Kremlin billions for Ukraine's defence: three ways to make Russia pay even during the war

To resist Russian aggression and regain the occupied territories, Ukraine needs weapons and ammunition. There have been growing calls to focus efforts on domestic Ukrainian manufacturing, to ensure stability even in the event of disruptions in external aid. 

Yet even the existing production capacity of Ukraine's defence industry is not being fully utilised. The main reason is that the ability to produce weapons far exceeds the financial capacity of Ukraine's budget. According to Strategic Industries Minister Herman Smetanin, Ukraine’s defence industry has the potential to produce US$20 billion worth of goods, but it produced only US$3 billion worth last year. 

If our budget cannot cover this expenditure, we need to seek alternative funding. 

There have been several success stories. 

Some of our partners, such as Denmark and Canada, have been persuaded to purchase weapons for the Armed Forces of Ukraine from Ukrainian manufacturers, and work to involve others (such as Norway) is underway. But this is not the only potential source of investment in Ukraine’s defence industry. 

First and foremost, Russia must be forced to pay. 

Denmark, together with the EU, is a pioneer in this regard. 

Further to a Danish initiative, the EU has already allocated €400 million in revenues generated by frozen Russian assets to the defence sector, and the money has been spent on manufacturing Bohdana howitzers. But these hundreds of millions are by no means the only Russian funds that could and should be used to finance Ukraine’s defence. 

Confiscation of Russian assets

One of the most frequently discussed options in terms of making Russia pay for its aggression is transferring frozen assets of the Russian Central Bank to Ukraine. These funds, amounting to about US$300 billion, were frozen in G7 and EU countries in the early days of the full-scale invasion.

The first steps towards this have already been taken, although the preparation has been unduly time-consuming. The first tranche of €1.5 billion in proceeds from frozen Russian assets generated in 2024 was allocated through the Ukraine Facility and the European Peace Fund (which covers defence expenses). €400 million of this amount was used to purchase Ukrainian howitzers through the Danish mechanism.

In addition, the G7 countries have politically agreed to issue loans to Ukraine totalling $50 billion and are currently working on mechanisms. They anticipate that this money will be repaid using income from frozen Russian assets. However, no final decision has been made, either on the terms of the loans or on who will provide them.

It is also crucial to develop safeguards in case anything goes wrong. 

First of all, if for any reason the income generated from the frozen assets stops, this loan should not turn into a debt owed by Ukraine. 

It is also important that we use these funds specifically to purchase Ukrainian-made weapons. 

Earlier, during a press conference with European Commission President Ursula von der Leyen, Ukraine’s President Volodymyr Zelenskyy stated that part of the loan funds promised by the European Commission under this mechanism would be spent on Ukrainian-made weapons, including long-range drones and missiles.

Aid needs to be different

While all these steps by Ukraine’s partner are certainly welcome, neither 1.5 billion nor even 50 billion – in either euros or dollars – is enough to turn the tide of the war. 

These are funds to survive on. Instead, it is essential to continue working toward the full confiscation of all US$300 billion of the Russian Central Bank's assets to ensure Ukraine's victory and compensate for the damage caused by Russian aggression.

I have previously explained why the arguments used by Western partners who oppose full confiscation are unfounded in terms of legal, financial and political risks. Additional research into the prospects of appealing the confiscation in international courts suggests that Russia’s chances are slim. Moreover, it’s worth remembering that Russia's expropriation of Western business assets began long before the partners had seriously discussed full confiscation, meaning that Russia will continue to steal Western property regardless of whether the West decides to take fair action regarding the assets of the aggressor state.

Our partners often regard the question of Ukraine's ability to manage such large sums in the event of full confiscation as the elephant in the room. However, there are mechanisms that can address these concerns.

A special mechanism was created to rebuild post-war Germany – the development bank KfW (Kreditanstalt für Wiederaufbau), through which US funds were directed. The first billion dollars from the Marshall Plan was channelled into this bank. KfW played a crucial role in restoring infrastructure, industry and small businesses, eventually becoming one of the world’s largest development banks, supporting projects both in Germany and abroad.

