An estimated 350 billion dollars in Russian government assets have been frozen in Western accounts since Russian President Vladimir Putin ordered a full-scale invasion of Ukraine on February 24th, 2022. These are not idle funds. With sanctions on the Kremlin remaining firmly in place and Putin showing no willingness to negotiate on his demand to annex a quarter of Ukraine’s territory or end his attacks, how these funds can be used to stop the war in Ukraine has become a key question for Kyiv’s Western allies.
G7 countries are discussing the possible confiscation of frozen Russian assets, although some G7 members are concerned about the precedent, mechanism, and potential impact of taking such a step on central bank assets. “The first thing you know is a bunch of lawyers have to step in. No decisions have been made,” Penny Pritzker, the United States (U.S.) Special Representative for Ukraine’s Economic Recovery told a panel at the World Economic Forum (WEF) in Davos on Monday.
It is estimated that the Kremlin has budgeted about 140 billion dollars – or seven percent of Russia’s gross domestic product – to finance its military in 2024. And as both Europe and the U.S. face key elections this year, which are likely to call for further cuts in aid to Ukraine, tapping into Russia’s frozen assets is looking like an increasingly attractive solution for Kyiv’s Western allies.
Confiscation of Russian assets?
The U.S. Secretary of the Treasury Janet Yellen has long expressed concern about the lack of legal authority for the U.S. to confiscate frozen Russian assets held at the Federal Reserve Bank of New York, but recently accepted a request by G7 leaders to explore options for seizing these assets based on international law.
Another concern some senior Western officials have is that the confiscation of Russian assets invested in government bonds denominated in euros, U.S. dollars, and Pound sterling could undermine the willingness of central banks to store reserves among themselves. Part of the assets, essentially securities, in which the Russian Central Bank has invested – is frozen in Euroclear, a depository based in Brussels.
Belgian Prime Minister Alexander De Croo stated in an interview he was not opposed to the confiscation of frozen assets, but there must be a clear mechanism. “We don’t say no to asset confiscation. But we have to work on the mechanism. For example, they can be used as collateral to raise funds for Ukraine,” De Croo said.
Ukraine’s war budget for this year
At the end of November last year, President Volodymyr Zelenskyy signed the Ukrainian state budget for 2024, which was previously adopted by the Verkhovna Rada. It goes without saying that the war is a key factor affecting the structure of income and expenditure. The state budget foresees revenues of 1.78 billion UAH (43.7 billion dollars), while expenditure is almost doubled, to the estimated 3.35 billion UAH (82.3 billion dollars).
The difference is expected to be covered by international loans and grants. At least that’s what the Ukrainian president, who is currently in Davos, is asking for. Ukraine’s state budget for 2024 is mainly focused on the military. The main emphasis is on waging war in 2024 throughout the year at the expense of the state: for now, there is no mention of the expected Western financial aid for military purposes.
The budget does not include funds for reconstruction, and all funds generated in the Road Fund (road construction) are also diverted to military purposes. Twenty-two percent of GDP expenditures, or about 40 billion dollars, are allocated to defense and homeland security.
Without clear agreements on international financial assistance to Ukraine
It is still not known where the funds will come from to cover the 27 billion dollars, or approximately two-thirds, of the projected budget deficit. There is an agreement with the International Monetary Fund (IMF) on a loan of 5 billion dollars with an interest rate of 7 percent. However, such a rate in the short term will significantly increase the national debt. If sufficient international funds are not available, the government and the National Bank can resort to printing money and use the liquidity reserves of the national banking system, which amount to about 20 billion dollars. But this would lead to ongoing inflation, along with the devaluation of the national currency and higher national debt. Ultimately, these factors would be expected to combine to cause a national default in Ukraine between 2025 and 2027.
After the U.S. Congress decided not to pass a new law to help Ukraine, Russia launched its deadliest missile attack on Ukraine. Apartment complexes, housing estates, and other non-military targets were attacked. Dozens were wounded and several civilians were killed. As the Russian invasion approaches its second anniversary, one-quarter of Ukraine’s population remains displaced. The brutal war in Russia has claimed thousands of lives, and several cities, villages, and towns have been destroyed. Meanwhile, Russia had nearly 400.000 casualties. The Russians lost tens of billions in military hardware, and the Russian economy shrank by about 3 percent.
Russia’s 2024 budget shows it’s planning for a long war in Ukraine
Pinning everything on growing military spending, the Kremlin is driving its economy ever deeper into the trap of permanent war. The Russian government has released its proposed budget for 2024. For the first time in modern history, the country will spend six percent of gross domestic product on the military, and defense spending will exceed social spending.
The war against Ukraine and the West is not only the Kremlin’s highest priority, but it is now also the main driver of Russia’s economic growth. Record defense spending shows that the Kremlin has no intention of ending its war against Ukraine anytime soon: on the contrary. Even if the fighting becomes less intense or the conflict freezes, the money will go to replenish Russia’s depleted military arsenal. Likewise, there is enough money to finance an escalation such as a state of emergency or full mobilization.
The new budget predicts that revenues will increase by more than a third in 2024 to reach 35 billion RUB (349 billion dollars). Of this, 11.5 billion RUB is expected to come from the oil and gas sector. Planned expenditures amount to 36.6 billion RUB (26.2 percent more than this year). This means that next year’s budget deficit, at least according to the government’s plans, should be significantly reduced – from the planned 2 percent of GDP in 2023 to 0.8 percent of GDP in 2024. National security spending (including agencies such as the National Guard and the Federal Correctional Service) will rise from 3.2 billion RUB to 3.5 billion RUB. In contrast, spending on education and health care will remain at this year’s level, which means a real decrease in 2024.
Consequences of the war: The United Nations (UN) launches humanitarian plans for Ukraine
On January 15th, the UN and partners requested 4.2 billion dollars from donors to support war-affected communities in Ukraine and Ukrainian refugees, as well as their host communities in the region through 2024.
Almost two years since the rapid escalation of the war, 14.6 million people are in need of humanitarian aid in Ukraine – a staggering 40 percent of the population. Millions of people have fled the country. The recent spate of Russian attacks underscores the devastating civilian cost of war, while the harsh winter heightens the urgent need for life-saving humanitarian aid. In frontline towns and villages, people have exhausted their meager resources and are relying on aid to survive.
Constant bombing forces people to spend their days in basements. Children are the most vulnerable. The UN Office for the Coordination of Humanitarian Affairs (OCHA) is coordinating the response inside Ukraine. This humanitarian needs and response plan calls for 3.1 billion dollars by 2024 and targets assistance for 8.5 million people. UNHCR, the UN Refugee Agency, coordinates the Regional Refugee Response Plan (RRP), which requires 1.1 billion dollars and targets assistance for 2.3 million refugees. In total, the two high-priority UN plans aim to support around 10.8 million people in Ukraine and the region, Forbes writes.
E.Dz.