The Reparation Loans are a bad idea. It will kill off the current peace talks and condemn Ukraine to more war as well as undermining Europe’s banking sector and currency. / bne IntelliNews
The EU’s vote on the Reparation Loan needs to fail. If it passes it will kill off any chance of a peace deal being signed. The US version of the plan is well advanced and special envoy to Ukraine retired Lieutenant General Keith Kellogg said last week that only points remain to be agreed. The EU versions of the plan are a non-starter and the proposed €210bn loan member states are due to vote on in the coming week has a continuation of the war built into the heart of it.
The EU is not trying to bring the war to an end. The various EU backed plans like the 24-point peace plan (24PPP) proposed by European Commission President Ursula von der Leyen, the European Parliament non-binding resolution (EPR) on November 27 and the latest E3-Ukraine 20-point peace deal on December 11 are all packed with red-line issues the Kremlin dismisses out of hand. Russian President Vladimir Putin has been accused of sticking to a maximalist position; the same can be said of the European Commission (EC).
Moreover, the Reparation Loan is illegal and will bring down a rain of lawsuits by Russia that it is likely to win. The US proposal to use $100bn of the frozen funds to set up a US-Ukraine investment fund is legal and more importantly, Putin has indicated he will agree to it handing Ukraine real reparation money.
US President Donald Trump is concretely talking about signing a peace deal by Christmas, including real Article 5-like security guarantees and $100bn of reparations that will be spent on rebuilding Ukraine as there will be peace.
European Commission President Ursula von der Leyen is talking vaguely about funding Ukraine’s continued military operations until such time as it is in “the strongest possible position” for undated negotiations. The money will not be spent on rebuilding Ukraine but funding more fighting, plus a €45bn payment to EU members for money they spent last year.
The US scheme is completely legal, and the Kremlin has strongly signalled that it agrees with most of the points on the list already. The EU scheme is illegal, and the Kremlin has rejected most of its points already. Indeed, the EU has been completely locked out of the current negotiations completely by both the US and the Kremlin.
As Zelenskiy himself said, he has a very difficult choice between keeping his dignity or losing a key partner.
War war rhetoric
The US and EU are now in open confrontation over who controls the frozen funds. But this shouldn’t be a squabble over who controls the cash, but how to spend it.
Does it really matter if the EU makes its €210bn “loan” (which will never be repaid as that is contingent on Russia agreeing to pay reparations, which will never happen unless it loses the war) or if the US runs a $100bn fund?
In both schemes not all the money goes to Ukraine anyway. The US will take half the returns from the US-Ukraine fund as payment. In the Reparation Loan the EU will take €45bn for itself to repay the G7 $50bn loan to Ukraine, approved on June 13 at a G7 summit in Italy last year.
And another glaring difference between them is that the US-Ukraine fund assumes that a peace deal is agreed, and all the money is dedicated to investment and reconstruction of Ukraine.
The EU Reparation Loan assumes that the war is not stopped, and a large amount of money doesn’t go into reconstruction, but into perpetuating the war. According to the draft, out of the €210bn in aid, €115bn is planned to support Ukraine’s defence industry over five years and only €50bn is to cover budgetary needs. In effect none of the EU’s €210bn loan is dedicated to reconstruction unless the war miraculously stops on its own. Ukraine is projected to face a budget shortfall exceeding $79.8bn next year, if the war continues.
On the other hand, all of the $100bn US fund – which is not even a loan that needs to be repaid – goes on reconstruction on vital needs like fixing the energy infrastructure that will also bring a boost to economic activity.
Things like repairing real estate objects will have to be done by the private sector and the development banks, but that is already happening to a limited extent. International defence companies have become the primary driver of demand in Ukraine’s office real estate market in 2025, replacing the IT sector, according to UTG real estate market analysis. And housing prices in the quieter cities have doubled on the back of high demand.
In the US scenario the massive $80bn budget deficit drops away following the end of hostilities and budget funding goes back to normal. The structure of the EU’s Reparation Loan spending structure has an assumption that the war continues built into it. At least the US only gets paid if it makes some profits for Ukraine from its investments.
Enemy at the gate
The rhetoric from the two camps is also very different. Trump is in a rush to end the killing, as he explicitly laid out in the new National Security Strategy (NSS) released last week. He has also downgraded Russia from “rival” to “Europe’s problem.”
Von der Leyen has repeatedly made the argument that the Reparation Loan will “significantly strengthen Ukraine’s hand.” The argument runs that by funding Ukraine, it will raise the cost to the Kremlin and show Europe can outlast Russia, “significantly strengthening” Zelenskiy’s bargaining position in “future” negotiations as Putin will see that Ukraine has the resources to continue defending itself for “at least another two years.”
Given Russia is making the fastest gains on the battlefield since the war started in 2022 and has taken an additional 500 square kilometres, this argument seems spurious at best and naïve at worst.
The EC moved to head off Trump’s attempt to hijack the frozen funds and include them in his deal by citing Article 122 that grants the Commission emergency powers and put the frozen assets off limits.
