Friedrich Merz’s swearing-in as German chancellor, expected on May 6, means that Germany can now play a key role in the defense of Ukraine. The new chancellor, the leader of the center-right Christian Democrats (CDU), realizes that Ukraine’s fate is vital for Europe. He is prepared to go further in supporting Kyiv than his predecessor Olaf Scholz. He has also declared that he wants Germany to play a leading role in Europe’s response to Russia’s aggression.
Getting Kyiv a war chest should be a central element of this. It should not, of course, be the only element. Europe needs to rush more military support to Ukraine, including Germany’s Taurus cruise missiles. It also needs to prepare a military force to keep the peace if Ukraine and Russia agree a deal.
But there is, as yet, no ceasefire, let alone a full peace deal—and there may not be one for months or years. Therefore, it is essential that Ukraine has the money to survive a war of attrition. There will then be a better chance of forcing Russia to accept a decent agreement—or freezing the conflict in a way that preserves Ukraine’s sovereignty—especially now that the weak oil price is hurting the Kremlin’s finances.
Meeting Ukraine’s Financial Needs
Kyiv needs around $100 billion a year in external support, much of which will be used for weapons. The Europeans will have to supply the cash as US President Donald Trump will not provide any new financial aid. But it will be hard to get European taxpayers to write big cheques to Ukraine when budgets are stretched, and governments need to find large sums of money to boost their own defenses.
The best solution is to use Russia’s frozen reserves to help Kyiv. Moscow left around $300 billion of its sovereign assets in the West when it invaded Ukraine. About $200 billion of these are in Belgium. Other large sums are in Germany and France. Significant sums are also in the United Kingdom. Outside Europe, the largest pile is in Japan.
The political logic of using Russia’s reserves to help Ukraine is compelling. Taxpayers will understand why Moscow must pay for its aggression. However, the European Union must mobilize Russia’s assets in a legally sound way. Seizing the assets and handing them over to Ukraine could run into legal issues.
This is why we propose an alternative mechanism: a “reparation loan.” It would work as follows:
The EU and other willing partners would lend Ukraine up to $300 billion. In return, Kyiv would pledge its claim for war reparations against Moscow as collateral. The loan would be structured as a limited recourse obligation, with the collateral being the sole source for repayment. An international claims commission would assess Ukraine’s claim for war damages. If the Kremlin refused to pay, as seems likely, the lenders would foreclose on their collateral, effectively inheriting the claim against Russia. The EU and other lenders would then set off that claim against the frozen assets, recovering in full their loan to Ukraine.
This mechanism is legally solid because of two long-established principles. The first is that a country must pay reparations for damages caused by illegal acts. The second is that a creditor can set off a debtor’s assets against its unpaid debts. The legal basis is different from the principle of countermeasures, which has been used to justify confiscating the Russian assets to help Ukraine, and so it does not suffer from the same legal doubts.
Coalition of the Willing
The EU has to play the central role in a reparation loan as the EU member states are sitting on around three-quarters of the frozen Russian assets. It should provide the loan on behalf of the whole union. There will then be no impact on member states’ debt ratios. Although the EU will have to fund the loan temporarily, it would be repaid in full with interest after the claims commission awards damages to Kyiv.
Merz, who has already said he is interested in using the reserves to help Ukraine, is well placed to provide leadership, especially vis-à-vis France, Belgium, and the United States.
France
The new German chancellor will first have to convince French President Emmanuel Macron, who has been reluctant to confiscate the assets and give them to Ukraine. One of his concerns is that it would be illegal. The reparation loan has been structured to overcome this objection.
Another of Macron’s objections is that foreign states such as China and Saudi Arabia might sell euros if they thought their sovereign assets were no longer safe in Europe. But this risk is exaggerated. Beijing and Riyadh have not removed their money from Europe despite the decision to freeze Russia’s assets indefinitely. They do not have many options for where to put their cash. They are hardly going to invest in rubles and rupees.
What is more, while China or Saudi Arabia may be worried by a capricious confiscation of assets, the proposed mechanism is very different from that. Russia’s assets would only be set off against its reparations bill after an international claims commission had awarded damages against Moscow and the Kremlin had refused to pay.
Such a tribunal still needs 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 favor 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. The EU and over 50 states from all continents have begun formal negotiations on creating a claims commission.
Belgium
Merz will also have to persuade the Belgian government to back the reparation loan. It will not want to face any risk, however remote, that it could end up liable for $200 billion.
Member states sitting on assets, including Belgium, France, and Germany, may also need to pass domestic legislation to cut any further risks in making the loan. Among other things, it could mean freezing the Russian assets indefinitely. This would avoid the current need to get unanimity at the EU level every six months to maintain the freeze. Hungary has several times threatened to lift the sanctions. It could also lead to moving the funds from the current private sector custodians, such as Belgium’s Euroclear, to the national central bank. It could also involve an express approval of a set-off mechanism if Russia fails to pay damages awarded by the claims commission.
If necessary, the EU could provide some indemnity to Belgium to cover any residual risks.
The United States
Washington would ideally also make a reparation loan to Ukraine. This would be a way for Trump to show Putin that he is willing to put pressure on Russia to agree a ceasefire. But it is not clear that the US president will be prepared to do this. Since Washington is only sitting on about $5 billion of Russia’s frozen assets, its participation is not essential.
The EU should not wait indefinitely for America to come onside. It needs to show that it is prepared to take action on its own to support Ukraine. While it will be hard to provide a security guarantee to Kyiv without US help, it can make a reparation loan without Washington’s permission. The United Kingdom and Canada are highly likely to join such a coalition of the willing.
France might still be worried that, if the United States did not join in the reparation loan, China or Saudi Arabia could sell euros and invest in dollars. But this seems fanciful now that Trump has launched a trade war against China and much of the rest of the world and international investors have started losing confidence in the dollar’s status as a reserve currency.
Once Merz has assembled the coalition of the willing, he should invite Trump to join. But he should make it clear that the coalition will proceed without the United States if necessary.
Leverage over America and Russia
Europeans are rightly worried that Trump will cut a bilateral deal with Putin and present it to both Ukraine and Europe as a fait accompli. Providing a reparation loan to Kyiv will earn them a seat at the table.
The loan should be phased in such a way as to maximize the chance of getting a good ceasefire—while also providing Putin with an incentive to stop dragging out the talks. For example, the coalition would provide the first $50 billion tranche of the loan if Putin has not agreed a ceasefire by the G7 summit, which takes place on June 15-17. It would lend a further $50 billion every six months until and unless Russia stops fighting. If the Kremlin agrees a ceasefire, there would be a pause in making loans. But if it started hostilities again, the coalition would provide another tranche. That way, Putin will know that every time he drags his feet, more and more of his assets are effectively being channeled to his enemy.
Merz has promised that Germany will show leadership on Europe and Ukraine. Getting Europe to provide Kyiv with a reparation loan is the easiest way to make a big impact fast.
Annegret Kramp-Karrenbauer served as German defense minister from 2019 to 2021 and as leader of the CDU from 2018 to 2021.
Hugo Dixon is commentator-at-large for Reuters.
Lee Buchheit is honorary professor at the University of Edinburgh Law School.
