The EU Ukraine Liberty Bond: Using the Whole of the €300 billion in Russian Assets in the EU Now

The EU has been debating how best to use the roughly €300 billion of Russian assets that are in EU jurisdictions to fund Ukraine-related expenditure. In the end, only the income and proceeds earned on the assets are used

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The EU Ukraine Liberty Bond: Using the Whole of the €300 billion in Russian Assets in the EU Now

The EU has been debating how best to use the roughly €300 billion of Russian assets that are in EU jurisdictions to fund Ukraine-related expenditure. In the end, only the income and proceeds earned on the assets are used, including, most recently, as collateral for a $50 billion loan. Russia retains the ownership title to the assets themselves, in accordance with the basic tenets of our constitutional and legal principles. I believe that the current regime can be turbo-charged, utilising a financial markets-driven solution.

Freezing is not seizing 

A key distinction must be made between the freezing and the seizing of assets. The former does not transfer the ownership title of the assets to a new owner, in this case from the Russian Federation to EU/relevant member state’s ownership. The latter does just that. The EU has been justifiably reluctant to violate, by fiat, the basic tenet of the sanctity of ownership titles. This is a slippery slope, if ever there was one, creating the wrong kind of precedent. Today’s political bête noire is Russia: who guarantees that the precedent will not be abused tomorrow by other political forces to expropriate property from opponents?

Therefore, the solution the EU formulated rightly combined two elements: respect for the sanctity of ownership and the legal certainty necessary for the functioning of a free democratic order on the one hand; and the political imperative to act when a member of the United Nations Security Council that violated the very core of the international order by illegally invading the territory of another member of the UN, on the other. This solution was to keep the €300 billion of assets as the property of the Russian Federation, but to authorise the use of the income it generates for Ukraine-related expenditure.

Turbo-charging 

There are, however, two key draw backs to the current regime. The first is one of principle. The aggressor is not made to pay the necessary substantial amounts commensurate with the damages he has caused, let alone the damage caused morally to the international community by violating international law. The second is practical. The Ukraine-related funding requirements, on an ongoing cash flow basis, greatly surpass the annual returns achieved on investing the €300 billion, which could be in the region of €15-30 billion per annum (assuming a 5-10% net annual income).

I propose a complimentary market-driven structure to use of the whole of the €300 billion, whilst simultaneously meeting the challenging legal tests of ownership mentioned above: the EU Ukraine Libert Bond.

• The EU issues a 50-year maturity “sovereign” bond in favour of the Russian Federation for the full face value of the whole of the roughly €300 billion. In effect, the EU “borrows” the €300 billion for 50 years. This means that the EU provides a sovereign guarantee for the full repayment to the Russian Federation in 50 years’ time. Thus, the €300 billion will remain the lawful property of the Russian Federation. This structure, therefore, fully respects the need to protect ownership titles in a free democratic system.
• The pricing of the bond will be determined based on the sovereign risk allotted by the debt capital markets to the EU (as the borrower). This should be quite minimal given the EU’s credibility, although the long maturity of 50 years may add extra borrowing costs, in addition to potential market concerns over the EU’s and the Euro’s systemic risks. As an idea, The European Investment Bank could act as the Lead Arranger.
• To cover all eventualities, and to minimise the possible various extra systemic risk-premiums related to the EU, and to make the bond as secure as possible (thus further respecting the legal certainty requirements), member states will agree on guaranteeing, back to back, tranches of the EU bond. So that, should the EU default, for whatever reason, after 50 years or should it default on interest payments, the rightful owner of the €300 billion, i.e. the Russian Federation, will be assured of repayment.
• The sanctions regime in place means, of course, that the income on the €300 billion, including the interest paid by the EU, will nonetheless be seized by the EU to pay for Ukraine-related expenditure, together with any other income that the €300 billion may generate.
• Down the road, circumstances may open the way for the bond to be securitised (this terminology is used here in the context of financial markets terms, not in defence and security terms!) to enable the EU and the member states to de-risk this item from their public finances obligations (for the member states this will include de-risking their contingent liabilities associated with the guarantees that they provided to further secure the bond). Securitising the debt means selling tranches of the €300 billion, that has been borrowed by the EU, to other lenders who would be willing to buy these tranches of the bond. But that is a subject that is likely to be a long way off, though it could provide a strategic and long-term roadmap for how the EU and member states may be able to “exit” this debt undertaking.

Conclusion

Ukraine-related expenditure will only grow. Global debt markets are nervous. This limits the ability of states and public institutions (sovereign and quasi-sovereign borrowers) to borrow in the same manner to which they have become accustomed in the past three decades or so.

Domestic expenditure items across the EU will also only grow, whether for housing, education, healthcare, greying of society, foreign policy, or defence and security. The challenge facing the EU, and member states, is in how to reconcile rising domestic expenditure requirements, with simultaneously growing Ukraine-related commitments. The opportunity here is that for the majority of member states, these are themes of common interest. The quantity of cash available is a key issue: size matters. Hence the need for a market-driven alternative, that compliments the legalistic solution, and that will enable the EU to answer the question of how to release the use of the whole of the €300 billion whilst respecting ownership titles. There will be many details to be worked out both politically as well as in terms of the debt capital markets, but as a scheme, it may be that the EU Ukraine Liberty Bond can be the answer.

Bernard Siman is a Senior Associate Fellow at the Egmont Institute and is Head of Financial Diplomacy and FinTech at the Brussels Diplomatic Academy of the Vrije Universiteit Brussel (VUB). 

(Photo credit: Dušan Cvetanovic, Pixabay)