“The EU just decided to indefinitely immobilize Russian assets. This ensures that up to €210 billion in Russian funds stay on EU soil, unless Russia fully pays reparations to Ukraine for the damage it has caused. We keep increasing the pressure on Russia until it takes negotiations seriously,” said EU foreign policy chief and former Estonian Prime Minister Kaja Kallas on December 12.
Article 122 allows the EC to abandon the unanimity rule in cases where the EU faces a major emergency and will negate the need to renew the asset sanction every six months with a unanimous vote. The argument runs that the EU would facing “economic havoc” if Ukraine is defeated, despite the fact there is no evidence for this position, and in reality ending the funding and war in Ukraine could significantly improve EU finances. Kallas, like von der Leyen, projects the gains to some unspecified point in the future without laying out any concrete goals or plan of action.
Nato Chief Mark Rutte has been even more jingoistic, urging EU member countries to do more to “prepare for the possibility of large-scale war” and warning that Russia may be ready to attack the alliance “within five years.”
“We are Russia’s next target. And we are already in harm’s way,” Rutte said on December 11 during a speech in Berlin. “Russia has brought war back to Europe, and we must be prepared for the scale of war our grandparents and great grandparents endured.”
This is little more than scaremongering to rally support for schemes like the Reparation Loan. Putin dismissed claims that Moscow intends to invade another country as a “lie” and “complete nonsense” during a press conference in Bishkek on November 28. He also said he was prepared to sign a treaty to that effect with Europe at any time.
“The truth is, we never intended to do that. But if they want to hear it from us, well, then we’ll document it. No question,” the Russian president told reporters.
If Nato is serious about the looming Russian invasion, then why would it not take Putin up on his offer? At the very worst it will seriously embarrass Putin should he tear the treaty up and gift the moral high ground to the allies.
“[Europe] is on the side of war,” Putin said, adding that, “If Europe suddenly wants to start a war with us and starts it,” Putin said, then it “would end so swiftly for Europe that Russia would have no one left to negotiate with.”
Funding the rebuild
The US plan does not address supporting Ukraine’s budgetary short fall, but as it assumes peace, presumably those budgetary needs will be reduced dramatically and can be funded by borrowing and tax burgeoning revenues in a post-war bounce.
The new IMF Extended Fund Facility (EFF) programme is for $8bn a year; pre-war after deductions for fines for failing to meet reform goals and other arguments, between 2017 and 2021 Ukraine received a grand total of a mere $5.2bn from the IMF. In 2019, Ukraine didn’t receive anything at all.
Access to the international capital markets will reopen and the local bond market has already been hooked up to the international financial system via Clearstream, giving the government a second significant source of access to foreign funds; international investors love the high-yielding short-term local debt, the appeal of which should be increased by a post-war recovery boom.
The World Bank has estimated the total cost of the damage done to Ukraine is $526bn (including indirect damage and economic losses), but as bne IntelliNews reported, the worst damage has been done in the east of the country in regions that will remain under Russian control. The Kremlin, not Bankova, will be responsible for paying for those repairs.
The damage done to the western parts of Ukraine that remain under Kyiv’s control is much less significant and will cost, making a back of the envelope estimate, around $200bn.
From this perspective, the US-Ukraine $100bn will go a very long way to meeting Ukraine’s reconstruction needs. Add to that the IMF money and the other International Financial Institutions (IFIs) assistance from the likes of the International Finance Corporation, European Bank for Reconstruction and Development (EBRD) and European Investment Bank (EIB), and the total IFI contribution is expected to be $75bn, according to Peterson Institute for International Economics (PIIE).
On top of that, the Trump administration has begun a conversation with Blackrock to restart the paused Ukraine reconstruction fund that could bring in between $400bn and $800bn, according to various reports. How realistic these numbers remain to be seen.
From an investor’s point of view there are two scenarios.
In the American scenario they arrive at Boryspil International Airport in a country where a clean negotiated end to the war has been signed, including “strong” security guarantees have been signed, backed with the promise of US military intervention should Russia reinvade. There is also an accelerated path to EU membership as soon as 2027, which since 1991 has been by far the most effective reform strategy any country could adopt. It creates an extremely attractive, but albeit not perfect, investment climate.
In the European scenario they arrive in a messy end that has probably been determined by Ukraine’s military capitulation or at least a perpetual war. No agreement with Russia has been signed leaving a sword of a Damocles’ threat of Russia’s reinvasion hanging over the country fr generations. Ukraine’s EU accession bid is still on the cards but the earliest it can happen in 2030, and even that is unsure. (Ask Turkey and all the Balkan candidates.)
This not an investment environment they will invest into, irrespective of how attractive the Ukraine investment story is. That leaves the reconstruction to be entirely reliant on the, still not insignificant, $75bn of IFI money.
If Europe goes on its own and takes full responsibility – both financially and militarily – for supporting Ukraine there is no scenario where it can force Russia to the negotiating table with better terms than are currently on the table, barring a very unlikely Russian economic collapse, as detailed in bne IntelliNews’ side-by-side comparison of the Ukrainian and Russian budgets.
As bne IntelliNews has reported, Europe can’t afford to take over the burden of supporting Ukraine, as most EU countries are either in recession or approaching a crisis.
