Dear Fellow Frozen Asset Leverage Scenarioizers,
Three things I’ve associated with Belgium: (1) It’s where I wrote my master’s thesis (King’s College London War Studies), around 40 years ago; (2) It’s where my dad, Lou Aboulafia, fought in 1944-45 (78th Lightning; Bronze Star and two Purple Hearts); (3) It’s the home of Dr. Evil’s father, from the Austin Powers movies. But now, there’s a fourth: Belgium is the country holding up a massive arms package for Ukraine that had the potential to re-shape European military aircraft producers and even the broader fighter market.
The idea was to use several hundred billion euros/dollars in frozen Russian assets, held in the Euroclear bank in Belgium, as collateral for a massive interest-free loan to buy weapons for Ukraine. The loan would be repaid as war reparations by Russia after some kind of peace settlement was signed. Seeing the opportunity to create an all-new air force (and to create a political and industrial constituency to help lobby for the loan’s approval), Ukraine placed conditional orders for 100 Dassault Rafales and 100-150 Saab Gripens, along with French SAMP/T air defense systems.
A majority of the 27 EU member countries (including France and Germany) backed this plan. But on December 19, after several months of negotiation, with success at times looking imminent, the idea failed. “In the very probable event Russia is ultimately not officially the losing party, it will, as history has shown in other cases, be legitimately asking for its sovereign assets to be returned,” said Belgian Prime Minister Bart De Wever. I’d like to think he said that in a Dr. Evil voice.
The failed plan was replaced by something much less ambitious and even by financial transaction standards kind of Rube Goldberg-like. The EU agreed to use its own budget to back a 90 billion euro ($105 billion) loan, which won’t need to be paid back unless Russia pays reparations. This will be provided over two years. It is enough to keep Ukraine in the fight – more drones, artillery shells, whatever else – but not enough to buy anything ambitious (like 250 Rafales and Gripens). US financial assistance has fallen to nothing, so this EU aid process will likely be repeated.
European countries might view this EU loan as a template. If the EU can loan money for weapons, why couldn’t Sweden, say, create loans to be used for Ukraine to buy Gripens? It doesn’t sound impossible, although if was easy it probably would have been tried already.
Also, the EU’s failure doesn’t mean the frozen Russian asset plan can’t be tried again. It’s possible that the Belgians can be indemnified against post-war Russian claims, although the European Central Bank has so far refused to provide any backstop financing. Or perhaps the entire process could take a different route.
Consider the big picture here: in response to the Russian threat and the risk of the US abandoning its allies, Europe has succeeded in ramping up its defense spending. But budget and debt limitations, and domestic politics, impose restrictions on re-armament plans. Accessing several hundred billion euros in Russian cash would benefit Ukraine (and therefore European defense) and provide a huge boost to Europe’s arms industries.
However, a further complication is that the November Trump administration peace proposal, which somehow made Neville Chamberlain look like Genghis Khan, includes its own plan for the frozen Russian cash: Per Point 14 of the Munich 1938 2.0 scheme: “$100bn in frozen Russian assets will be invested in US-led efforts to rebuild and invest in Ukraine; The US will receive 50 percent of the profits from this venture.” In other words, nothing for European defense, and also a clear warning to the Belgians to be careful about what they do with those Russian assets.
European defense budgets and weapons production will continue to head up, as will European defense company stock prices. But this will need to be funded the old fashioned way: taxes, debt, budgetary compromise. Finding a pile of cash in a Belgian vault is not the baseline scenario.
One final thought. If the Trump administration and the Pentagon were sincere about military transformation (that is, if it wanted to do more than release performative videos on the subject, like this, or this), it would arrange for a drone experience-for-weapons program. Ukraine has learned more about drone warfare than anybody. In exchange for all of that operational knowledge, and further joint testing efforts, the US would resume providing weapons aid, with F-16s possibly providing the basis for a future Ukrainian air force, rather than Rafales or Gripens. I’m betting this won’t happen either.
My best for the holidays and the new year.
Yours, ‘Til World Liberty Financial Issues Frozen Russian Asset-Based Cryptocurrency,
Richard Aboulafia