Europe’s chance to change the war: How to make the most of the reparation loan

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The recent flurry of diplomatic activity after a 28-point framework for halting Russia's war of aggression against Ukraine was made public last week has put Europeans on the defensive once again. Damage limitation is the order of the day. But it does not have to be this way. The EU can change Ukraine's fortunes. It must approve the reparation loan for Ukraine and make sure it counts - not just keeping Ukrainians on financial life support, but arming them with the means to turn the tables.

Speaking in the European Parliament on Wednesday, Commission President Ursula von der Leyen promised to speed up work on a legal proposal underpinning the reparation loan backed by frozen Russian assets held in Europe. The funds would remain formally unseized and returnable to Russia on the condition that, at some point in the future, it pays Ukraine reparations for the extensive damage caused by the war that it initiated. The scheme requires EU Member States to guarantee the loan. Indeed, a mutualised guarantee would create the necessary stability for the sanctions regime while cementing a shared interest in a just peace - which must include reparations paid by Russia.

The reparation loan should be approved by the European Council later in December. By then, amendments to the peace negotiation framework will have made Moscow even less likely to accept it as a basis for negotiations. The Kremlin's interest in peace, unlike that of the White House, remains largely performative. Russia may agree to a ceasefire it can brand as 'peace' for a while, but only on terms that would fundamentally weaken Ukraine. However, while these terms - such as ceding the Donbas- may resonate with Mr Witkoff, convincing the US administration as a whole is another matter. As for President Trump, he appears to be waiting until a nearly complete agreement is hashed out before investing further efforts to finalise the process. More likely than not, therefore, the war will continue, as the Kremlin appears to believe that even without a win on the diplomatic front, the slow erosion of Ukraine's defences and a deepening domestic political crisis place it on a path to victory.

Beyond the least bad option

In this context, the EU should not merely approve the reparation loan. It should reframe how it is conceived: not as the least bad option for covering Ukraine's immediate financial needs, nor as a bargaining chip in future negotiations with Russia, but as one of Europe's last chances to shape the war's outcome in a way that protects the continent's future security.

To achieve this, the loan must be made available as soon as possible, and largely upfront rather than being disbursed in a series of small tranches over time. It should not be made conditional (as is the case with the Ukraine Facility, the current lending instrument) on systemic rule-of-law reforms or anti-corruption measures. These are worthy goals, necessary to bring Ukraine closer to the EU and to restore trust damaged by recent reports of corruption potentially reaching the highest levels of government. However, this particular loan should not try to pursue too many objectives at once. The fund should instead focus on a single, strategic objective: helping Ukraine to change the trajectory of the war.

Three overarching goals should guide its use. First, harden Ukraine's defences by turning the country into more of a 'steel porcupine' while future security guarantees take shape to reinforce Kyiv's deterrence posture. Second, boost morale by investing in Ukraine's severely damaged energy infrastructure. Third, provide for Ukraine's future by channelling a portion of the resources to a dedicated recovery fund, where they would be managed competently to yield solid returns.

Russia will have to be forced into any peace that is not an imperial one.

A new defence fund, equipped with governance arrangements that ensure accountability, should receive the lion's share of the resources. Ukraine should decide how best to invest the funds, but on the basis of agreed rules. These could define indicative shares for spending on European and other off-the-shelf equipment, as well as on government contracts that boost domestic industrial production by building on the tested Danish model. If the price for having Washington on board is a share for US defence sales, especially where Europeans struggle to substitute that supply, so be it. Similarly, part of the loan could be directed towards creating a platform led by the EU and Ukraine, together with the United States and other stakeholders, to build the infrastructure needed for better coordinated development cooperation and future private equity investment. This would be another sensible down payment on the future, from which US businesses would also benefit.

Conversely, Kyiv's macro-financial needs, which the European Commission estimates at €52.3 billion over the next two years, should primarily be covered by other means, such as a replenished Ukraine Facility. It may be tempting to rely on the loan so that the EU does not have to mobilise more of its own resources to support Ukraine's war economy. However, this would dilute the loan's impact.

Buying time is not enough

The reparation loan needs to be underpinned by a clear strategic vision. Russia's economy is a leaky ship. Declining export revenues and persistent inflation will erode it further. However, the political effects of this erosion may take time to materialise. High consumer prices, cuts in social welfare, further levies or other, more radical measures to extract resources for the ongoing war from the population may only bite later. If the loan is designed merely to keep Ukraine afloat, the EU may run out of time before that happens. The EU should therefore engineer the loan in a way that enables Ukraine to seize the initiative and increase pressure on Moscow, while it does more to weaken Russia's wartime economy by assertively targeting its export revenues, alongside other measures the EUISS has put forward in a recent report.

Russia will have to be forced into any peace that is not an imperial one. Europeans have the means to help make that happen. The cost of failing to act now could soon prove crushing.

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• Russia and Eastern Neighbours
• Ukraine
• EU Foreign Policy
• Security and Defence