Moreover, Europe is also unable to provide Ukraine with the weapons it needs as after ignoring the defence sector procurement contracts needed to upgrade Europe’s military it doesn’t have the production capacity. The mooted ReArm defence sector modernisation plan has not started even its most powerful missiles that could change the game – the Franco-British Storm Shadow and German Taurus – are actually all out of production. As bne IntelliNews reported, Europe will not be able to match Russia on the battlefield for at least five years, and it has already failed to offset the end of US military aid this year.
Long-term consequences
The Reparation Loan vote is unlikely to succeed as the opposition to the idea is building steadily. Belgium’s Prime Minister Bart De Wever has been the biggest problem as he refuses to release the money unless the whole of the EU bears the risks with his country. At the moment if Russia wins a lawsuit against Euroclear, where the money is held, Belgium would be on the hook to repay the entire amount.
The rest of the EU has been pressuring Wever to support the loan but has refused to offer the necessary guarantees. If anything, Wever has hardened his line in the last week due to this reticence calling the loan “theft.”
“This is money from a country with which we are not at war. It would be like walking into the embassy, taking out all the furniture, and selling it,” he said.
Hungarian Prime Minister Viktor Orban and Slovak Prime Minister Robert Fico have both long been opposed to the idea of the loan, but they have since been joined by the recently appointed Prime Minister of Czechia Andrej Babis. And other far right leaders in the EU area lso against it. Over the weekend Italy’s Prime Minister Giorgia Meloni added Italy to the list along with Malta and Cyprus – both of which have business ties to Russia.
The issue of the Reparation Loan is only deepening a growing rift between the E3 (France, Britain and Germany) and the Nordic supporters of Ukraine and the rest of the EU to the west and south which are more indifferent to Ukraine’s fate.
Both the International Monetary Fund (IMF) and the European Central Bank (ECB) have condemned the idea, saying countries need to respect international law.
And last week the Financial Times reported that British banks are opposing the proposal to transfer £8bn ($10.6bn) of frozen Russian assets to Ukraine. According to the FT, the banks fear the UK government will not protect them from potential damage if Russia takes them to court. In the short-term, a blizzard of Russian lawsuits are a given against governments and commercial banks. Which banks in the UK hold sovereign Russian assets is a closely held secret.
“The legal risk is that if Ukraine doesn’t pay back you need to repossess an asset that the government says is yours, but Russia says isn’t,” an adviser to major lenders told the FT.
The Kremlin will also retaliate by seizing Western assets stuck in Russia estimated to be worth approximately $288bn, according to Russian Finance Minister Anton Siluanov. Unlike the CBR money, these are privately-owned assets belonging to companies, banks, and individuals from the EU, G7, and allied countries that imposed sanctions on Russia following the full-scale invasion of Ukraine in 2022.
“We have about $288bn of Western assets immobilised or effectively frozen in our jurisdiction. Any hostile actions with our reserves abroad will receive a mirrored response,” Siluanov said earlier. Major Western companies like BP, Shell, UniCredit, Raiffeisen Bank, Carlsberg, and Danone are exposed with billions in assets still on Russian soil.
In the medium-term the cost of borrowing for Europe will rise notably. The leading economies of Germany, France and the UK have already lost their triple AAA ratings from the leading rating agencies, but the whole of Europe will be downgraded as a result of the Reparation Loan.
All three countries used to be AAA rated, but they have all lost this status since 2012. Germany is the best of the bunch, but S&P Global Ratings downgraded Germany from AAA to AA+ in October 2023. France has lost its triple-A rating from all three of the big agencies and now has an AA rating by S&P as its best result. And the same has happened with the UK, including a paltry Aa3 from Moody’s – the lowest grade in the top tier.
Given that in addition to the €800bn over four years needed to modernise Europe’s military, it needs to spend €800bn a year to modernise its economy to remain competitive with both the US and China, according to last year’s Draghi report, this not a good time to be making borrowing more expensive.
But the worst damage could come from a massive outflow of reserves of other countries, or deposits held in private banks. The euro will also suffer as trust in the currency will be undermined at a time when it is vying in de-dollarisation as the currency of choice for reserves and global trade.
No one knows how bad it could get, but as the vote looms, those questions are coming up now. Germany’s leading newspaper, Frankfurter Allgemeiner Zeitung (FAZ), slammed German Chancellor Friedrich Merz in an editorial on December 10, saying: “Since at least the beginning of October, [Merz] has repeatedly championed the reparations bond without truly addressing the associated risks. He has neither substantively commented on the potential impact on the federal budget nor on the objections raised by the Belgian government and Euroclear.”
Earlier European bankers called on EU governments to indemnify them against liquidity problems if there is an exodus from European banks. Belgian depository Euroclear could immediately lose €16bn in client assets in Russia if Moscow responds to the seizure of its frozen funds, Guillaume Elie, the depository’s chief financial risk officer, said in an interview with AFP last week.
And the liquidity crunch could get very bad indeed. But even if there is no banking crisis, the reputational damage will hurt important financial centres like London permanently.
