Ukraine Jittery Over Funding Delays From Frozen Russian Assets

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(Bloomberg) — Ukrainian officials are increasingly concerned about delays in finalizing a deal that would open the door to $50 billion in support by tapping profits from frozen Russian central bank assets, according to people familiar with the matter.

The money is due to flow to Kiev by the end of the year, according to a G7 agreement in June that envisaged a loan pool to be repaid from earnings generated over time from about $280 billion in frozen Russian funds.

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But implementation of the plan has been hampered by demands from the United States and the risk that Hungary would slow down any EU-level decision on support for Ukraine or sanctions on Russia, according to people who spoke on condition of anonymity because the talks are being held behind closed doors.

The funding will provide much-needed support to Ukraine as the war nears its two-and-a-half year mark. Ukrainian forces are struggling to halt a strong Russian advance in the east while shifting resources to a new front in the Kursk region of western Russia after a surprise incursion this month.

While the timeframe for the G7 deal runs to the end of the year, Ukraine will need to make a decision next month, when an IMF funding review includes assurances that Kyiv’s budget requirements will be met, one of the people said.

“We need a real mechanism. The relevant discussions have been going on for too long, and we finally need to make decisions,” Ukrainian President Volodymyr Zelensky said on Wednesday.

Ukraine’s allies froze the Russian central bank’s assets, most of which are in Europe, after the Kremlin’s forces invaded in February 2022, with the West demanding that the money be used to compensate for damage and help rebuild Ukraine after the war.

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Implementation of the G7 arrangement has been hampered by US concerns that the EU needs to renew the asset freeze every six months alongside broader sanctions targeting Moscow. The US has demanded more permanent guarantees that would ease concerns in President Joe Biden’s administration about signing off on the loan without congressional approval.

A senior Biden administration official, who asked not to be identified discussing private deliberations, said the United States wants assurances from allies that Russian assets will remain frozen until a fair peace deal is reached and Russia pays for the damage caused by the invasion. If that happens, the official said, the United States is confident the funds could begin disbursing by the end of the year.

move the agenda

Last month, the EU offered member states two options for a longer asset freeze, Bloomberg reported last month. The 27-nation bloc has so far failed to reach an agreement — and some officials are skeptical that a solution will be reached, given Hungary’s record of blocking efforts to renew the sanctions measures for more than six months.

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Some officials have argued that a permanent commitment by the European Union and the G7 to freeze the funds until Russia agrees to pay compensation to Ukraine would ease U.S. concerns.

A European Commission spokesman said work was underway, further discussions would be needed and would resume in the coming weeks. A Hungarian foreign ministry spokesman did not respond to a request for comment.

As Brussels formally returns from summer recess, the issue of central bank money is likely to top the agenda of EU diplomats, according to another person.

The issue has already become a flashpoint in Germany’s recent political battle. Responding to a report that Berlin had capped military funding for Ukraine beyond funds already allocated in budget negotiations, Chancellor Olaf Scholz said Germany would continue to provide aid — and pointed to the G7 deal as a major new source of funding.

The German leader brushed aside the complexities surrounding the deal’s introduction, telling reporters in Moldova on Wednesday that the arrangement was “technically difficult but politically clear” – as he stressed the end-of-year timeframe.

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The central bank’s revenues are estimated at around €5 billion ($5.6 billion) a year – and each G7 member would be responsible for covering its share of the loans if the freeze on assets is lifted. The G7 agreement calls for the EU and the US to provide loans of around $20 billion or more each, with the UK, Canada and Japan contributing smaller amounts.

According to the first half of the year, some €173 billion of sanctioned assets were held by the Euroclear clearing house in Belgium as of June. The EU has separately agreed to provide Kyiv with the profits generated by these funds, with an initial €1.6 billion disbursed at the end of July.

The funds have so far made about €3.4 billion since they were frozen, although Euroclear will hold on to profits made before February 15 as a buffer to deal with current and future risks, such as litigation.

—With the assistance of Victoria Dendrino.

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