Squaring the Circle: How to Use Russia’s Frozen Assets for Ukraine

There are many ways to cook an egg. The same goes for using Russia’s frozen assets to help Ukraine. The simplest would be for the West to just seize up to the $300 billion and hand them over to Kyiv. But this is not the wisest. A better alternative would be to lend Ukraine money, secured by Kyiv’s claim for war damages against Moscow.

The French National Assembly has voted in favour of seizing Russia’s frozen assets and giving them to Ukraine. But Emmanuel Macron is unconvinced. The President is worried that doing so would contravene international law - and could lead international investors, especially China and Gulf Countries, to desert the euro. Some other European countries have similar qualms. Belgium is sitting on the largest chunk of assets, with significant amounts also in France and Germany.

It would work as follows:

• Holders of frozen Russian assets would lend Ukraine $300 billion.
• In return, Kyiv would pledge as collateral its claim against Moscow for war reparations.
• An International Compensation Commission would assess Ukraine’s claim for war damages.
• ⁠If the Kremlin refused to pay, the lenders would foreclose on their collateral, effectively inheriting the claim against Russia.
• The lenders would then set off that claim against the frozen assets.

The Legal Basis

This mechanism relies on two established legal principles. First, that countries are required to pay reparations if they illegally invade another country. Second, that a creditor can "set off" a debtor’s assets against its unpaid debts.

The legal basis is completely different from the one that advocates of outright confiscation normally rely on: that a country is entitled to take "countermeasures" in response to an illegal invasion. A Reparation Loan is therefore not subject to the same legal doubts that some experts have raised about the countermeasure doctrine.

"But don’t states have sovereign immunity?" some will still ask. The answer is they do not have absolute immunity. If they did, there would have been no justification for freezing the assets in the first place.

The doctrine of sovereign immunity does not absolve Russia from its obligation under international law to pay reparations for the damage inflicted by its invasion of Ukraine. It merely affects the ability of the creditor to use legal remedies to collect such a debt. But the beauty of the "set-off" mechanism is that there is no need to seize Russia’s assets via a court order. The lenders just do an internal book-keeping transaction, netting off what they are owed against the assets they are sitting on.

When the incoming German Chancellor Friedrich Merz toldThe Economist he was up for using the assets to aid Ukraine, he was probably referring to the Reparation Loan.

No Risk to Euro

What about that other fear: that international investors would desert the euro? This concern is exaggerated. After all, if China was really worried about its own assets being confiscated, it would have taken them away when the Group of Seven pledged to freeze the assets until Moscow paid reparations. Non-Western governments also have no alternative hard currencies to invest in if the G7 moves together. Beijing will not want to put its assets into roubles or rupees.

But again, a Reparation Loan should provide comfort to those who are still worried that confiscation could hurt the euro. The proposed mechanism is not a capricious confiscation of assets. Russia’s assets would only be set off against its reparations bill after an International Compensation Commission had awarded damages against Moscow and the Kremlin had refused to pay.

Such a tribunal would still need to be set up - and Russian President Vladimir Putin would no doubt say it was a kangaroo court. But the United Nations General Assembly has voted in favour of establishing a compensation mechanism by 94 to 14. That provides legitimacy for creating a tribunal to hear the case against Russia. A register of claims has already been set up in the Hague as a preliminary step.

Such a process is obviously more complex than simply grabbing Russia’s assets and handing them to Ukraine. But one of the virtues of the Reparation Loan is that it involves various stages - a loan, a tribunal and setting-off Moscow’s assets if it refuses to pay - each of which is transparent and justified. The fact that the whole process would be drawn out could also be an advantage. While the Reparation Loan should happen immediately, the International Compensation Commission would take several years to rule. And it would only be after the set-off that Russia would be able to take legal action.

It is also hard to see which part of the process an international investor such as Beijing might object to. Certainly, there would be no basis for opposing the initial loan. If it objected to the tribunal, it would then be going against the overwhelming view of the UN General Assembly. Meanwhile, challenging set-off would be trying to overturn a basic legal principle used daily in the global banking industry.

Leverage in Peace Talks

Some will still say that the West does not need to do anything dramatic since Ukraine has no immediate need for money. But it would be foolish to wait until the last minute given how delays in getting Kyiv cash in the past have undermined it on the battlefield.

Moreover, part of the point of the Reparation Loan is to do something dramatic. Europe is rightly worried that US President Donald Trump might cut a deal with Putin and present it as a fait accompli. It desperately needs a seat at the negotiating table to protect both its interests and Ukraine’s.

Promising to fund Kyiv via a Reparation Loan could help secure such a seat. After all, Europe is sitting on the lion’s share of the assets and would therefore make the bulk of the loan. The United States would lend only around $5 billion. Trump, who has accused Europe of exploiting American largesse, would be impressed that it was finally pulling its weight.

A loan of up to $300 billion would also impress Putin. He is currently convinced that he will win a war of attrition. But if Ukraine had such a vast warchest, it would have enough cash to keep fighting for roughly another three years at its current spending rate. It could even outlast Moscow in a war of attrition, especially if a Reparation Loan was combined with tighter sanctions on the Kremlin’s oil revenue. After all, Russia is already suffering from high inflation, high interest rates and high casualties on the battlefield.

In theory, Europe could just give Ukraine cash as and when it needs it from its own resources. But such a drip-feed of funds would not give Kyiv the morale boost it needs. Nor would it give Europe’s arms industry the incentive to tool up and achieve economies of scale. Nor would it impress either Putin or Trump.

Trump has made clear he wants peace in Ukraine. He has piled a huge amount of pressure on Ukraine to get it to agree to a ceasefire. The G7 foreign ministers have now discussed imposing further costs on Russia, including via sanctions, as well as providing more support to Ukraine if Moscow does not also agree to a ceasefire. An obvious way to do that is to threaten to give a lot of cash to Kyiv if Moscow keeps fighting - and to get the money indirectly from the Kremlin’s own reserves. Putin might then come to the negotiating table willing to make concessions.

But, of course, in deploying the Russian assets as a weapon against Moscow, Europe must be careful not to damage itself. That’s why a Reparation Loan is a wiser option than outright confiscation.

Copyright image : Roman PILIPEY / AFP
Volodimir Zelensky in Kiev, March 12, 2025