Feb 9, 2024 - Economy

An unprecedented plan for Russia’s frozen assets to rebuild Ukraine

Illustration of a brick wall of rubles under construction

Illustration: Sarah Grillo/Axios

Belgium's government is shopping around an avant-garde solution to Ukraine's money problems, now that further direct aid to the country seems all but dead in the U.S. Congress.

Why it matters: The war has dragged on — this month marks two years. Ideas that once seemed far-fetched or too difficult are now being given serious consideration.

State of play: In broad strokes, the plan would entail Ukraine raising new debt from private-sector lenders, using Russian central bank assets (frozen by Western sanctions) as collateral, as the FT first reported.

  • Having collateral is crucial because Ukraine is broke — it can't assure its prospective lenders that it'll be able to pay the money back.
  • Think of this in the same way that a house is collateral for a mortgage. It can be taken over by lenders in the future if the borrower can't repay.

The intrigue: In any normal debt placement, the borrower (Ukraine in this case) has to have possession of the collateral for it to actually be collateral.

  • The big question is how the West can financially engineer this assurance for would-be lenders.

What we're hearing: Any such plan would probably involve putting the Russian assets into an escrow-type account with a neutral third party until the invasion ends.

  • The terms of the escrow would allow Ukraine to use the assets to raise money — likely by placing zero-coupon bonds that mature in 30 or 40 years.
  • The escrow account's very existence would give cover to Western governments to insist they haven't actually seized anything, since Russia's ownership wouldn't technically change.

The upshot: The plan acts as a bridge to a time in the future when Russia has exited Ukraine and is willing to negotiate over compensation. Or, failing that, a legal entity like the International Court for Justice rules that Russia owes reparations, which would mean the assets could finally be seized.

  • Reparations rulings can take years — decades, even. The debt plan would allow Ukraine to capitalize on expected reparations now.
  • This flavor of lending could appeal to investors who are willing to bet that Russia will be held liable for reparations.

Worth noting: The reason Belgium's circulating the plan to the G7 is because the biggest chunk of Russia's frozen assets are held there.

Between the lines: In some ways, the plan has a model — it's a modern twist on the Brady bonds of the 1980s.

  • But, but, but: It's hard to understate how unprecedented it would be to utilize another country's sovereign assets — even with an elegant, arm's length arrangement. Under international law, those assets are sacrosanct.

What they're saying: "This is untested. But I think it's something we should take seriously because there's been tremendous pressure on the Europeans to just seize it and give it to Ukraine — which they aren't willing to do," says Charles Lichfield, deputy director at the Atlantic Council GeoEconomics Center.

  • "There's now a renewed focus on using Russian assets because everyone is running out of money — it's as simple as that," says Thomas Kleine-Brockhoff, of the German Marshall Fund.

Reality check: The debt plan may be the leading option for using Russia's assets at scale to help rebuild Ukraine, but the barriers are still high.

  • In order to move the assets into escrow, the individual countries where the assets are held may need to pass legislation to allow it. And many countries in Europe still need to be convinced.
  • (The U.S. for its part, has expressed openness to using the assets.)

What to watch: The G7 nations will likely want to make progress on some details of a framework at their next meeting, a source familiar with the matter tells Axios.

Go deeper: How frozen Russian assets could pay to rebuild Ukraine

Go deeper