some of those involved are already warning that the payment of the money could be delayed beyond the end of the year.
Ukraine also needs clarity quickly. It must ensure that the budget for the coming year is sufficiently financed, says Olena Halushka from the International Center for Ukrainian Victory, a non-governmental organization that advocates the use of confiscated Russian assets. Otherwise, the International Monetary Fund (IMF) threatens to temporarily halt the Ukraine program.
