EU floats plan to use frozen Russian assets for Ukraine loan, bypassing a Hungary veto

By Jan Strupczewski

BRUSSELS (Reuters) -The European Union is discussing ways to use frozen Russian assets to underpin a so-called "reparation loan" to Ukraine to bolster its wartime finances and bypass the risk of a veto by Moscow-friendly Hungary, officials close to the project said.

Ukraine would only pay back the reparation loan once it receives compensation from Russia for damage inflicted during the war. The concept was floated by European Commission President Ursula von der Leyen last week, at a time President Donald Trump is curbing direct U.S.-funded military aid to Kyiv.

Von der Leyen said the loan could be arranged on the basis of cash balances associated with Russian central bank assets frozen in the West after Moscow's invasion of Ukraine and would not involve seizing the assets - a red line for some in the EU.

Any such loan will need to be designed in a way that avoids a veto by Hungary, the most pro-Moscow of all the EU's 27 member states and whose purchases of Russian oil have this week been a source of irritation for the Trump administration.

LOAN FROM A 'COALITION OF THE WILLING'

Officials close to the project said a new mechanism could be created by a coalition of the willing, rather than all 27 EU governments, if Budapest did not want to participate.

"We had a first preliminary discussion of the new loan idea. But so far many things, including the amounts, are not clear," one senior EU official told Reuters.

Some 210 billion euros ($250 billion) of Russian assets are immobilised in Europe. Most have already matured and become cash held by Belgian securities repository Euroclear on deposit.

The EU has been using interest from the assets to repay a $50 billion loan to Ukraine extended by G7 countries. With most of the assets now held as cash, the amount of interest being generated is modest.

HOW TO CREATE A NEW LOAN FOR UKRAINE

The idea that the EU is now working on would involve replacing the Russian assets with zero-coupon bonds issued by the European Commission.

The bonds would have guarantees from either all EU countries or just those willing to participate.

The government guarantees are the politically risky feature because they could be called upon if Russia makes claims once EU sanctions against Moscow are reversed. The threat of a separate Hungary veto on rolling over sanctions hangs over the EU.

"However, under the assumption that the sanctions will remain in place until Russia fully withdraws from Ukraine, including from Crimea, the assets will likely remain frozen for the foreseeable future. That means the guarantee is not very risky," a second senior EU official said.

Once the assets are replaced by EU bonds, one option under consideration is to place them in a special purpose vehicle owned either by all EU nations, or just the governments that guarantee the bonds. The idea is still at an early stage.

HUNGARY'S ABSENCE WOULD HAVE MINIMAL IMPACT

Moving the assets away from Euroclear would allow greater investment flexibility and higher returns, officials believe.

"This means it will be possible to invest the Russian assets long-term and at better rates," the official said.

Officials said that if Hungary wished not to participate in the intergovernmental guarantees, the impact on others would be minimal because of the country's small economic weight.

"To avoid blackmailing the EU with a veto by some, an intergovernmental agreement would probably be the way to go," a third senior European official said.

Officials said funds already disbursed under the $50 billion G7 loan to Ukraine, to be paid back from the interest generated by the assets, could be repaid directly from the assets under the proposed scheme or in the longer term from the higher interest generated by the more profitably invested assets.

($1 = 0.8465 euros)

(Reporting by Jan Strupczewski; Editing by Richard Lough and Ros Russell)