Europe eyes “reparations loan” using Russia’s frozen assets to support Ukraine

Since Russia’s invasion of Ukraine in 2022, Western policymakers have debated the fate of Moscow’s frozen sovereign assets. Now, with the European Commission backing a so-called “reparations loan,” there is a real prospect that these funds could finally be directed to Ukraine’s defence, according to a Reuters analyst. The key challenge is for allies to maximise the size of the loan and implement it swiftly.

After the invasion, the Group of Seven industrialised nations froze approximately $300 billion of Russia’s central bank assets. However, there was little consensus on the next steps. Some supporters of Ukraine have called for outright confiscation of these funds, but such a move is politically untenable: Belgium, where most of the assets are held, opposes it, as do Germany and France, the EU’s leading powers.

A “reparations loan” offers a legally robust alternative. Based on the principle that a country that illegally invades another must pay damages, the loan would require repayment only if Russia eventually provides war reparations. If Moscow refuses, the loan effectively becomes worthless, leaving Ukraine with no repayment obligation but immediate access to the funds it needs.

Several conditions supporting this approach are already in place. The United Nations General Assembly has called for Russia to pay reparations, and last week, a group of countries finalised a draft convention establishing a claims commission for Ukraine. While this tribunal could take years to reach a decision, Ukraine requires cash now. The reparations loan is designed to bridge this urgent gap.

To strengthen the loan’s legitimacy, any claims for damages could be contingent on the commission officially finding Russia at fault. Governments sponsoring the loan could also commit to reimbursing Russia in the unlikely event the tribunal does not award sufficient compensation.

EU finance ministers are scheduled to discuss the reparations loan on September 20. One proposed mechanism involves transferring Russia’s frozen assets from depositaries such as Brussels-based Euroclear to a special purpose vehicle (SPV). The SPV would then lend the money to Ukraine, with repayment contingent on Russia paying reparations. This arrangement does not constitute confiscation, as Moscow remains the legal owner of its funds, and Ukraine issues an IOU in return.

Another option under consideration is a bond swap, in which Russia’s frozen funds would buy long-term, zero-interest EU bonds, with the proceeds then loaned to Kyiv. While this could achieve a similar outcome, it introduces complexities, including EU involvement as both borrower and lender, and the potential need for EU member states to cover shortfalls if Russia does not pay. By comparison, the SPV mechanism is more straightforward and avoids requiring guarantees from EU governments.

The priority is not the precise structure but rapid implementation. With the U.S. having largely ended financial support, Ukraine faces a cash crunch early next year. Swift access to a reparations loan would allow Kyiv to continue defending itself and could incentivise Russia to negotiate a ceasefire.

The scale of the loan is also crucial. Of Russia’s frozen assets, €210 billion are in the EU, with an additional $75 billion held elsewhere. A broader coalition is already emerging: the UK and Canadian finance ministers plan to join EU discussions, and Canada, as G7 chair, could encourage participation from the U.S. and Japan. While the U.S. holds only around $5 billion of frozen assets, its support adds political weight to the initiative.

Ultimately, the EU is the critical actor. Marginalised in direct U.S.-Russia negotiations over the war, a successful reparations loan would position Europe as a key player at the table and demonstrate its capacity to lead on urgent financial and geopolitical matters.

By Tamilla Hasanova