ECB rejects plan for €140 billion Ukraine loan backed by Russian assets

The European Central Bank (ECB) has refused to support a €140 billion payment to Ukraine, dealing a blow to the plan to create a “reparation loan” backed by frozen Russian assets.

According to several officials, the ECB concluded that the European Commission’s proposal violated its mandate, complicating Brussels’ efforts to create a massive loan against frozen Russian central bank assets held at the Belgian securities depository Euroclear.

The decision comes amid pressure on the EU to provide financing for Ukraine over the next two years, as Kyiv faces a cash shortage due to Russia’s renewed military offensives and a US peace initiative.

Under the European Commission’s plan, EU countries would provide state guarantees to ensure the risk of repaying the €140 billion loan to Ukraine is shared.

However, commission officials stated that countries might not be able to raise the cash quickly in an emergency, which could put pressure on the markets.

According to four people familiar with the discussions who spoke to the Financial Times (FT), officials asked the ECB if it could act as a lender of last resort to Euroclear Bank, the Belgian institution’s credit arm, to prevent a liquidity crisis.

Three of these individuals stated that ECB officials told the commission this was impossible.

In its internal analysis, the ECB concluded that the commission’s proposal was equivalent to providing direct financing to governments, as the central bank would be covering the financial obligations of member states.

This practice, known by economists as “monetary financing,” is prohibited in EU treaties because it has been proven to lead to high inflation and a loss of credibility for the central bank.

“Such a proposal is not being considered because of the likelihood that it would violate the EU treaty law that prohibits monetary financing,” the ECB said.

In response to the ECB’s stance, the commission has begun working on alternative proposals to provide temporary liquidity to support the €140 billion loan, according to two officials knowledgeable on the matter.

A commission spokesperson said they have been in “close contact with the ECB” since late October and that the central bank has been “actively involved in all discussions” regarding the loan proposal.

“Providing the necessary liquidity for the possible obligations to return the assets to the Russian central bank is an important part of a possible reparation loan. This is a necessity to ensure that the EU, its member states, and private entities can always fulfill their international obligations. Detailed considerations on how we will provide this liquidity are ongoing,” the spokesperson added.

The EU has frozen approximately €210 billion worth of Russian assets since the start of the Russia-Ukraine war. Belgium opposes granting the loan to Kyiv, arguing that if the freeze on Russian assets is lifted and Moscow is able to reclaim them, Euroclear would not be able to repay the money immediately.

Belgian Prime Minister Bart De Wever called the EU plan “fundamentally flawed” and demanded that the bloc’s other 26 member states sign “legally binding, unconditional, irrevocable, on-demand, joint and several guarantees” to share the risk of the loan’s repayment.

He wants such a commitment to be made before EU leaders meet on December 18 to decide how the bloc will continue to provide financing to Kyiv.

De Wever argues that member state guarantees and some form of support mechanism are necessary in case the EU sanctions freezing Russian assets are suddenly canceled.

The sanctions must be renewed every six months by a unanimous decision. Some countries, including Hungary, have opposed the renewal of sanctions.

Pressure from the US for a peace agreement between Russia and Ukraine, along with alternative proposals from the Trump administration regarding the use of Moscow’s frozen assets, has caused concern across the EU.

Belgium is particularly worried that a potential peace deal signed between Washington and Moscow could override EU sanctions, forcing Euroclear to make immediate repayments to Russia.

According to the commission’s proposal, Ukraine would only be obligated to repay the money if Russia agrees to pay reparations.