Kyiv’s cash crunch exposes tight Russian assets timeline

The EU executive is doubling down on using frozen Russian assets to finance a €140-billion reparations loan to Ukraine after most of the bloc’s finance ministers agreed to back the initiative — rather than looking to their own coffers.

Belgium is still the key holdout, fearing that using the frozen assets — which remain under the guardianship of Brussels-based financial depository Euroclear — will expose it to Russian retaliation at home and abroad.

With Kyiv’s war chest running low on finances to defend the country from Russia, the European Commission’s economy chief, Valdis Dombrovskis, warned ministers on Thursday that the cost of inaction far outweighs the consequences of moving forward with the loan.

The Danish EU presidency, which currently chairs legislative negotiations in the bloc, asked that the Commission move ahead with the reparations loan after this week’s ministerial gathering in Brussels. That will at least give the chief advisers of EU leaders something to chew over when they meet on Friday to discuss the next summit, scheduled for mid-December, when the initiative will be back on the agenda.

However, many hurdles remain before Ukraine might actually begin receiving cash payouts. Further delays will likely force the EU to provide Kyiv with bridge loans until the funds arrive.

Here’s what to know about how long Kyiv has until it runs out of cash, and how Europe can fix it:

When does Ukraine run out of money?

Kyiv will start tightening its belt as of April if there’s no new cash injection from either the EU or the world’s lender of last resort, the International Monetary Fund. The contingency measures begin with front-loading money that is earmarked for next year, such as dividend payments from state-owned banks. After that, the government would look to sell debt to investors, who will demand a financial return for providing the IOU.

Once those options are exhausted, Kyiv would begin withholding funds for municipalities and for reconstruction tied to damage from Russian missiles and drone attacks. The last resort would be to postpone public salaries for civil servants, hospitals, pensioners and the military. That hasn’t happened so far in the ongoing conflict with Russia.

What’s the deal with the IMF?

The Washington-based IMF is preparing a new batch of loans worth about $8 billion to Ukraine. But disbursement is contingent on whether the EU agrees to use the Kremlin’s frozen cash to finance its far larger loan, which Ukraine wouldn’t have to repay unless Russia ends the war and pays war reparations — effectively a guarantee for the IMF.

A formal proposal from the European Commission to the Parliament and the Council could be enough to reassure the IMF that the Ukrainian government’s finances will be healthy enough to take on more debt.

Is Belgium the only obstacle to the reparations loan?

Bringing Belgium on side is vital to leverage the Russian assets. But lying in wait are Slovakia and Hungary, two Kremlin-friendly countries that have poured cold water on providing Belgium with a guarantee to address concerns about what would happen if the Kremlin tried to claw back its frozen assets. Their opposition is a real threat to the initiative.

Every six months, EU capitals need to unanimously approve Russian sanctions, which include the assets, giving Budapest and Bratislava the power to effectively hand the sanctioned cash back to Moscow with a single veto. The Commission is exploring a loophole to nullify the veto threat, although some EU officials are unconvinced that the legal acrobatics will succeed.

Anything else?

Yes. The European Parliament is also slated to have a say on the legislation that will underpin the loan. That opens a new arena for political risk if MEPs demand substantive changes to the draft text. Deadlocks are common when MEPs come head-to-head with government officials. This time, a delay could impact the front lines.

Once agreed, is the €140 billion payout immediate?

No. Some EU governments, such as Germany, will still have to go to their national legislatures to secure the guarantees that Belgium demands in exchange for using the Russian assets. This process could take months to complete.

Are there other complications?

Yes. There’s the small issue of an alleged corruption plot in Ukraine to skim €100 million from the country’s energy sector. The scandal blew up earlier this week after Ukraine’s state anti-corruption watchdogs blew the whistle on a group of current and former energy officials, a noted businessman, government ministers and a former deputy prime minister.

The alleged criminal organization is said to have manipulated contracts at Energoatom, Ukraine’s state nuclear energy company, to extract kickbacks worth between 10 percent and 15 percent of contract values. The corruption probe implicates key allies of Ukrainian President Volodymyr Zelenskyy. Hungary and Slovakia could use the scandal as a pretext to reject the initiative, while other nations might set strict terms and conditions on how the money is used, for fear it will end up in the wrong hands. Few have suggested scrapping the loan outright, however, given what’s at stake.

“What other options do we have? Ukraine is our only option. And it’s fighting not only for its own freedom and the right to choose the way we live, but also for the freedom of Europe as well,” Lithuania’s finance minister, Kristupas Vaitiekūnas, told reporters ahead of Thursday’s gathering in Brussels. “So, despite the scandal, there are no other options.”

What’s next?

The Commission is in a race against time to propose the reparations loan so technical talks can begin over the financial engineering behind the initiative. Waiting until after the next EU leaders summit on Dec. 18 is a nonstarter — unless the EU is prepared to let Ukraine fall.

Jamie Dettmer, Giovanna Faggionato, Seb Starcevic, Gregorio Sorgi and Tim Ross provided reporting.