Exclusive-Ukraine resists EU conditions on loan backed by frozen Russian assets

By Tom Balmforth

LONDON (Reuters) -Ukraine is urging European countries not to limit its use of a proposed $163 billion loan based on frozen Russian state assets, arguing that it needs to be able to buy non-European arms, repair war damage from Russian attacks and compensate victims.

With EU leaders to discuss the "Reparations Loan" to Kyiv on Thursday at talks attended by Ukraine's president, some states suggest the funds be spent mainly on European-made weapons to boost their defence industries as threats from Russia grow.

A senior official in President Volodymyr Zelenskiy's administration told Reuters Ukraine needed the funds by the end of the year and autonomy over how to spend them, in some of the first public comments laying out Kyiv's stance in detail.

"Ukraine's position is that any conditionality undermines the principle of justice. So the victim, not the donors or partners, must determine how to address its most urgent defence, recovery and compensation needs," Iryna Mudra, a top legal adviser in Zelenskiy's administration, said in an interview.

SOME US WEAPONS ARE CENTRAL TO UKRAINE'S DEFENCE

U.S.-made Patriot air defence systems have, for instance, been crucial to Ukraine's ability to shoot down Russian ballistic missile salvos that have targeted military sites, power stations and also smashed civilian buildings.

In comments that come at a crucial moment in the EU's deliberations, Mudra told Reuters that Ukraine supported cooperation with European defence industries and was already finalising deals with Europe's biggest industrial companies.

"But we would insist on autonomy in deciding how to allocate resources between defence - if there (are) not enough defence capacities in European countries, then we have to have the possibility to buy (them) from non-European countries."

She said part of the loan must go towards "urgent reconstruction needs", such as Ukraine's critical energy infrastructure which has been pummelled by Russian strikes as well as "to a prudent extent" towards compensation for victims.

According to a European Commission document seen by Reuters, some European states want the funds to go predominantly on European-made weapons, while others say there must be flexibility.

As a compromise, the Commission suggested the majority of the loan should be spent on Ukrainian and European weapons but a smaller part would be for general budget support, which Kyiv could also use to buy arms from outside Europe.

SUMMIT MAY PAVE THE WAY FOR FORMAL LEGAL PROPOSAL

European leaders expressed broad support earlier this month for the idea of using Russian assets frozen in the West to provide a 140 billion euro ($163 billion) loan to Ukraine.

EU diplomats say many legal and technical challenges need to be addressed, in particular to reassure Belgium, which holds the Russian assets that would be used in its Euroclear securities depository.

But senior EU officials say they hope leaders at Thursday's summit will give the green light for further work on the idea, with a view to the Commission producing a formal legal proposal.

The Kremlin has described the plan as an illegal seizure of Russian property and cautioned there would be retaliation.

Under international law, sovereign assets cannot be confiscated. The proposal would allow EU governments to lend the funds to Ukraine, which would repay them once it receives war reparations from Russia in an eventual peace agreement.

Supporting Ukraine has become harder for Europe as it faces fiscal headwinds and has had to carry more of the burden since Trump took over the White House in January, making it clear that new U.S.-funded assistance is not in the offing.

Ukraine is yet to find funding to plug an $18 billion gap in its 2026 budget, according to its finance ministry.

"We really would like to convince our allies that the EU reparation loan must be operational by the end of 2025 to avoid this financing gap and to ensure continuity of military and macro-financial support," Mudra said.

Failing to do that would mean Ukraine risking entering next year without predictable sources of financing, she added.

($1 = 0.8575 euros)

(Reporting by Tom Balmforth; Additional reporting by Andrew Gray, Jan Strupczewski and Julia Payne in Brussels and Olena Harmash in Kyiv; Editing by Mike Collett-White and Philippa Fletcher)