ECB Refused to Support Reparations Loan to Ukraine

The European Central Bank rejected the European Commission's proposal to issue a loan to Kyiv backed by frozen Russian assets. It warned that such a scheme is equivalent to direct financing of governments and violates EU rules, DW reports.

The European Central Bank (ECB) has refused to support a scheme for a reparations loan to Ukraine amounting to €140 billion, which was supposed to be backed by Russian assets frozen in Western countries due to Russia's war against Ukraine, the London newspaper The Financial Times (FT) reported on Tuesday, December 2, citing sources.

According to the publication's sources, officials from the European Commission proposed that the ECB act as a lender for the Belgian depository Euroclear, where the majority of the blocked Russian assets are held. This was intended to prevent a potential liquidity crisis.

However, the European Central Bank rejected the proposal. Its analysis showed that such a scheme would effectively mean providing direct financing to governments, as the ECB would assume the financial obligations of EU states. Such practices are prohibited by EU treaties, as they could lead to inflation and undermine trust in central banks, FT notes.

Frozen Assets and the Scheme's Principle of Operation

After Russia's invasion of Ukraine, Western countries froze Russian assets amounting to about €210 billion. The European Commission's plan was to use €140 billion of these assets to provide Ukraine with a so-called "reparations loan."

Legally, the funds would not be confiscated, but Russia would only be able to return them after paying reparations to Ukraine. Ukraine would then use the reparations paid by Russia to repay the "reparations loan" received from the EU.

Belgium, where Euroclear is located, opposed such a mechanism. The country's Prime Minister Bart De Wever, in a letter to European Commission President Ursula von der Leyen, called the scheme "fundamentally wrong" and dangerous for Belgium. He emphasized that it would undermine trust in Euroclear: despite the legal wording, investors would perceive this model as a confiscation of assets entrusted to the depository.

Search for Alternatives

According to FT, the European Commission has already begun working on alternative proposals. Earlier, there were hopes in Brussels that agreements on a reparations loan for Ukraine could be reached in December.

The scheme was supported by German Chancellor Friedrich Merz and most EU leaders.