To maintain its defense against Russian aggression, Ukraine needs money. The EU and US are having difficulty continuing to send money to this country. Also, they are hesitant to hand over the $300 billion in reserves held by the Russian central bank, which the West froze at the beginning of the war.
Here is a suggested backup plan. Bond sales secured by any war damages claims against Moscow might help Kyiv generate funds.
Yet it would have been better if supporters of Ukraine just sent it more money, as the UK did last week. However, fatigue is beginning to creep in elsewhere. Thus far, US President Joe Biden has been unable to convince Congress to give the go-ahead for another $61 billion aid package for Kiev. Although other members of the EU are keen to find a solution, Hungary blocked the EU's intended rescue package of 50 billion euros last month.
The attempts to seize Russia's frozen funds are likewise moving slowly. Attorneys are debating more than just whether or not confiscation is permitted. According to the Financial Times, politicians doubt if it would be wise, although they are actively thinking about it.
"Reparation bonds" could be issued to get around these issues. Ukraine would provide securities that would only be paid out if and when it received compensation from Russia for the damage caused by the war. Interest payments may also accumulate and be payable only in the event that Kyiv receives compensation.
There would be no legal claim from the bondholders to the frozen reserves of the Kremlin. But these assets would seem to be the most probable source of funding to cover losses, as Russia is not likely to cough up cash willingly.
The principal and coupons of the bonds may be paid with the interest-bearing reserves. In contrast to confiscation, in this case the assets would only be transferred upon the determination by a valid compensation process that Ukraine was entitled to the damages.
As long as damages were awarded up to the reserve value, Ukraine would have a reasonable means of claiming them. As a result, it might issue $300 billion in reparation bonds. However, this amount would only become possible if the governments of the US, the EU, and its other allies agreed to purchase the assets.
A windy and long road
Kiev has a strong case against Moscow for damages exceeding $300 billion. The incursion into Ukraine by Russian President Vladimir Putin is unlawful and has led to havoc. By last February, a World Bank estimate indicated that the cost of reconstructing the country had risen to $411 billion. It keeps on increasing.
It is a well-established legal principle that a nation shall make full compensation for the damage caused by an internationally illegal act. A recent example of a state taking this action exists. Iraq had to pay $52 billion in damages when it attacked Kuwait in 1990, according to a reparations commission established by the UN Security Council. Part of Iraq's oil earnings were siphoned off to provide the funds.
It will be more difficult for the outside world to force its way on Russia. Since Russia is one of the five nations that have the power to veto UN Security Council decisions, the UN Security Council will not decide to establish a reparations panel. Nevertheless, the UN General Assembly, which lacks the authority of the Security Council but does not have state veto power, has already declared the necessity of an international reparations process. Additionally, it has urged members to create a register of claims against Russia.
In reaction, the Council of Europe, an intergovernmental institution committed to strengthening the rule of law, is building up a register. The body that will decide how to handle claims has not yet been decided. However, the endorsement of the UN General Assembly lends credibility to measures aimed at making Russia responsible for the war damage.
However, obtaining compensation from Russia will be a difficult procedure. It was not until 2022 — more than 30 years after its invasion of Kuwait — that Iraq issued its last compensation payment. Now, Ukraine needs money. This timing issue might be resolved via reparation bonds if the allies of Ukraine are unable to write any more large checks.