Given our partners’ concerns and the gaps in the current financial support mechanisms for Ukraine, we propose setting up a separate development bank.

The suggested working name is the Ukrainian Bank of Restitution and Reconstruction. 

The bank’s immediate objectives could include: providing financial compensation to victims of Russian aggression based on an international compensation mechanism; offering low-cost loans to small and medium-sized enterprises in strategic industries, including defence, which are not currently financed by international mechanisms; stabilising Ukraine's economy, and more.

What needs to be considered? Transparency and accountability.

If representatives from the G7 and the Ukrainian government are included in the bank’s supervisory board, this will ensure international partners' control and Ukraine’s participation in management. It is vital that the bank should be headed by a Ukrainian citizen selected through a transparent competitive procedure. It is only fair that Ukraine’s reconstruction should be carried out by Ukrainians, using Russian funds.

Upon receipt of confiscated assets, the bank could invest these funds more effectively than is currently being done by the Belgian depository Euroclear, where the largest share of frozen Russian assets is held. 

A proposal that Ukraine create such a mechanism would demonstrate that we can offer an international system and provide guarantees of the transparent and accountable use of confiscated Russian assets.

A war tax on Russian gas

The frozen funds of the Russian Central Bank are not the only way to make the Russians pay. 

Profits from Russia’s oil and gas sales, as well as general trade with the West, could also replenish Ukraine’s support fund while simultaneously depriving Russia’s war machine of resources. 

Russia continues to spend significant amounts on the war and still has the necessary revenues to do so. In 2025, year four of the full-scale invasion, Russia’s war machine budget is expected to reach US$142 billion, or 6.2% of Russia’s GDP, according to Bloomberg. Sanctions on Russian fossil fuels have not stopped this channel of war financing: since the start of the full-scale invasion, Russia has earned nearly €750 billion from energy exports, according to the Center for Research on Energy and Clean Air (CREA).

To date, energy sanctions have included an embargo on pipeline gas (incomplete) and oil price caps. However, Russia is bypassing the oil price cap by using a shadow fleet, and the reduction in gas pipeline deliveries is slowly being offset by increased shipments of liquefied natural gas (LNG). Moreover, traders in EU countries are now signing new long-term contracts for Russian LNG, even though the price discount compared to gas from other countries is minimal.

The most effective way to deprive Russia of access to the European LNG market would be a full embargo. 

But since Ukraine’s partners have failed to do this for over two and a half years and have given no signals about the possibility of such a move, we need to explore interim ideas and mechanisms. 

For example, by introducing a "war tax" on Russian gas. 

In 2024, EU import duty on Russian LNG was 0%. A war tax could take the form of a customs duty at the EU level on LNG of Russian origin. This tax would help either redirect the profits of Russia’s war machine to benefit Ukraine, or price Russia out of the competitive European LNG market if the Russians attempted to shift the burden onto European consumers.

The EU has previously imposed similar duties on agricultural products from Russia and Belarus, so there is experience and a mechanism for this. The war tax could be extended to other goods that Western consumers still buy from Russia. Strategically, this move would help Europe end its dependence on Russia, remove the threat of energy blackmail by the aggressor state, and cut off the revenues that fund Russia’s war machine. 

For now, Russian money should be invested in Ukraine’s defence. 

This is an elegant way to achieve justice. 

In a war of attrition, uninterrupted access to resources plays a decisive role. That is why we, as a civil society, will continue to work on solutions that will deprive the aggressor of resources to wage this war, while creating stable funds for military and financial support for Ukraine that will be independent of elections or internal political crises in our key partners. 

This is the only way we can guarantee that Ukraine will have the resources needed for victory and for restoring a just peace.

Olena Halushka, 

Co-Founder of the International Center for Ukrainian Victory, 

for European Pravda