Excuse my French but the EC’s push to assure Ukraine’s financing, and to keep it in the war, despite the US pulling back, is turning into a bit of a shit show.

To recap, the IMF and the EC determined that with the US stepping back from financing Ukraine, and given the assumption of an extended war, Ukraine would need an extra €140 billion to cover its military and budget financing needs for 2026-2027, and according to the IMF $140 billion in just budget support to 2029.

The EC initially proposed a Reparation Loan to Ukraine funded from using the €190 billion in immobilised CBR assets in EU jurisdictions.

This was pushed back on by Belgium where most of these assets are located. The EC agreed to come up with different options and detailed three scenarios: a) direct bilateral financing of Ukraine; b) Common EU level borrowing or c) the Reparations loan.

Belgium still pushed back, arguing that the risks from a legal ruling to return the CBR or the lifting of sanctions and mobilisation of the assets should be shared. The EC has now come back with what it deems are sufficient legal assurances for Belgium. See the attached EC statement today, which actually fails to detail the specific legal arguments but noted that they will be provided once the Council makes a decision on them.

The EC approach seems to be to recommend the Reparation Loan still but to provide assurance to Belgium that the risks will be guaranteed across EU membership states, and perhaps beyond to other willing allies. It also suggests resort to an emergency EU ordinance which should ensure that CBR assets are protected from the removal of sanctions for an extended period. The latter suggests that the sanctions rollover will be moved to qualified majority voting, rather than the unanimous decision required at present. It is unclear in my mind whether the decision to move to QMV for specific sanctions rollovers would first require a majority decision, and then why would the awkward club of Belgium, Slovakia, Hungary et al agree to that? The unanimous decision-making process gives these countries leverage which they can milk.

The EC also suggests scaling back its ambition for the RL, to a first tranche of only €90bn. Perhaps the EC is trying to make the RL programme more digestible, have a trial run and at least get something over the line. Unfortunately, the above does not square with the stated EC/IMF prior statements as to the financing shortfall faced by Ukraine. The EC seems to hint that other official creditors will cover the €45 billion shortfall for 2026-2027 at least, but I think the IMF would need a much stronger financing assurance before green lighting its $8.2bn EFF.

The idea of the RL was to send a strong message to Putin of Western unity, and that Ukraine’s financing needs were assured for 2-3 years to come, so Russia better sue for peace. But what seems to be happening again is half measures and the drip feed of funding to Ukraine. And the West taking ages to end up doing what they should have done in the first place.

The RL was never my preferred option. I favoured full seizure. Putting all the assets in a sovereign wealth style structure, which could then on lend to Ukraine and perhaps leverage up CBR assets to generate multiples of the $330 billion in immobilised CBR assets for Ukraine. But I went with the RL idea as it appeared that is what the EC suggested they could get done and in scale. Increasingly it’s like why did we not go for the full hog, for the full $330 billion at the outset?

As is the small-minded interests of Belgium and Euroclear appear to be being put above the national security interest of Europe.

Where is the leadership in Europe?

Actually, what Belgium seems to be saying is that it likes the business of managing the CBR assets, and the German tax payer should step up and pay for it to keep this business. Because if immobilised CBR assets are not used to fund Ukraine, guess who will end up paying the bill? Yes, the German taxpayer. And guess what, the cost to the German taxpayer will be multiples higher than if we just use immobilised CBR assets now.

On the ECB position note my comments yesterday. Lagarde has, in my view at least, again failed the basic test of leadership. If we fail to fund Ukraine to survive this war, the impacts on Europe and the Euro will be devasting. But Lagarde’s computer says no.

 

Timothy Ash is the senior sovereign strategist at BlueBay Asset Management in London. This note first appeared on his substack here.