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Ukraine bonds: make Russia share the liabilities from its illegal war

You could feel the cold piercing the hearts of Ukrainian officials at the news that US Republicans could limit assistance for Kyiv. Poll data suggest the party will win control of the House of Representatives in November’s midterm elections.

Eight months into Russia’s full-scale invasion, Ukraine is struggling to plug a budget deficit of $5bn a month. The case for western support is clear: Ukraine is the front line in Russia’s wider war against western democracies. But help has been slow in coming.

Ukraine’s finance ministry says that to October 11, $19.9bn had been disbursed by governments and multilaterals out of $36.1bn promised since the invasion on February 24. The US is by far Kyiv’s biggest supporter, in budgetary as well as military terms.

One option for additional funding is the roughly $400bn of Russian assets frozen outside the country. They could be used as collateral to back Ukraine’s return to foreign bond markets.

In August, foreign holders of Ukraine’s $22.5bn in sovereign eurobonds agreed to suspend repayments for two years, freeing up about $6bn. This put Ukraine into default and locked it out of markets, which were already prohibitively expensive. Using Russian assets as collateral offers an affordable way back.

There is a strong case against encumbering Russian property in this way. It would be illegal, so would undermine the rule of law. Even if laws were changed, it would damage trust in western institutions. And allowing a borrower to use the assets of a third party to collateralise its debts hardly encourages fiscal responsibility.

The case in favour is also strong. Quite apart from its illegal aggression — with its targeting of civilians and compelling evidence of atrocities — Russia has caused damage that will cost hundreds of billions of dollars to repair.

The World Bank has put the figure at $349bn only up to June 1. Since then, Russia has redoubled efforts to cripple Ukrainian infrastructure. It has been bombing cities and energy installations heavily. Compensation is due.

Ukraine worked for years to gain market access that it has lost through no fault of its own. Using Russian collateral could restore that access. There would be poetic justice in the move. Russia would backstop loans supporting the Ukrainian independence it has been seeking to obliterate. And restive Republicans could take comfort from reduced US financial exposure to Ukraine.

The Lex team is interested in hearing more from readers. Please tell us what you think of using frozen Russian assets as collateral in the comments section below.

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