Risky business: How to save the G7 deal to mobilize $50 billion for Ukraine

Could the Group of Seven (G7) deal to mobilize Russia’s immobilized reserves for Ukraine now be upended by a risk-weighting exercise? Senior US officials have been invited to join this week’s meeting of the European Union (EU) member states’ top representatives in Brussels in one of the last attempts to secure US participation in the scheme.

In the early months of this year, the United States and the EU’s largest member states were at odds over the fate of the $280 billion of Russian reserves immobilized in the West. The EU’s skepticism over seizing the money to fund Ukraine has prevailed—not least because most of the money is in the EU.

At the G7 summit in June on Italy’s Adriatic coast, the United States and the EU’s largest member states demonstrated they could come up with a solution that was agreeable to all and deliver a serious amount of cash. The plan remains for the G7 to make a joint sovereign loan to Ukraine and for the creditors to pay themselves back with interest income from the immobilized reserves. Because most the reserves are in the EU, some of that income would have to be transferred out to creditors who are not in the EU.

The strong political signal sent from the G7 summit in Apulia was enough to suggest that this approach could get over the line by the end of the year, with the technocratic baggage cart following behind and ironing out the details.

But the political deal is now at risk of getting caught between the specific way the EU enacts sanctions and the Biden administration’s aversion to bringing any new Ukraine funding bills before Congress.

It is EU sanctions legislation that prevents financial institutions holding assets for Russia’s Central Bank and its National Welfare Fund to complete transactions on their behalf. The sanctions need to be renewed every six months by consensus of all member states. If they are lifted, then there would be no principal left to generate the revenue needed to repay the creditors of this special sovereign loan.

For the United States to participate, it does not need an appropriation for the full amount, but only the amount deemed to be at risk. The White House Office of Management and Budget (OMB) has tried-and-tested methods to calculate the level of risk stemming from other factors, such as diminished cash flow once interest rates fall. The OMB is understandably perplexed at having to price the risk of the member states failing to agree unanimously on a contentious foreign policy issue every six months.

The EU’s six-month approach dates back to the sanctions packages of 2014, long before these were expanded to include a block on Russian sovereign assets. Before 2022, even attempts to move to twelve-month intervals were deemed escalatory and rejected. Still, there is now a decade-long record of sanctions being rolled over on time.

Over the summer, the European Commission publicized its own efforts to meet the United States halfway. It presented member states with two options: extending the roll-over period to two or three years or adopting an open-ended approach specifically for the assets, which would still have to be reviewed at regular intervals. Repaying the loans will take anywhere between ten and twenty years. So, the first option would only provide certainty for the first few years, although the early period of certainty would secure a lower risk score. The second approach will be hard to get past EU member states.

The European Council has committed to blocking Russian sovereign assets until Russia leaves Ukraine and pays compensation. But that political commitment is not currently reflected in how the sanctions legislation works. Moreover, the EU moving to a strict events-based conditionality remains challenging, and not just because Hungary holds the Council presidency. Capitals that have been consistent supporters of Ukraine also see a problem in tying sanctions relief to specific goals, even if these goals are desirable. Events-based conditionality also tests the EU’s red line on confiscation, as it implicitly puts the blocked sovereign assets on the hook to compensate Ukraine, with or without Russia’s consent.

The best way forward would be for EU member states to sign off on new language making the immobilization so open-ended that the OMB can deem the entire US portion of the loan risk-free. But even if this isn’t achieved in the coming weeks, alternatives are available.

The United States could lend a smaller amount to Ukraine and rely only on assets immobilized in the United States. The Biden administration’s reticence to reveal how much is blocked in US financial institutions and the ratio of cash to yet-to-mature bonds has been an odd contrast to its willingness to push for confiscation. However, the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act, which Congress passed in April, forces it to do so by October. There may be more than the reported five billion dollars, but it would still mean the United States cannot lend the twenty-five billion dollars—half of the entire scheme—that was planned. The rest of the G7 would then have to lend more and face the same polarized debate on funding Ukraine in their parliaments as in the US Congress.

Some on the EU side suspect that the United States will not be able to stomach being relegated to lending such a small share of the total. If the OMB is unable to label the income stream from assets blocked in the EU as risk-free, the percentage of risk should still be small. After all, the EU lifting the immobilization early would also mean that EU participants would be unable to repay themselves—making this outcome unlikely, even if it only takes one member state to upset the apple cart. It is not impossible to imagine a small percentage of the twenty-five billion dollars being appropriated for Ukraine during the lame duck session of Congress.

There are many paths to get there, but the destination—fifty billion dollars that Ukraine could treat as a grant ahead of a highly uncertain 2025—would be a game-changer for Kyiv. Let’s make sure it’s delivered.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the Atlantic Council’s GeoEconomics Center.

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Image: Ukraine President Volodymyr Zelenskyy meets leaders of the Group of Seven (G7) leaders’ summit meeting at Borgo Egnazia in Fasano, Puglia, Italy on June 13, 2024.