Feb 24, 2024 - Economy

How Ukraine can monetize frozen Russian assets

Illustration of a brick wall of rubles under construction

Illustration: Sarah Grillo/Axios

Ukraine can borrow money against seized Russian assets. That's the verdict of the doyen of all things related to sovereign debt, Lee Buchheit.

Why it matters: As my colleague Kate Marino reported earlier this month, there are many practical and legal obstacles to Ukraine being able to use the Russian money western governments have frozen.

The big picture: In a new paper he co-wrote with my former Reuters colleague Hugo Dixon and former U.S. Deputy National Security Advisor Daleep Singh, Buchheit seems to have found a way around those obstacles.

Zoom in: Under Buchheit's plan, Ukraine would borrow money directly from G7 governments, rather than issuing a bond to private-sector investors.

  • The funding from G7 countries to Ukraine would be a "limited recourse" loan, with the Ukraine government itself having no repayment obligation and having to pay no interest.
  • When an international court awards war damages against Russia, however, the G7 countries could foreclose on the loan and seize the collateral — Ukraine's claim for reparations against Russia.
  • That claim would then belong to the G7, which could reduce the amount outstanding by the amount currently frozen, under the law of "set off." That would effectively repay the loan.

By the numbers: There are about $300 billion in frozen Russian assets, but the initial loan wouldn't need to be that big. Instead, there could be a smaller initial installment, with future tranches envisaged as they are needed.

Between the lines: One of the elegant aspects of this structure is that it gives the G7 an important seat at the table in any armistice negotiations — something private-sector bondholders would certainly not want.

  • If the G7 wanted to allow Russia to access its frozen money in return for ending the war, they could do so — in the knowledge they would have to write off their loan to Ukraine.

The bottom line: This is a structure that allows governments to lend money to Ukraine without Ukraine ever having to pay it back out of domestic tax revenues.

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