Anticipated Trouble Brewing in Ukraine
The ongoing conflict in Ukraine has placed a significant strain on Europe's social, economic, and political fabric, with the potential for many millions of Ukrainians to move West if the war continues and Ukraine is defeated by Russia. This grim scenario could be averted by seizing and utilising frozen Russian assets, particularly those held in Western jurisdictions.
The use of these assets would send a powerful message that Ukraine can withstand Putin's long-war scenario and his own failing economy. Moreover, it would amply finance Ukraine's defense needs for a prolonged conflict, reducing the annual cost to the West, which has been estimated to be nearer to $100bn annually.
Opponents of seizing Russia's Central Bank of Russia assets have offered various excuses, but none have been found persuasive. Timothy Ash, a Senior Emerging Markets Sovereign Strategist at RBC BlueBay Asset Management, has proposed a similar plan for a Reparation Loan, with all the risk being carried by the Kremlin. This action could increase the Kremlin's risk in continuing its war of aggression and potentially force it to the negotiating table.
The International Monetary Fund (IMF) has completed a review mission to Kyiv under its Extended Financing Facility (EFF). However, the IMF focuses on budget and balance of payments requirements, excluding broader, essential military support. Ukraine's Finance Ministry estimates the funding need at $37bn, a figure that the IMF now estimates will require additional $10bn-$20bn by the EFF to the end of 2027, significantly higher than its previous estimate.
Europe cannot and will not pick up the long-term financing commitment for Ukraine due to rising budget deficits, subdued growth, competing demands, and a populist tide demanding spending at home. The situation is now serious, and there is a possibility that the IMF will not receive the financing assurances to continue the current program, creating a swift financing crisis for Ukraine.
Europe needs a plan B, but in truth, that's really now Plan A. European states, coordinated through the EU's Ukraine Facility, are collectively ready and able to provide up to 50 billion euros (about 54 billion dollars) in financing from 2024 to 2027 to support Ukraine, covering the additional financing needs of 20 to 37 billion dollars. Major contributors include Germany, which plans around 9 billion euros annually, along with other EU member states pooling funds through this mechanism.
The biggest risk to the reserve currency status of the euro is not actually seizing immobilized CBR assets, but failing to seize these assets, underfunding Ukraine's war as a result, and seeing it defeated by Russia. Defeat would put Europe’s two largest military industrial complexes - Russia and Ukraine - in the hands of a victorious Kremlin. Therefore, it is crucial that Europe takes decisive action to secure these assets and support Ukraine in its fight for freedom and democracy.
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