Western governments want to borrow $50 billion from the market to aid Ukraine by taking the profits from frozen Russian assets to repay the loan. But they could readily borrow directly in greater amounts from the same frozen Russian assets if they place these assets in an independent trust fund, which can serve as a quasi-bank.
For nearly three years, since the February 2022 Russian invasion of Ukraine, when the U.S., the European Union, and other Western allies sequestered the foreign exchange reserves of the Russian Central Bank in their jurisdictions, these assets have languished in limbo, despite efforts to harness them. Estimates range from $350 billion to $375 billion to $383 billion. Proposals ranged from asset confiscation to collateralization for borrowing in financial markets.
None were deemed fully satisfactory. In June–October 2024, the G7 and the EU jointly proposed a new approach. The preliminary procedure was announced at the Nov. 25-26 meeting of the G7 foreign ministers.
Call it ABC: Appropriate, borrow and compensate. Appropriate the investment returns, such as interest payments, on the sequestered Russian assets. Borrow long-term from capital markets and financial institutions against these regular revenues. Use the appropriated flows to compensate and reimburse the borrowing G7 and EU governments for their interest payments on and repayments of the loan principal.
This G7-EU proposal exploits a loophole. The bulk of sequestered assets, about €210 billion ($220 billion), are located in EU jurisdictions and impounded in the Central Securities Depositories, primarily Euroclear in Belgium, which holds €176 billion ($185 billion). By statute, these depositories do not pay interest on custodial balances and must now remit to the EU all coupon payments on government bonds and other returns on investments of sequestered Russian assets.
The EU total yield is about $3 billion per year, of which $2.6 billion is Euroclear’s profit after paying Belgian taxes. Against these continuous annual revenues, the G7 and the EU encourage individual governments to borrow from capital markets and financial institutions on their own faith and credit in 2025-27, to be reimbursed for interest and principal.
The total loan is $50 billion, of which the U.S. pledged $20 billion, and the individual governments are free to determine their share, while the EU will cover any shortfall. The EU also set a target of $37 billion to its members, just in case the incoming Trump administration reneges on the $20 billion promise.
Alas, the ABC scheme can accomplish part A, appropriate, maybe part B, borrow, but not part C, compensate. If the annual returns on the Russian assets slated for reimbursements to borrowers are $3 billion, it will take 30 years to amortize the repayment of the $50 billion loan even at the generous 4 percent interest, at the total cost of $85 billion. The scheme risks becoming a debt trap if the war ends in less than 30 years and Russia’s assets are unfrozen in a peace settlement.
There is a better, more flexible alternative. Western countries that want to help Ukraine can create an independent, non-governmental trust fund capitalized with frozen Russian assets. It becomes a lending and borrowing facility that lends directly to individual Western governments and their groups on a commercial basis.
Based on the official Russian Central Bank data from 2021 and 2022, the $383 billion of frozen reserves includes $113 billion in deposits on correspondent accounts with central and commercial banks (a ready cash), $178 billion in Western government bonds (also liquid because they can be used in repo operations) and other assets. The repayable loans to Western governments from the trust fund constitute the continuous flows of funds. Interest payments will be capitalized and enhance the fund balance.
The trust fund meets the two necessary and jointly sufficient conditions for a well-functioning and stable financial institution. It provides a steady flow of funds to borrowers and it preserves the capital balances for the next loans and for the owners. The first condition is good for Ukraine and the West. The second condition is good for Ukraine, the West and Russia.
The trust fund is a fiduciary. It lends only for Ukraine aid, not for Western budget expenses. The trust fund should be run by an independent international board that hires professional managers to assess the creditworthiness of the borrowing governments. It stands ready for the post-war resolution.
Michael S. Bernstam is research fellow at the Hoover Institution, Stanford University. Steven R. Rosefielde is professor of economics at the University of North Carolina at Chapel Hill.
