The EU Reparation Loan as Solutio Damni for Ukraine

At the October 2025 European Council, European leaders invited the Commission ‘to present, as soon as possible, options for financial support’ for Ukraine based on the use of immobilised Russian assets. This request followed more than three years of debate (see here, here, and here) and culminated in Commission President Ursula von der Leyen’s announcement of an ambitious Reparation Loan initiative during her 2025 State of the Union address. The proposal envisages financing Ukraine through the cash balances of the immobilised assets and reserves of the Russian Central Bank (RCB) held within the EU.

The Reparation Loan builds on the fact that the EU holds more than two-thirds of the Russian Central Bank’s assets and reserves within the G7—around €210 billion out of €260 billion. After all, the EU had already frozen RCB assets under its jurisdiction just six days after Russia’s invasion of Ukraine, and in February 2024 required all central securities depositories (CSDs) holding over €1 million in Russian assets to separate the extraordinary cash balances and revenues accumulated by EU sanctions from their ordinary accounting activities. The EU also played a central role in the €45 billion G7-led Extraordinary Revenue Acceleration (ERA) loans-to-Ukraine initiative, providing Ukraine with an €18 billion loan financed by Eurobonds under the Exceptional Macro-Financial Assistance programme and, more importantly, assuming full repayment responsibility for the ERA loan through future flows of extraordinary proceeds generated by the immobilisation of RCB assets under the Ukraine Loan Cooperation Mechanism (see here). It is therefore unsurprising that the EU has rapidly become the global laboratory for the use of sovereign assets as instruments of geopolitical leverage.

Against this background, this post analyses the legal and fiscal implications of the Reparation Loan initiative and its role in advancing EU fiscal integration. Unlike previous instruments, the Reparation Loan relies on the extraordinary cash balances derived from frozen RCB assets—rather than on the extraordinary profits they generate—thereby demanding a delicate balance between legal constraints and geopolitical objectives.

The Reparation Loan constitutes a game changer in the EU’s support for Ukraine, for two main reasons. First, it provides sustainable and predictable financial flows for Ukraine’s defence—both to procure mostly US-made weapons and to ramp up domestic industrial capacity (see here)—something that windfall profits alone have proved far too limited to achieve. To date, the EU has delivered only three tranches worth €4,6 billion to Ukraine (see here, here, and here), with annual proceeds estimated at merely €3-4 billion. By contrast, by bankrolling Ukraine with about €185 billion, the Reparation Loan would exceed the €177.5 billion provided by the EU and its Member States over the past three and a half years (see here). Second, the Reparation Loan aims to fill the military vacuum left by the United States (US) under the Trump administration, covering Ukraine’s military needs through 2026 and 2027 and ensuring multiyear predictability.

The fiscal architecture designed by the Commission is both ingenious and operationally complex. EU-based international CSDs—Euroclear and Clearstream—would issue a syndicated long-term, zero-interest loan to the EU equivalent to the cash balances resulting from frozen RCB assets—approximately €185 billion—backed by Member States through their national budgets in proportion to their size. A similar approach was successfully used in the €100 billion employment-SURE programme during the Covid-19 pandemic. The reliance on RCB assets as collateral cleverly circumvents the legal obstacle posed by outright confiscation, which—unlike immobilisation—cannot be justified as a collective countermeasure under international law owing to its permanent and irreversible nature (see here and here). This same legal constraint also explains why successive US Presidents have refrained from exercising the authority granted under the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act (REPO Act) to seize Russian assets. It is therefore unsurprising that the Commission President clarified from the outset that ‘the assets themselves will not be touched’.

At this point, the EU faces a choice: it can either use this loan first to repay the €45 billion ERA loan and then provide the remaining €140 billion to Ukraine—making the Reparation Loan a superseding mechanism for the ERA programme—or directly channel the full €185 billion to Ukraine while keeping the ERA repayment funded through the extraordinary revenues accrued on the cash balances. In the first scenario, the EU would likely need to provide an additional €52 billion to fill Ukraine’s 2026-2027 budget gap (see here). Ultimately, if Russia pays war damages, those funds would be used by the EU to repay the CSDs. Conversely, if Russia refuses, Member States would repay the CSDs through their national budgets.

