Ukraine Jittery Over Funding Delays From Frozen Russian Assets

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(Bloomberg) — Ukrainian officials are growing wary over delays in finalizing a deal that would unlock $50 billion in support by harnessing the profits of frozen Russian central bank assets, according to people familiar with the matter. 

Those funds are intended to flow to Kyiv by the end of the year, according to a Group of Seven agreement in June that foresaw a loan syndicate to be paid back by profits generated over time by some $280 billion in frozen Russian funds. 

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But the implementation of the plan has been snarled by demands made by the US and the risk of Hungary slowing down any EU-wide decision on support for Ukraine or sanctions against Russia, according to the people, who spoke on condition of anonymity as talks take place behind closed doors. 

The financing would provide badly needed support for Ukraine as the war reaches the 2-1/2 year mark. Ukrainian forces are struggling to halt a grinding Russian advance in the east while moving resources to a new front in Russia’s western Kursk region after its surprise incursion this month. 

While the timeframe for the G-7 deal stretches to the end of the year, Ukraine will require a decision next month, when a funding review by the International Monetary Fund will entail assurances that Kyiv’s budget requirements are met, one of the people said. 

“We need a real mechanism,” Ukrainian President Volodymyr Zelenskiy said Wednesday. “The relevant discussions have been ongoing for too long, and we finally need decisions.” 

Ukraine’s allies froze the Central Bank of Russia assets, most of which are held in Europe, after the Kremlin’s forces invaded in February 2022, with the West demanding that the funds be used to compensate for damages and to help rebuild Ukraine after the war. 

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Implementation of G-7 arrangement has hit a snag over US concerns about the fact that the EU needs to renew the asset freeze every six months along with broader sanctions targeting Moscow. The US has asked for more durable assurances that would ease concerns in President Joe Biden’s administration over signing off on the loan without approval by Congress. 

A senior Biden administration official, who asked not to be identified discussing private deliberations, said the US wants assurances from allies that the Russian assets will remain immobilized until there’s a just peace deal and Russia pays for damage caused in the invasion. If that happens, the official said, the US is confident the money could start being distributed by the end of the year.

Moving Up the Agenda

Last month, the EU presented member states with two options to freeze the assets for a longer period, Bloomberg reported last month. The 27-member bloc has failed to lock up an agreement so far — and some officials are skeptical a solution will be found given Hungary’s track record of blocking efforts to renew sanctions measures for more than six months. 

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Some officials have argued that a standing commitment by the EU and G-7 to freeze the funds until Russia agrees to pay Ukraine for damages should assuage US concerns. 

A European Commission spokesperson said work is ongoing, and further discussions will be needed and will resume in the coming weeks. A spokesperson for the Hungarian foreign ministry didn’t reply to a request for comment.

As official Brussels returns from the summer break, the central bank funds are likely to move up the agenda for EU diplomats, according to another person. 

The issue is already front and center in the latest political fight in Germany. Pushing back on a report that Berlin has capped military funding for Ukraine beyond funds already earmarked in budget negotiations, Chancellor Olaf Scholz said Germany will continue to deliver aid — and pointed to the G-7 deal as a main new source of funding. 

The German leader brushed off the complexities around delivering the deal, telling reporters in Moldova Wednesday that the arrangement is “technically difficult but clarified politically” — as he stood by the year-end time frame. 

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The central bank proceeds are estimated to be worth as much as €5 billion ($5.6 billion) annually — and each G-7 member would be responsible for covering their portion of the loans if the assets were to be unfrozen. The G-7 pact envisions the EU and the US providing loans of around $20 billion or more each, with the UK, Canada and Japan contributing with smaller loans.

Some €173 billion in sanctioned assets are held through the Belgium-based Euroclear clearing house as of June, according to its first-half results. The EU has separately agreed to provide Kyiv profits generated by those funds, with an initial €1.6 billion installment released at the end of July.

The funds have so far earned about €3.4 billion since they were immobilized, although profits generated before Feb. 15 will be retained by Euroclear as a buffer to handle current and future risks, such as litigation. 

—With assistance from Viktoria Dendrinou.

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