The United States and other major countries are close to finally finding a way to turn frozen Russian state assets into financial assistance for Ukraine, with this week’s G-7 meeting of finance officials in Italy expected to lay the groundwork for a breakthrough deal worth as much as 50 billion euros.
But the U.S. push to get allies on board with large-scale financial assistance to Ukraine is undercut by the Biden administration’s reiterated limits on what Ukraine can actually do with the assistance it receives, with Ukrainian strikes on Russian territory still a no-go for Washington. Those restrictions are becoming increasingly contentious as Russia continues its bloody offensive against Kharkiv using troops and weapons staged with impunity right across the border.
The good news for Ukraine is that after weeks of U.S. prodding, key members of the G-7 seem inclined to sign off on a novel way to aid Ukraine with frozen Russian assets. The idea, which will be discussed at the meeting this week in Italy and likely further developed in meetings over the summer, is to use the approximately 3 billion euros in annual proceeds from Russia’s 300-odd billion euros in frozen state assets to underwrite a loan for Kyiv worth as much as 50 billion euros. Germany, which was reluctant to entertain previous proposals to tap frozen Russian funds, was the latest country to throw its support behind the new initiative.
“I believe it’s vital and urgent that we collectively find a way forward to unlock the value of Russian sovereign assets immobilized in our jurisdictions for the benefit of Ukraine,” said U.S. Treasury Secretary Janet Yellen in a speech in Germany on Tuesday. “This will be a key topic of conversation during G-7 meetings this week.”
The new plan, if it comes to fruition, would substitute a scheme that Europe just finalized this month on how to use the proceeds from Russian assets, which involved taxing the roughly 3 billion euros a year that accrue and sending the bulk of that money to Ukraine. Instead, the United States and allies in Europe and Asia would provide Ukraine with a lump sum rather than annual payments.
That would go some way toward meeting Ukraine’s huge financial burdens in the medium term, and also insulate some future assistance for Ukraine from potential political upheavals in the United States after November’s presidential election; presumptive Republican nominee Donald Trump has a mixed record on Ukraine and has consistently complained that the United States is doing more than Europe to support the country in its fight against Russia.
“The advantage is that you get the money for Ukraine now, and it would be partially Trump-proofed,” said Charles Lichfield, deputy director of the Geoeconomics Center at the Atlantic Council.
It’s no coincidence that Europe is just now coming around to even this watered-down way to tap frozen Russian funds, he added. Europe was reluctant to take further action to support Ukraine while U.S. assistance remained frozen. But Republican lawmakers in the United States finally unlocked billions of dollars in aid for Ukraine after months of delay, removing one possible European objection to taking a step that some countries still see as risking Russian retaliation.
Those European fears help explain why the United States and the United Kingdom have been unable to muster much support for more ambitious plans to seize the entirety of Russia’s frozen assets to aid Ukraine. The United States just passed a fresh law reaffirming its right to seize Russia’s assets, but the bulk of that money is held in Europe, making unilateral U.S. action unlikely and ineffective. Many European countries are worried that any move to seize the entirety of Russia’s frozen assets could spark tit-for-tat retaliation from Moscow, as well as threaten the euro’s attractiveness as an international reserve currency.
But Moscow isn’t waiting for an excuse to snatch Western assets in any event. In recent weeks, Russia has seized hundreds of millions of dollars in assets held by Western banks in Russia such as J.P. Morgan, Deutsche Bank, Commerzbank, and UniCredit. Moscow has also shaken down Western businesses that left the country due to sanctions to the tune of more than $1 billion, and it continues to grab money even from companies such as IKEA that have suspended operations there.
A number of questions about the latest plan to use Russian assets remain, including the size of the loan, the timeframe of future revenues used to pay it back, and whether it would be underwritten by the entire G-7 or by the United States alone.
Perhaps the trickiest part of turning future revenues into current money is the fact that, as things stand now, the European Union needs to renew its sanctions on Russia every six months. That could cast a shadow over just how secure those future revenues meant to back a loan really are, Lichfield said. That uncertainty could increase the risk profile of any loan underwritten by the United States or other major economies.
“To lock in that revenue stream for 20 years, you’d need to change European Union law—you can’t have it subject to renewal every six months,” he said.
But the U.S.-driven progress in unlocking more aid for Ukraine remains undermined by the continued restrictions placed by the United States and some other Western allies on exactly what Ukraine can do with the military assistance it receives.
Washington has since the start of the conflict warned Ukraine that it will not allow Kyiv to use U.S.-supplied weapons to strike at targets outside Ukraine itself, a prohibition that severely limits the utility of long-range weapons such as the recently supplied ATACMS, an Army missile system. U.S. Defense Secretary Lloyd Austin reiterated that prohibition this week, even as Russian forces staged just outside Ukraine’s reach are sowing death and destruction in places such as Kharkiv. Washington has even sought to extend the prohibition to Ukraine’s use of its own weapons, frowning on long-range drone strikes at vital targets inside Russia, though the White House has acknowledged that “Ukraine makes its own decisions about its military operations and how it uses equipment that it manufactures.”
From Washington’s perspective, the cautious approach makes sense when dealing with a nuclear-armed state that has repeatedly threatened to escalate the war if the United States and its allies keep bolstering Ukraine’s ability to defend itself. It’s not a trivial fear: Russia did practice starting a nuclear war just this week, ostensibly in response to increased Western involvement in Ukraine’s defense. But the Biden administration’s goal of keeping Ukraine from losing while keeping the war from widening is running into a logical cul-de-sac.
“They don’t want Ukraine to fall, but they also have the priority of keeping the war contained,” said Edward Hunter Christie, a senior research fellow at the Finnish Institute of International Affairs. “The mind virus that has taken hold is that you can control the war through the tap of military assistance—dial it up, dial it down—but the U.S. administration has put itself on this tightrope where it is afraid of falling on either side.”
The United Kingdom, for its part, has seemingly removed such limits. Foreign Secretary David Cameron said earlier this month that Ukraine can use British-supplied weapons as it sees fit. But U.S. limits remain.
The problem with the U.S. constraints has come into sharp relief with the Russian attack on Kharkiv, a big Ukrainian city right on the Russian border. Due to U.S. restrictions, Ukrainian forces are powerless to interdict Russian forces that stage beyond the border, leading to more destruction and more Ukrainian deaths.
That, in turn, has led a chorus of U.S. lawmakers to call on the Biden administration to relax its restrictions on Ukrainian use of U.S. arms. A bipartisan group of House lawmakers sent Austin a letter this week, echoed by a similar plea from Sen. James Risch, the ranking member of the Senate Foreign Relations Committee. House Speaker Mike Johnson Other prominent figures, including Mike McFaul, a former U.S. ambassador to Russia, have publicly questioned the continued U.S. restrictions. Even a lawmaker who held up U.S. aid for Ukraine, House Speaker Mike Johnson, is questioning the Biden administration’s limits on Ukraine’s targeting.
“The debate is live now, because of Kharkiv. Everybody can now see how absurd and damaging to Ukraine these caveats are,” said Christie, who was also formerly a NATO official. “We continue to be in a situation where Ukraine has to fight with one hand tied behind its back.”
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