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Financing Ukraine and Russian money

The long and bitter war in Ukraine is causing dreadful death and destruction. It is also imposing considerable financing strains on Ukraine and its allies, which the West is striving to meet.

| 5 min read

The US House of Representatives and the Senate have passed a Bill to give the president power to take frozen Russian assets held in US banks and use the money for Ukrainian reconstruction and reparations for war damage.

The US lawmakers say that a sovereign loses the right to the safekeeping of their money if they themselves break international law. Russia has broken international law with its invasion of Ukraine, so they think it fair to withhold Russian funds and reapply them in the event of Russia not reaching an agreement with Ukraine about repairing the war damage it has inflicted.

The US has small amounts of Russian money. Some European Union (EU) countries have larger sums, with around $300bn as frozen deposits in Western banks. The US hopes to influence the Europeans to take similar action to amass a serious sized fund to help pay for repairs to Ukraine’s war-torn structures. It is another complication in international finance to watch with the danger of retaliation from the China/Russia led countries.

Western governments are finding the magnitude of financial and weapons aid to Ukraine is a strain on their budgets. They are increasingly offering loans rather than grants. Here, the US is looking forward to reconstruction costs, and considering humanitarian aid outgoings. They are keen to find other ways of financing the reconstruction that is needed.

Some lawyers may argue that the money held for the Russian Central Bank is covered by sovereign immunity. They may be concerned that money held in other states by Western banks could be at risk from counter moves. That is why the US Act states that “under international law a country that is responsible for an internationally wrongful act is under an obligation to compensate for the damage it has caused… The Russian Federation bears such responsibility to compensate Ukraine” as guidance to courts were anyone to try to argue the case for sovereign immunity.

The new money for Ukraine

The new US package of $60.7bn entails substantial expenditure within the US. Of this, $23bn is earmarked to rebuild US weapons stockpiles, $14bn is to be spent on procuring new weapons to send to Ukraine, $11bn is on intelligence collaboration and US military aid, with $8bn for non-military assistance.

The US has offered more by way of military support and the EU has offered more as financial assistance. With Russia occupying part of the country – and many Ukrainians living abroad to avoid the war – tax revenues have been hit whilst the costs of government have risen sharply with all the extra expenditures the war imposes.

All the time the war continues there will be a substantial demand for more money to sustain both the civilian government and the additional costs of the military. The war has also warned Nato countries of the need to spend more on their own weapons stocks and defences at the same time as offering support to Ukraine.

The EU has welcomed millions of refugees from Ukraine and made $18bn available for their support.

Since the start of the war, the EU and member states have made available $107bn in humanitarian assistance, refugee support and financial aid. In December 2023, EU leaders agreed to open accession negotiations with Ukraine to work towards membership of the EU.

The EU has welcomed millions of refugees from Ukraine and made $18bn available for their support.

On 1 February, EU leaders agreed up to an additional $47.5bn for a new Ukraine facility up to 2027 to support Ukraine’s recovery, reconstruction and modernisation and to help pay for reforms needed to join the EU.

How far to go?

The granting of new powers to the US President over Russian money heralds negotiations with allies over how far to go in transferring Russian assets to the tasks of humanitarian aid and of rebuilding Ukraine. The act requires the government to “work with international allies and partners on the confiscation and repurposing of Russian sovereign assets as part of a coordinated multilateral effort including with G7 countries and other countries in which Russian sovereign assets are allocated”.

This still means there will be continuing large bills for the Western allies of Ukraine to help maintain the current costs of government and to finance and supply the military. These will partly take the form of loans and are further pressures on budgets already stretched by other priorities. Ukraine is finding it difficult to pay all the interest on its growing amount of state debt and may be wanting some debt rescheduling in due course.

The reach for Russian money is also a tremor in the global system of finance, with risks that markets need to understand and manage.

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Financing Ukraine and Russian money

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