Russian assets could be Trump card in Kyiv endgame
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Hugo Dixon
LONDON, Nov 25 (Reuters Breakingviews) -During his election campaign, Donald Trump pledged to end the war in Ukraine quickly. One reason he wants to do so is because he does not want the United States to pay to defend the country. If Europe promised to find the cash – perhaps by drawing on the $300 billion of Russian foreign reserves that the West froze at the start of the war – the incoming U.S. president might hold out for a better deal with Vladimir Putin.
It is not just Ukraine which is nervous that Trump may cut a ceasefire deal that benefits the Russian president. The European Union, the United Kingdom and other European nations are worried too. A pact that left Ukraine vulnerable would be bad for their security.
Europe therefore has a strong incentive to persuade Trump to hold out for a decent agreement. Showing the author of “The Art of the Deal” that they will find the money to defend Ukraine if the war drags on could encourage him to do precisely that.
Trump has argued that some European countries are “delinquent” for not paying enough for their defence. He may also like the fact that most of any increased spending would go to American manufacturers, because Europe has been slow to ramp up its own defence industry.
One way Trump could put pressure on Russia would be for him to tell Putin that the West is ready to pour in so much extra financial and military support that Ukraine would be able to hold the front line. He would add that Russia would eventually run out of troops and money, so it is in its interest to agree a decent deal now.
This is roughly the approach Trump has said he will take to end the war in 24 hours. It would also be a chance to demonstrate his promised “peace through strength” approach to foreign policy, sending a warning to rivals including China not to challenge U.S. interests.
FINDING $300 BILLION
For this plan to work, Europe would need to commit a large sum of cash upfront. Something like $300 billion, enough to support Ukraine for three years, would do the trick.
Such a sum would not only impress Trump that Europe was finally pulling its weight in its back yard. It might convince Putin, who has not been particularly worried by the drip-feed of cash up to now, that Ukraine could withstand a war of attrition. A three-year commitment would also give Western arms manufacturers an incentive to tool up and produce more weapons, so achieving economies of scale.
In theory, European countries could just give Ukraine $300 billion. Spread over three years, that is equivalent to only 0.4% of the EU and UK’s combined economic output – or roughly double what Europe is currently providing. But at a time of tight budgets, when there are many other priorities including beefing up their own defences, European countries will struggle simply to write a cheque.
One alternative is to mobilise the Russian central bank assets which Western countries froze in 2022. The majority, about 210 billion euros, is in the EU. But many officials, especially in the German government and European Central Bank, have been reluctant to simply confiscate those reserves. They are worried that this would contravene international law and lead other countries to avoid the euro.
A more legally robust alternative to confiscation would be the so-called reparation loan that I proposed with co-authors earlier this year. Under this scheme, the Group of Seven large industrial democracies would lend Ukraine $300 billion. In return, Kyiv would pledge its claim against Moscow for war reparations. If the Kremlin refused to pay up, as seems likely, the G7 countries would inherit the claim against Russia and set that off against the frozen assets, which would then become theirs.
To revive this scheme, it would need to be adjusted to take account of the fact that the G7 has already agreed to lend Kyiv $50 billion backed by the interest that is accumulating on the frozen assets. The EU would supply the lion’s share of the loan because its members are sitting on most of the funds. The United States should still lend an amount equivalent to the $5 billion or so of Russian assets it is holding to show solidarity and reduce the threat to the euro.
PERSUADING PUTIN
With Trump about to enter the White House and Ukraine losing ground on the battlefield, now is the moment of truth. If Europe does not find cash for Kyiv, it will be in a worse position both strategically and financially.
February’s election in the EU’s largest country, Germany, provides the opportunity for a rethink. This is because the centre-right leader Friedrich Merz, who is favourite to become the next chancellor, has taken a more hawkish approach on supporting Ukraine than the incumbent Olaf Scholz.
If Europe commits the cash, it will be up to Trump to see if he can cut a decent deal with Putin. The front line itself seems unlikely to change much. The key issue in any negotiations is likely to be what security guarantees Ukraine would receive after a ceasefire.
Kyiv wants membership of the NATO defence alliance. By contrast, Moscow will not tolerate Ukraine joining NATO, or the presence of NATO troops on its soil – and may push for a limit on the size of the country’s own armed forces, Reuters reported last week, citing five sources with knowledge of Kremlin thinking.
There is a world of difference between these two outcomes. A ceasefire with credible security guarantees would allow the roughly 80% of Ukraine which is currently not occupied by Russia to be free and sovereign. The country could eventually join the EU and rebuild its economy. By contrast, a deal which left Ukraine effectively undefended would keep it poor, miserable and in Moscow’s sphere of influence.
The world would view the former as a partial defeat for Putin, whereas it would see the latter as a victory. All the more reason for Europe to do its utmost to persuade Trump to hang tough.
Follow @Hugodixon on X
Graphic: Monthly government support to Ukraine https://reut.rs/3CEo6w5
Editing by Peter Thal Larsen and Oliver Taslic
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
