KYIV BLOG: EU finalises €5bn Ukraine Peace Fund contribution that will see little new money sent to Kyiv

KYIV BLOG: EU finalises €5bn Ukraine Peace Fund contribution that will see little new money sent to Kyiv
EU finalises €5bn Ukraine Peace Fund contribution that will see little new money sent to Kyiv / bne IntelliNews
By bne IntelliNews March 18, 2024

EU ambassadors agreed to back a new €5bn Ukraine Assistance Fund on March 13, part of the EU's off-budget European Peace Facility (EPF) that is used to partially reimburse member countries for the weapons they provide to Ukraine.

The EPF is separate from the Ukraine Fund, a four-year €50bn support package that can only be used for non-military items such as support for the Ukrainian budget to pay pensions and salaries.

After the Ukraine support fund passed Ukrainian President Volodymyr Zelenskiy immediately called for another €5bn to be added to the EPF to pay for badly needed military equipment and ammunition.

However, the €5bn commitment to the military fund agreed in Brussels will amount to less than that as some of the money is accounting tricks and reshuffling of previous commitments that will be used to compensate EU countries, rather than supply money to buy Ukraine ammo, Politico reports.

“The programme appears to be more of an administrative manoeuvre rather than a direct financial injection,” Politico reported. “Despite its name, the "fund" won't actually see a €5bn infusion — as bilateral weapons shipments can count as “in-kind contributions”.” The accounting practice indicates that the actual monetary flow into the fund may be less than the headline figure suggests, with the "fund" serving more as a framework for coordinating and recognising the support provided by EU countries rather than a standalone pool of fresh capital.

Publicly the EU is keen to stand behind its “as long as it takes” rhetoric, but in practise it has failed to meet commitments to supply Ukraine with 1mn rounds of shells, fast track the transfer for F-16 fighter jets, and German continues to hold back deliveries of its power Taurus cruise missiles, amongst many other shortcomings in the EU’s commitment to adequately supplying Ukraine with the weapons it needs to defeat Russia’s forces.

Following the agreement on the EPF commitment, EU foreign policy chief Josep Borrell tweeted: "We made it. The message is clear: we will support Ukraine with whatever it takes to prevail." Except more cash, apparently.

As Europe slides into recession and the US ran out of money for Ukraine in January, the vice is starting to close on Europe which is reluctant to pick up the whole bill for the Ukrainian war effort. However, there was already €11bn in the EPF, which is being used to pay for ongoing supplies to Ukraine, following €6.1bn that has already been disbursed.

And allocations to the EPF and spending from it has been complicated by infighting within the EU. Hungary has a veto over every allocation but has agreed to sit out on all meetings concerning allocations so as not to block them.

Germany wanted a rule change that would see direct bilateral aid to Ukraine deducted from allocations to the EPF as Germany is by far the biggest single European donor.

Berlin was also complaining that other EU members have been using the fund to modernise their own military by giving away their old equipment to Ukraine and applying for compensation from the EPF for the full value of modern military equipment to replace it for their own armies.

Berlin’s suggestion that its direct aid be discounted from its commitments to the EPF sent shockwaves through Brussels, as it could cut Germany’s commitments to the EPF to nothing and defund the EPF. A compromise has been thrashed out where 50% of direct aid can be deducted from Germany’s EPF commitments, Politico reports.

Another rider added to compensation claims on the EPF is that it can only be used to pay for EU-made arms in an effort to boost the EU arms industry. But Netherlands and Italy, argued that Ukraine's desperate need for arms means there should be some flexibility and Czechia has this month successfully led the drive to buy 800,000 artillery rounds from mainly non-European countries.

The creative accounting will not stop the supply of EU weapons to Ukraine as those are still being sent on a bilateral basis that now reduces the corresponding contributions to the EPF, which will be discounted from cash contributions to the fund at a level of around 43%. In practice this means that as long as countries give enough bilateral aid, they won’t have to give any new cash to the fund.

In Germany’s case it has committed to give Ukraine €7bn this year, far more than the €2.3bn it needs to give to let it off the €1.2bn obligation it has to fund the EPF. That deal suits Germany as it has a big arms industry so its contributions are indirectly ploughed back into its own economy.

Europe’s arms industry is slowly responding to the ramped up demand for weapons as Nato stocks piles in both Europe and the US start to run dry. France has overtaken Russia to become the world’s biggest exporter of arms after the US as a result of the war, according to the Stockholm International Peace Research Institute's latest analysis of arms transfers.

France significantly increased its share of the export market to 11% from 7.2% in the preceding five-year period thanks to an effort to move into regions typically dominated by Russia, driven by big deals for its Dassault Aviation's Rafale fighter jet with the likes of Qatar, Egypt and India

Moscow saw its share of global arms exports fall from 21% to around 11%, according to SIPRI. India is the world's largest arms importer with 36% of its imports come from France, and another 36% come from Russia. Previously India imported over half its arms from Russia and the Soviet Union before that.

The same research shows that China, a Russian ally, has moved into fourth place behind Russia while Germany has dropped one position to be the fifth biggest exporter.

The US has further extended its lead with its share increasing from 34% to 42% over the same period.

Most European countries are boosting defence spending; arms imports were 94% higher in 2019-2023 than 2014-2018. Ukraine was the Continent's largest arms importer. (See SIPRI’s interactive European arms map here.)

Europe is also becoming increasing dependent on US arms supplies which account for 55% of EU arms imports in the last five years, compared with 35% in the period before that.