Assisting Ukraine or financing the war: how will the Russian frozen assets be used?

In April 2024, Andrey joined the news wire agency The LCB as an independent congressional reporter covering congressional action on the war in Ukraine and the 2024 U.S. election. When Congress is in session, Andrey conducts dozens of interviews with lawmakers weekly to inform his writing. 

The future of the Russian assets frozen by Western governments remains unclear. Despite the U.S. Congress passing legislation in April directing the seizure of these assets, many details are still ambiguous. Echo’s Andrey Beregovskiy spoke with American lawmakers to clarify what will happen to the Russian frozen sovereign assets and how the Western governments plan to use them.

The U.S. Congress passed the law seizing Russian assets in late April 2024 as part of the latest military and humanitarian aid package to Ukraine. This part of the law known as REPO for Ukrainian Act (Rebuilding Economic Prosperity and Opportunity for Ukrainians) seizes the frozen assets of the Russian Central Bank, Russian National Wealth Fund, and the Russian Ministry of Finance, and transfers them to a dedicated fund, Ukraine Support Fund. Initially, the fund was intended for Ukraine’s post-war reconstruction. However, this year’s congressional disagreements over unconditional aid to Ukraine have raised the possibility of using the funds not for the redevelopment of the country but for financing Ukraine’s current military operations.

The issue of seizing Russian assets is twofold. Freezing the assets was one of many sanctions imposed by the United States and the European countries against Russia following the annexation of Crimea in 2014. The seizure of the frozen assets is viewed by the U.S. government as one of the means of holding Russia accountable for waging an aggressive war against Ukraine.

"Russia is in violation of international law,” Sen. Elizabeth Warren (D-MA) stated in an interview with Echo. “We would not do this alone as the United States. The communities of the world would seize these assets and let Ukraine use them for their defense."

The international nature of the seizure that is prescribed by the law prevents the quick seizure of assets. In the last months, the U.S. administration and the governments of the European Union have been negotiating the best way to manage the assets, in part to protect the funds from legal challenges by the Russian government.

However, the goal of the fund is not only to sanction Russia but to compensate Ukraine for damages. Originally, the fund was supposed to be frozen until the end of the war in Ukraine and be directed to the post-war reconstruction of the country, using the fund as war reparations.

"My understanding is that the focus has been more on gathering funds for reconstruction,” said Sen. Chris Murphy (D-CT), echoing REPO’s provisions.

As the war in Ukraine drags on, the allocation of unconditional aid to Ukraine becomes the point of growing disagreements between the political factions in the U.S. and Europe. Before passing the aid package this April, Republicans in the U.S. Congress suggested using the REPO Fund as collateral for a zero-interest loan for arms purchases to Ukraine. Ultimately, Congress approved the unconditional aid package. Now, the fund of frozen assets is seen as a way of financing the army of Ukraine instead of unconditional supplies from the West. As such, the G7 summit this June, which included Ukrainian president Volodymyr Zelensky, decided to grant Ukraine a $50 billion loan, using the frozen Russian assets as collateral. Preliminary reports say the fund will be invested to generate interest.

"I think we should confiscate the Russian assets to be able to make sure that Ukraine can win the war and then help rebuild afterwards,” said Sen. Pete Ricketts (R-NE), a ranking Republican on the Senate Foreign Relations Subcommittee on Europe.

The delay in arms deliveries in late 2023 and early 2024 hindered Ukraine’s ability to defend its front lines effectively. Transferring the profits from Russian assets to Ukraine could stabilize Ukraine’s military operations and reduce its dependency on political decisions in the West. “The American strategy is to shift all responsibility, financial and military, on Europe – but Europe has its own limitations,” Ukrainian political analyst Vadim Karasyov told Echo. “This is a beautiful and elegant arrangement but it was born not for the sophisticated punishment for Russia but out of necessity because the budgets of the European countries, in Brussels and the European Union in general, are not unlimited,” said Karasyov.

The details of this arrangement remain unclear: the exact amount of frozen funds, the interest that can be earned, the timeline for accessing these funds, and the revenue that the Western countries can transfer to Ukraine are still unknown. These uncertain conditions cast doubt on congressional plans of using the REPO Fund to sponsor Ukrainian defense and post-war reconstruction.

"I think there are two issues here. One is the interest on the money that most people think is accessible much faster. And then there's the total amount, which a lot of people have to agree to, and it's going to be litigated. So, I think, realistically, it's not going to be available in time," said the chairwoman of the Senate Foreign Relations Subcommittee on Europe Sen. Jeanne Shaheen (D-NH.)

“Of course, [the interest] is not going to be enough. But this transfer isn’t supposed to cover all of Ukraine’s deficit. This is only to try how it’s going to work. And then they’ll use not only the interest but the principal, and the work is ongoing,” Vadim Karasyov told Echo.

Some members of the U.S. Congress including the Republican leadership of foreign relations committees in both chambers also point out that investing the assets is only the first step. "We appreciate the persistent efforts of G7 leaders to find creative mechanisms to mobilize the value of these assets. However, we view today’s announcement as just the first step in the right direction, not the final verdict," wrote several lawmakers including Republican leaders on foreign affairs committees Sen. Jim Risch (R-ID) and Rep. Michael McCaul (R-TX.) "As such, we urge the Biden administration to strongly advocate with our G7 partners for a full seizure and transfer of all frozen Russian sovereign assets in our jurisdictions."

The REPO Act mandates that the U.S. administration must report to Congress on the use of the seized assets within 90 days of the law’s passage, which is no later than July 23, 2024.

Published on June 25, 2024, in Germany-based outlet Echo FM