As Ukraine loses ground, allies are debating how to squeeze money for Kiev from frozen Russian assets

Frankfurt, Germany — Ukraine's allies are grappling with how to squeeze money from frozen Russian assets to support Kiev's war effort, a debate that is becoming increasingly urgent as Russia gains ground on the battlefield and the prospects for Ukraine's state finances look shakier.

What to do with Russia's central bank reserves frozen in response to the invasion of Ukraine is top of the agenda as financial officials from the Group of Seven wealthy democracies meet Thursday through Saturday in Stresa, Italy, on the shores of the picturesque Lake Maggiore.

The issue: While Ukraine and many of its supporters have called for the confiscation of $260 billion in Russian assets frozen outside the country following the Feb. 24, 2022, invasion, European officials have resisted, citing legal and financial stability. Most frozen assets are located in Europe.

Yet a European plan to just tap interest on Russian funds would generate only a trickle of money each year – about $2.5 billion to $3 billion at current interest rates. That would barely meet one month's financing needs for the Ukrainian government.

U.S. Treasury Department officials and outside economists are proposing ways to turn that annual trickle into a much larger chunk of cash. This could be done through a bond that would be repaid with future interest income, giving Ukraine the money immediately. The ministers will meet with Ukrainian Finance Minister Sergii Marchenko on Saturday.

U.S. Treasury Secretary Janet Yellen said Monday during a speech in Frankfurt, Germany, that “it is vital and urgent that we jointly find a path forward to unlock the value of Russian government bonds in our jurisdictions for the benefit of Ukraine .”

The debate is being revived after President Joe Biden signed into law the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act in April, which would allow the government to seize the roughly $5 billion in Russian state assets in the U.S. . The law was included in the US aid package for Ukraine and other countries, which includes about $61 billion for Ukrainian defense.

Ukraine spends almost all its tax revenue on the military and needs another $40 billion a year to continue paying old-age pensions and the salaries of doctors, nurses and teachers – the glue that holds society together under dire war conditions. It was initially thought that support from allies and a $15.4 billion loan from the International Monetary Fund would secure the budget for four years, but the prospects of a protracted conflict have made the outlook bleaker.

Ukraine depends on its allies for that money because the war prevents the government from accessing loans on the international bond market. The alternative would be to print money at the central bank, which risks creating hyperinflation.

Thanks to EU support and the US aid package, which was adopted after months of delays, this year's budget looks “decent in terms of budget financing”, but “next year will be much more challenging”, says Benjamin Hilgenstock , senior economist at the Kiev. School of Economics Institute.

Ministers will try to reach consensus ahead of the G7 national leaders' summit in Italy on June 13.

Yellen will also speak during the three-day meeting about China's excessive state-backed production of green energy technology, which the US sees as a threat to the global economy. It's been just over a month since she traveled to China to speak to her counterparts in Guangzhou and Beijing about the country's massive subsidies for electric vehicles, batteries, solar equipment and other products.

Since then, the US has imposed major new tariffs on electric vehicles, semiconductors, solar energy equipment and medical supplies imported from China. Included is a 100% tariff on Chinese-made electric vehicles, intended to protect the U.S. economy from cheap Chinese imports.

A Treasury spokesman, who spoke on condition of anonymity to preview the meetings, also said the finance ministers would also discuss humanitarian aid to Gaza, and would use bilateral meetings to discuss through proxies the Iran's destabilizing actions in the Middle East.

The G7 are: Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. Representatives of the European Union also participate, but the EU does not serve as one of the annually changing chairs.

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Follow AP's reporting at https://apnews.com/hub/russia-ukraine

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