How will the EU's US$105 billion loan to Ukraine work without frozen Russian assets?

BRUSSELS: European Union leaders decided on Friday to borrow cash to lend 90 billion euros ($105 billion) to Ukraine to fund its defence against Russia for the next two years, rather than deploying an unprecedented plan to finance Kyiv with frozen Russian assets.

AI Brief

EU will lend Ukraine 90 billion euros in interest-free loans for 2026-2027 by borrowing on capital markets backed by the EU budget.
Plan to use frozen Russian sovereign assets stalled due to Belgium and other states' legal and financial concerns.
Russia is unlikely to repay reparations, but EU leaders still expect strong investor appetite for the new borrowing method.

This is how the loan will work and why the bloc dropped the idea of using Russian sovereign assets.

HOW WILL EUROPE LEND UKRAINE THE MONEY?

The EU will provide interest-free loans for the years 2026-2027 based on EU borrowing on capital markets backed by the EU budget headroom, the difference between the maximum amount the EU can ask EU members to contribute and the amount it needs to cover foreseen expenses.

The 90 billion euros should cover about two-thirds of Ukraine's needs for the next two years. Initially, the idea had been for Britain to provide much of the rest, using its frozen Russian assets.

The idea of EU borrowing had initially seemed impossible as it requires unanimity and faced opposition from Hungary's Russia-friendly Prime Minister Viktor Orban. But Hungary, Slovakia and the Czech Republic agreed to let the scheme go ahead after EU leaders agreed it would not impact the three financially.

WHY DID USING FROZEN RUSSIAN ASSETS FAIL?

The European Commission had put forward a plan, which many EU members backed, to allow EU governments to use up to 165 billion euros - most of the 210 billion euros of Russian sovereign assets currently frozen in Europe.

This would not involve confiscation, which contravenes international law. Instead, the cash would be invested in zero-interest bonds issued by the Commission, which would help cover Ukraine's needs for 2026 and 2027.

However, Belgium, where 185 billion euros of the total Russian assets in Europe are held, resisted. Italy, Malta and Bulgaria also expressed reservations.

The main difficulty was providing Belgium with open-ended guarantees against financial and legal risks from potential Russian retaliation or legal action for the release of the money to Ukraine.

The leaders still gave the European Commission a mandate to keep working on this "reparations loan".

WILL EUROPE BE REPAID AND WHAT IS THE FINANCIAL IMPACT?

The EU leaders said Russian assets, totalling 210 billion euros in the EU, will remain frozen until Moscow pays war reparations to Ukraine. If Moscow ever takes such a step, Ukraine could then use the money to pay back the loan.

That does not look likely.

German 10-year government bonds DE10YT=RR, which serve as a benchmark for the wider euro zone market, came under modest pressure, which pushed up yields, albeit below Thursday's nine-month high, while the euro EUR= held steady against a firmer dollar.

Using frozen Russian assets could have cheapened European government bonds, raising market borrowing rates further and deterring investors. To some, borrowing 90 billion euros is a relatively small price to pay to help Ukraine and keep creditors happy.

Carsten Brzeski, global head of macro research at ING in Frankfurt, said he thought there should be enough investor appetite for the new loan.

"The nice thing about the current solution is that it establishes this idea that, well we’re not allowed to call it a Eurobond, but we’re getting very close. The project bond has clearly become a tool in Europe’s toolkit.”