A new solution to finance Ukraine: A trust fund of Russian assets

Western governments have been vetting one proposal after another about how to finance Ukraine by leveraging frozen Russian assets. The G-7 proposed in June that Western countries borrow $50 billion in 2024, making the interest payments by seizing the investment returns on the frozen Russian assets. So far, the EU could find about $1.5 billion for Ukraine from this source. The G-7 communique implies that repaying the $50 billion loan principal will take the subsequent confiscation of the assets. The EU refused to participate in the loan, and it is doubtful that financial markets will lend on this uncertainty.

We propose an alternative that is credible, sustainable and prompt: trusteeship. Consolidate all frozen foreign exchange reserves of the Russian Central Bank — estimated variously from $350 billion to $383 billion — in the independent trust fund, which serves as a lending and borrowing facility.

Western governments individually or in groups would be able to borrow from the trust fund short-term for the sole purpose of financing Ukraine, while repaid loans would provide the continuous flows of funds. Governments can borrow to the extent they are willing to commit and can afford to repay with interest at various periods. If Western countries each borrow and repay $2 billion to $4 billion a year on average — the U.S. and other big countries more, smaller countries less — they can readily raise $50 billion to $100 billion a year for Ukraine’s needs. This is at least as much — or, at the higher bound, twice as much — as Western countries have struggled for months, and failed, to squeeze out of frozen Russian assets via various schemes.

The liquidity would be available immediately after the trust fund is established. We conservatively estimate, using the Russian Central Bank’s records of 2021 and 2022, that about $113 billion were liquid deposits on correspondent accounts with Western central banks and commercial banks; about $178 billion are Western government bonds; $68 billion are Western corporate and agency bonds. Nearly $5 billion was added in 2022 to 2024 in accumulated interest by Euroclear, a European central depository.

The trust fund can start with conducting an audit to account for all Russian assets frozen in various jurisdictions. Consolidation would end Western jurisdictional debates over which Russian assets denominated in whose currency should be controlled by which government.

If Western governments need to borrow more than $100 billion or for longer than a year, with reduced loan turnover, the trust fund of over $350 billion would still be able to accommodate by raising liquidity from Western central banks via repo operations with the bonds of respective Western governments. To obtain dollars and euros, it can utilize central bank currency swaps, as established in 2008.

If additional liquidity is needed for any contingency, the trust fund, acting as a quasi-bank, can borrow short-term from financial markets by issuing debentures against its income from lending to Western governments, thus making financing scalable.

The trust fund would not be a substitute for regular Western aid to Ukraine allocated by national and supranational authorities. It is complementary to these efforts, but also serving as a supplementary lending source.

The trust fund would be independent both financially, with its own balance sheet and loan operations, and politically, with its own board of trustees. The multinational board would include trustees delegated by various Western governments, the U.N., the IMF, the World Bank and also, if they agree, by Russia itself (and can add Chinese and other global observers). It would be managed by professional international bankers hired by and reporting to the board. 

The trust fund would be an independent fiduciary. Its dual mission is to provide the continuous flow of Western funding of Ukraine and, as opposed to confiscation of balances or investment returns, to preserve the frozen asset balances including repayable loans, capitalized interest, other investment returns and proceeds from matured Western government and corporate bonds in the Russian portfolio. Assets will be preserved for the future international resolution after the end of the Russo-Ukrainian war.

Only the borrowing governments would allocate spending between military and civilian uses. The trust fund is a neutral fiduciary and only controls the creditworthiness of borrowers and enforces the return of the loans. This way, Russian, Hungarian and other dissenting trustees cannot block the loan, since the only criterion is the creditworthiness of the borrowing Western government, not whether they use loans for military, financial or humanitarian aid to Ukraine (which is a constitutional issue in Japan). The use of money is not in the trust’s and trustees’ brief. The borrowers bear full responsibility for their choices.

The trust fund’s independence assures that the flows cannot be interrupted by any disagreements between the EU governments or between the branches of the U.S. government. Even if there is a change in American government policy after the next election, the independent trust fund would remain and continue its lending operations.

The trust fund renders the legal arguments for and against taking frozen Russian assets unnecessary. It moves assets to the international fiduciary trusteeship from their current limbo and both preserves them and uses them for financing Ukraine.

Russia may disagree with the use of its assets for helping Ukraine. Ukraine may disagree with not disbursing Russian assets directly as war reparations. This is their prerogative. Once the independent trust fund exists as a juridical entity with its own balance sheet, both Russia and Ukraine can — and indeed should — sue it in the International Court of Arbitration. Each side can submit its claims and evidence of financial loss and war destruction. Then the tort arbitration hearings can turn into a war crimes trial, which otherwise may never happen.

Michael S. Bernstam is a research fellow at the Hoover Institution, Stanford University. Steven R. Rosefielde is professor of Economics at the University of North Carolina at Chapel Hill.