After a tense day of negotiations, the European Union has dropped its plan to sequester Russian assets. Belgian Prime Minister Bart De Wever, a stubborn opponent of the deal, stuck to his red lines to the very end. Instead, the EU will now raise a €90 billion eurobond against its budget — a mechanism similar to that of the recovery fund. The official line is that this is only a temporary funding arrangement, and that the sequestration scheme has not been formally dropped. But this is just an attempt to save face. The obstacles to the sequestration were not technical but political: you either agree to share the risks, or you don’t. The EU chose not to, and Belgium objected.

There was a sense that something was going to shift last night when Hungarian PM Viktor Orbán posted a picture of himself, Slovakian premier Robert Fico and Czech counterpart Andrej Babiš, with the cryptic headline “Back in business”. The three held the key to unlock talks by accepting the idea of the eurobond. German Chancellor Friedrich Merz had spent the last few days telling everybody that the sequestration scheme had no alternative, on the grounds that Orbán would block a eurobond. What happened during the informal get-together of the “Visegrád Three” is that they agreed to drop their veto for as long as their countries were exempted from the liabilities of the loan. It is another dirty EU deal, but it was the compromise which worked in the end.

The €90 billion will cover Ukraine’s estimated budget deficit for two years, but this is not enough money for Kyiv to turn looming defeat into victory. The original idea was to have a much bigger loan, of over €200 billion, backed by the Russian assets. What happened last night was reminiscent of the innumerable European Council meetings during the sovereign debt crisis, when officials always ended up agreeing the minimum to stop the euro area from collapsing.

Ultimately, the purpose of the now-defunct asset sequestration scheme was to frustrate the Trump administration’s peace efforts. The White House knew that, of course, and pulled its diplomatic strings in the background. Under the published drafts of the US peace deal, the Russian assets held in Europe would be unfrozen and serve as the base equity for a private-sector investment vehicle that invested in Ukraine. That is still the base case scenario going forward.

Now that it is the EU’s own money at stake, the Europeans will become more supportive of the US-led peace talks. France’s Emmanuel Macron said after the meeting that it would be useful for the EU to re-engage with Vladimir Putin after a diplomatic freeze of over three years. At present, in his view, the Europeans are mainly talking amongst themselves. This became painfully clear at this week’s meetings in Berlin, when continental leaders clumsily injected themselves into the peace talks. They had no constructive proposals of their own, just a reiteration of their red lines. Evidently, they thought the asset sequestration scheme would give them a prominent role.

The scheme came straight from the playbook of structured finance. It would have been a loan secured on revenues resulting from a legal proceeding that has not even started, and which may never see the light of day. The incontrovertible fact is that the sequestration of sovereign assets is illegal under international law: no matter how clever you make your scheme and how much you try to hide the risk, the ultimate financial reality remains the same. Belgium is a small country with a big liability, and it’s perfectly normal that it would want to hedge its risks — just as everybody else did in refusing to grant unlimited guarantees.

This is an edited version of an article which originally appeared in the Eurointelligence newsletter.

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Wolfgang Munchau is the Director of Eurointelligence and an UnHerd columnist.

EuroBriefing

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