EU Member States constitute the real guarantors of the loan repayment to CSDs. Russian assets and reserves function as fictitious collateral: they are frozen but not confiscated and, by definition, remain destined for return to the Russian Central Bank once ‘Russia ceases its war of aggression against Ukraine and compensates it for the damage caused by this war’. As a result, Member States shoulder a substantial financial risk—potentially being called upon to repay around €185 billion to CSDs if Russia does not compensate Ukraine. As the Commission President noted, ‘the risk will have to be carried collectively’. Above all, Russia may find it preferable to leave its assets immobilised—and economically unproductive except for limited extraordinary revenues—under EU jurisdiction, thereby compelling Member States to honour the loan through taxpayers’ resources, rather than paying far greater war damages to Ukraine. Member States, however, already face tight fiscal constraints, squeezed between the Stability and Growth Pact parameters and their commitment to increase defence spending to 5% of GDP by 2035 after decades of chronic underinvestments. The Reparation Loan therefore creates a powerful incentive for all Member States to make Russia’s payment of war damages a central condition of any future peace settlement.

The proper functioning of the Reparation Loan depends on the continued and uninterrupted immobilisation of the RCB assets and reserves for the entire duration of the loan. While the Reparation Loan itself would be adopted by qualified majority voting under Article 212 TFEU, the renewal of the restrictive measures immobilising these assets must still be agreed unanimously every six months within the Council under Article 24 TEU. This creates a structural risk that certain Member States—Hungary in primis—could eventually decide to lift the asset freeze. Although this scenario is unlikely—since unfreezing the assets would oblige all EU Member States to repay the loan to the CSDs on their own, including the state vetoing the sanctions—the issue was already voiced by President Biden during G7 negotiations concerning the stability of the ERA programme (see here). Technically, the EU could eliminate the unanimity constraint by invoking the passerelle clause under Article 31(2) TEU. However, moving from unanimity to qualified majority voting in CFSP decisions—such as sanctions—would itself require unanimous approval by all Heads of State or Government within the European Council, rendering this outcome highly improbable.

While the Reparation Loan constitutes a creative legal mechanism to mobilise Russian assets, it does not by itself advance the EU integration process towards a fully-fledged fiscal capacity. The scheme is backed by Member States’ budgets rather than the EU’s own budget. A comparable approach was adopted with the Macro-Financial Assistance Plus (MFA+) in 2022, after Hungary opposed an EU-centralised fiscal model. The Reparation Loan thus departs from the practice consolidated under the Ukraine Facility and the Exceptional Macro-Financial Assistance, both of which were backed by the EU budget’s headroom. The reason for this nationally driven approach lies in the limited fiscal space of the EU’s Multi-Annual Financial Framework, which accounts for only about 1% of the EU’s aggregate GDP.

The Reparation Loan constitutes the most technically sophisticated and financially significant initiative ever proposed to support Ukraine, demonstrating that Russia’s assets can serve as an exceptional geopolitical instrument to be leveraged to both exert pressure on Moscow to end its unlawful aggression and to contribute to the reparation of war damages. Importantly, the Reparation Loan will test the reaction of the international community which, if favourable, could lead to its replication by other G7-members. Criticism has already emerged: Russia has denounced the mechanism as an illegal act of confiscation likely to be challenged before international courts (see here), while both Belgium and the European Central Bank have warned of potential repercussions for the euro’s international credibility and investor confidence, potentially fuelling financial instability (see here). Yet, these risks appear outweighed by the benefits. The Reparation Loan would empower the EU to act decisively and enable Ukraine to sustain its defence right in the wake of the US withdrawal. Ultimately, given that the EU will likely bear—directly or indirectly—the largest share of Ukraine’s reconstruction costs, estimated at over half a trillion euros, the Reparation Loan represents not only a pragmatic but also a fair starting point.