EU Frozen Asset Plan

After a contentious summit – one that saw European Union (EU) members divided on the future of funding to Ukraine as the war nears its fourth year – the EU has created a plan to secure an interest-free loan of US$105 billion to support Ukraine through at least the next fiscal year. This plan depends on using cash from secured capital markets, deviating from the original controversial proposal to use frozen Russian assets. The summit comes at a time where Russian attacks have escalated and Ukraine stands on the brink of bankruptcy. While the EU’s major goal of securing a funding package was achieved, internal fractures are increasingly felt and spreading, with the discussion inflaming verbal attacks and disagreements between Hungary, Slovakia, and other EU members.

Risky or revolutionary?

The EU’s final iteration of its funding package comes as a much safer development from the Commission’s initial Reparations Loan. That initial package would have secured funding from cash balances on Russian assets that have been frozen since the start of the full-scale invasion. Days before the summit, the EU agreed to indefinitely freeze these assets, which primarily belong to the Russian Central Bank, held through Euroclear. The Commission maintained there was no breach of ethics on account of the agreement not affecting the Russian Central Bank’s intellectual property and Euroclear would be bound to repay it. Despite this, the plan elicited heated controversy among EU members.

Strong opposition largely stems from Euroclear and Belgium – where the financial company is based. Euroclear’s concerns pertain to the international trust in the euro and the company itself; it also expressed concern that it may be undermined by what they deemed a “legally shaky procedure.” Belgium fears Russian retaliation through international courts. The Russian Central Bank has already sued Euroclear for damages and promised more retaliation if the plan were to go ahead. Retaliation from Russia could also include various hybrid strategies such as cyberattacks, sabotage of critical infrastructure, or even drone incursions. Hungary and Slovakia have also opposed the plan. The two countries have become increasingly critical of EU sanctions against Russia due to their own political and energy connections and dependencies on the country. Both nations opposed the decision to indefinitely freeze Russian assets, eliminating their veto power. Prime Ministers Robert Fico and Viktor Orban slammed the plan on social media, implying it betrays important normative and legal architecture of the European Union.

Ultimately, the Reparations Loan in its original form was not passed, with members saying it was “too complex” and politically risky to go through with now. The primary concern was that Belgium needed binding commitments from other members to protect them from any Russian retaliation. This brought mixed reactions and the guarantees could not be met. The EU’s main strategic goal to avoid escalation with Russia also made this move too risky, with the threat of financial and legal repercussions too costly.

What’s next for Ukraine?

The loan will be based on joint borrowing, requiring Ukraine to pay it back once they begin receiving reparations after the war has ended. The current plan eases the burden for some struggling with financing Ukraine directly, while also not affecting the obligations of countries like Hungary, Slovakia, and the Czech Republic, who do not want to contribute. This guarantee also paved the way for these countries to support the loan, making the decision smoother. The loan will be used to support Ukraine’s financial needs, particularly for investing in Ukrainian defence technology and industry. The country has identified a need for additional funding beyond its current IMF program, calling for up to US$136 billion between 2026-2029.

What does this say about the EU?

One thing that has become abundantly clear during the summit is the increasing fractures between members of the European Union regarding the war in Ukraine. Russia’s full-scale invasion of Ukraine and its continued influence throughout Eastern Europe is beginning to sow real discord within the EU, proving to be an increasingly complex issue as the war rolls on. Currently, the EU has made several moves that mitigate the ability for countries that sympathize with Russia to disrupt aid to Ukraine; however, the new plan also gives a noteworthy “out” to these countries by allowing them not to contribute. Disagreements over the war are also combined with strong anti-bureaucratic and anti-EU rhetoric from leaders, who operate from a populist and, at times, illiberal base of governance. The EU will need to be vigilant and cautious about the influence and relationship to Russia that current member states have. The destabilization and weakening of the EU will be strategically advantageous to Russia, divisions that the Russian Federation and other revisionist actors have already begun to exploit.

What will be interesting to see is how funding will evolve as time goes on. The EU has not completely taken the Russian asset plan off the table, and maintains the right to use it if needed. Will later developments prompt this risky move? Additionally, what will the reaction of Moscow be in these current conditions? It will be important to follow developments as they relate to renewed funding, as this could (re)invigorate either party and change future strategies and funding scenarios. Whether this will result in strategic pressures with positive outcomes or a further destabilization of the European continent, has yet to be seen.