Published: Thursday, May 23, 2024
FRANKFURT (Germany) — The question of what to do with the Russian Central Bank Reserves that were frozen as a response to the invasion of Ukraine was at the forefront of the agenda when finance officials of the Group of Seven Rich Democracies met in Stresa on the picturesque shores of Lago Maggiore, Italy.
Ukraine and its supporters want to confiscate $260 billion of Russian assets that were frozen outside of the country following the invasion of February 24, 2022. European officials, however, have refused to comply citing concerns about legal and financial stability. Most of the assets that have been frozen are in Europe.
If the Europeans were to use only the interest from the Russian funds, they would be able to provide a trickle every year – about $2.5 billion to $3 billion at the current interest rate. This would barely cover the Ukrainian government’s monthly financing needs.
U.S. Treasury officials, as well as economists from outside the country, have proposed ways to convert this annual trickle of cash into a larger lump sum upfront. This could be done through a bond which would be repaid from future interest income. Ukraine would then receive the money instantly. On Saturday, the ministers will meet with Ukrainian Finance Ministry Sergii Marchenko.
At a press conference held Thursday in Stresa, U.S. Treasury secretary Janet Yellen stated that “securing Ukraine’s long-term position requires unlocking value from immobilized Russian assets.” “We support the EU decision to use the windfall profits generated by these assets. But we must continue our collective efforts on more ambitious solutions.”
She stated that $50 billion was “mentioned as a number that could be reached” with the assets but that the exact approach is still being discussed.
After President Joe Biden signed the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act in April, the debate about the Russian assets has been revived. The act allows the administration the ability to seize approximately $5 billion worth of Russian state assets in the U.S. The law was part of the U.S. assistance package for Ukraine, as well as other nations. This included approximately $61 billion in defense funding for Ukraine.
The exact purpose of the Russian assets’ income is still unclear, but Kyiv’s state budget remains a key concern. Ukraine spends nearly all of its tax revenues on the military. It needs an additional $40 billion per year to pay for old-age pensions, salaries for doctors, nurses and educators and continue to fund the society in wartime. The IMF loan of $15.4 billion and support from its allies were initially believed to be enough to cover the budget for the next four years. However, the prospect of an extended war has dimmed the outlook.
Ukraine is dependent on its allies to provide this money, as the war prevents the government from borrowing international bonds. Alternative would be to print money at the central banks, which could lead to hyperinflation.
The budget for this year “looks decent” in terms of funding, but next year will be “much more difficult,” according to Benjamin Hilgenstock. Senior economist at the Kyiv School of Economics Institute.
Ministers will try to reach a consensus before the G7 summit, which takes place in Italy from June 13-15.
Yellen also plans to bring up China’s massive, state-backed productions of green energy technologies, which are seen by the U.S. as a threat to global economic growth. It’s been just over a month since Yellen visited China to discuss with her counterparts at Guangzhou and Beijing the massive subsidies that China offers to electric vehicles, solar energy equipment, and batteries.
Since then, the U.S. imposed new major tariffs on imported medical supplies, solar equipment, semiconductors and electric vehicles from China. The tariffs include a 100% tax on Chinese-made EVs. This is meant to protect U.S. businesses from cheap Chinese imports.
Read More: Russian attacks on Ukraine power grid touch Kyiv with blackouts ahead of peak demand
Yellen stated that the issue of Chinese overcapacity is not only a concern for the U.S., but also other G7 countries and developing nations. She said that China’s low-priced products threaten the existence of other companies in the world. She said, “We don’t want to be totally reliant on China for these goods.”
“We must stand united and send a message to China to let them know that this is not just a feeling of one country, but they will face an opposition wall to the strategy they are pursuing.”
Yellen stated that the finance ministers will also discuss humanitarian assistance for Gaza and she would encourage other member countries to join in strengthening sanctions on Iran due to its support of terrorist organizations.
The G7 gathers annually to discuss issues such as security and energy, and coordinate their economic policies. Canada, France Germany Italy Japan, United Kingdom, and the United States are its members. The European Union is represented, but it does not rotate as a chair.
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