How the West can increase funding for Ukraine using Russian resources
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.
The main reason is that the ability to produce weapons far exceeds the financial capacity of Ukraine's budget.
Some of our partners have been persuaded to purchase weapons for the Armed Forces of Ukraine from Ukrainian manufacturers, and work to involve others is underway. First and foremost, Russia must be forced to pay.
Denmark, together with the EU, is a pioneer in this regard.
Read more in the article by Olena Halushka, Co-Founder of the International Center for Ukrainian Victory - Kremlin billions for Ukraine's defence: three ways to make Russia pay even during the war.
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.
It is also important that we use these funds specifically to purchase Ukrainian-made weapons.
Earlier, 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.
While all these steps by Ukraine’s partner are certainly welcome, it 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.
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.
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.
A special mechanism was created to rebuild post-war Germany – the development bank KfW (Kreditanstalt für Wiederaufbau), through which US funds were directed.
What needs to be considered? Transparency and accountability.
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.
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.
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.