The EU's Reparation Loan Dream Is Slipping Away

And the Ukrainians are running out of time

Today, an update on the status of Ukraine’s funding debacle. To summarize our previous reporting on this subject:

• Ukraine is facing a $60B – $80B hole in its 2026 budget due to the end of US financial aid, the reluctance of international lenders to issue new loans, the EU’s own budgetary shortfalls, and the rising costs of waging the war.

• Without a large injection of cash, the Ukrainians will run out of money as early as February or as late as April.

• The only obvious solution is to issue the so-called “reparations loan,” a ~$150 billion loan to Ukraine backstopped by Russian assets held by the Belgian financial institution Euroclear.

• To maintain a remotely plausible argument that the EU is operating within international law, the loan is a convoluted scheme whereby Euroclear will transfer the Russian assets to the European Commission, which would then use those assets to backstop a new loan to Ukraine. When the war ends, the Russians would pay “reparations” to Ukraine, who would pay the EU, who would pay Belgium, who would pay back Russia.

• The EU has so far failed to clear a series of forbidding political and legal hurdles to make the loan a reality. The Belgians, who control the Russian assets, are refusing to accept sole liability for repaying the Russians, which would be necessary in several realistic scenarios.

The only clear path forward since the Belgians began to dig in their heels has been for the EU to provide “binding commitments” to backstop Euroclear. The Belgian proposal is that every member state would share in the liability in proportion to the size of its economy. In the event that a vote to renew the sanctions on Russia fails, or the war ends in Russia’s favor, the entire EU would repay the Belgians, who would then repay the Russians.

Belgian prime minister Bart De Wever outlined additional conditions for Belgian cooperation in a letter to the European Commission last week. First, the backstop guarantee must be for the entire amount of Russian assets held by Euroclear, which totals roughly $215 billion. Second, the guarantee must be “unconditional, irrevocable, and on-demand.” The “on-demand” aspect means the EU would transfer Euroclear’s entire liability instantly, and would ensure the Belgians would be operating within international law, which requires that “countermeasure” sanctions be “immediately reversible” if the sanctioned party ceases its illegal actions.

Third, De Wever demanded that other EU countries holding frozen assets be forced to put skin in the game by contributing to the loan, spreading the legal liability across the Union. While Belgium holds the vast majority of frozen Russian assets within the EU, Germany, France, and Luxembourg hold tens of billions of dollars of Russian funds between them. By forcing them to participate directly in the scheme, these states would be just as legally liable as the Belgians, decreasing the likelihood of a scenario in which the EU would hang Euroclear and Belgium out to dry on their own.

“When we talk about having skin in the game, we have to accept that it will be our skin in the game. Talk is cheap but helping Ukraine will unfortunately be expensive.” - De Wever

De Wever’s conditions read more as a rhetorical argument for the infeasibility of the loan itself rather than a realistic set of demands as a negotiating position. In the letter, he warned that illegally seizing the Russian assets is likely to sabotage any peace deal and referred to the entire scheme as “fundamentally wrong.” There is no politically acceptable mechanism through which the European Commission could conjure up $215 billion of taxpayer money to repay the Belgians overnight. And European politicians in Germany and France are highly unlikely to willingly step into Belgium’s position by contributing their own frozen Russian assets to the scheme. Much of their holdings are held in private banks, and seizing that money would present an unprecedented legal challenge.

In the letter, De Wever suggests an alternative: the EU simply issuing a new loan to Ukraine equalling the amount of its budget shortfall, without touching the Russian assets. But De Wever likely knows that this prospect is only slightly more palatable than the reparations loan. Joint EU borrowing falls under the Treaty on the Functioning of the European Union (TEFU), and raising the money for a new loan scheme would require unanimous support from all EU member states, just like the reparations loan scheme. While the amount of this EU-only loan would be only a third of the reparations loan, both Hungary and Slovakia are still likely to veto a joint borrowing plan. Neutral states like Ireland, Cyprus, and Austria have also limited prior joint borrowing approvals to non-lethal aid, complicating German, French, and Swedish demands that new aid be spent on military procurement deals with their defense industries. And multiple EU leaders have been explicitly rejecting the idea of new joint borrowing since at least October. With budgets already strained across the continent, the reparations loan plan is “the only way forward.”

Zooming out, it’s possible to see the shadow political battle being waged beneath the surface of these negotiations. The most reckless and hawkish members of the European Commission have been plowing forward with the reparations scheme, knowing full well the loan would never be repaid by either Russia or Ukraine. Unconcerned with asset flight or the health of the European banking system, they have consistently refused to expose themselves to liability and are content with leaving the Belgians on the hook. All signs point to an eventual military defeat of Ukraine and the increasing risk of a veto by Russia-neutral or friendly EU states on the extension of the sanctions regime that keeps the assets legally frozen. With the clock ticking, these states’ priority has been to funnel money to their own military-industrial complexes at the expense of the Belgians and the EU as a whole. From this perspective it’s understandable that the Belgians have chosen to take a stand despite the political consequences and why other EU states are quietly supporting Belgian resistance to the plan.

Bart De Wever and Ursula von der Leyen

Complicating matters is the mystifying US peace plan unveiled last month, which would immediately unfreeze the Russian assets. $100 billion of the assets would be spent on Ukrainian reconstruction, with half the “profits” from reconstruction going to the US government itself. The EU would match this with $100 billion from its own pockets, while the remaining $200 billion of Russian assets would flow into a joint Russian-US investment vehicle to be used for whatever the two states agree on. While this proposal has since been walked back, it adds to the sense of uncertainty around the potential consequences of touching Russia’s money.

In the midst of this contention, European governments are unsurprisingly refusing to meet Belgium’s demands. Four EU diplomats spoke to Politico about their rebuke of De Wever, referring to his request for a backstop as a demand for a “blank check.” If this wasn’t bad enough for the reparations loan’s prospects, today the European Central Bank (ECB) rejected the European Commission’s alternative plan of using it as a backstop, declaring it would “violate its mandate” and EU law if it did so. To provide direct funding to reimburse member states for the liabilities to Russia, it would be engaging in “monetary financing,” a banned practice under EU treaty. It would also be unable to raise the money with the speed the Belgians demand, exposing them to violations of international law, and failing to meet one of their key conditions.

Meanwhile, the Ukrainians have been sounding the alarm as their financial prospects look increasingly dire. They’ve been negotiating with the IMF for a new 48-month loan agreement, called the Extended Fund Facility (EFF), for the past several months. The EFF agreement would provide the Ukrainians with $8.2 billion in total, paid in installments over the course of the next four years. The IMF has been candid about just how little this will do to address the problem. First, unsecured Ukrainian external financing needs over the length of the agreement will be a staggering $140 billion, which doesn’t include military expenditures or the cost of servicing existing debt. Second, the Ukrainians have a $162 billion funding gap for military expenditures just for 2026-2027. Adding these figures together with the presumption that Ukraine will survive for another four years of war without further military spending increases (military costs have ballooned from $140 million a day to $172 million within the past year), Ukraine has a $464 billion funding gap through 2029. This is three times the amount the reparations loan would provide.

With political turmoil within Ukraine reaching a fever pitch, the Verkhovna Rada can’t even agree on a 2026 budget it doesn’t currently have the money to pay for. The opposition is demanding the resignation of the entire Zelensky government, while Ukrainian government sources express concerns about alienating the IMF. The nightmare scenario for Ukraine is that further debt from the IMF and other international lending instruments is effectively contingent on the reparations loan. The IMF’s open concern about Ukraine’s massive funding gaps has been read as a coded message to the EU that it needs to get its act together or risk the international financial system divesting from Ukraine entirely. This is a plausible prospect, as no one wants to be the one left holding the bag if the Ukrainian project implodes completely, and lenders have already expressed concerns about Ukraine’s existing—and massive—debt burden.

The EU will meet on the 18th in an attempt to secure a deal on the reparations loan. European Commission president Ursula von der Leyen has projected a public sense of confidence, saying the EC will present a “legal proposal” to assuage Belgian concerns. There’s little reason to think any legal argument could secure Belgian cooperation, and it’s difficult to imagine how the outlook for Ukraine could be more grim.