Русский
The United States House of Representatives cleared two important pieces of legislation over this weekend, both of which will affect Russia. Firstly, approval was given to extend an additional US$61 billion in loans to Ukraine, while the “Rebuilding Economic Prosperity and Opportunity for Ukrainians (REPO) Act approves the diverting of profits from Russian government capital and permits the funds to be given to Ukraine. We discuss these issues and what we see as the implications as follows:
Ukraine’s US$61 billion
In the Ukraine bill, of the US$60.7 billion allocated, a total of about US$23 billion would be used by the US to replenish its own military stockpiles, opening the door to future US military transfers to Ukraine. Another US$14 billion would go to the Ukraine Security Assistance Initiative, (USAI) in which the Pentagon buys advanced new weapon systems for the Ukrainian military directly from US defence contractors. There is also more than US$11 billion to fund current US military operations in the region, enhancing the capabilities of the Ukrainian military and fostering intelligence collaboration between Kiev and Washington; and about US$8 billion in non-military assistance, such as helping Ukraine’s government continue basic operations, including the payment of salaries and pensions.
This money is in the form of loans, not aid. Which means that Ukraine is liable for US$23 billion for the US replenishing its own military stockpiles – which may – or may not – be used to support Ukraine itself. The US$11 billion – again lent to Ukraine – is to pay for the US (not Ukrainian) military support ‘in the region’ while US$8 billion goes towards paying Ukraine’s social responsibilities for the next year.
What actually reaches Ukraine in military support therefore is rather less. This includes US$14 billion as part of the USAI, which is used to purchase US made weaponry, plus whatever the US uses as part of its own military operations. As President Joe Biden has said, “the Ukraine war is good business for the United States.”
What the US has actually done is dump US$61 billion of debt onto an already bankrupt country that will almost certainly be unable to repay it. Kiev will be hoping for ‘debt forgiveness’ later down the line but in reality, what is more likely to happen is that the IMF will have to restructure Ukraine’s debts – which will then be spread around member states to repay. The United States might take a partial haircut, but it will have refunded its own military. Make no mistake, the US$61 billion will mostly be repaid to Washington – by Western members of the IMF. As for the actual amount that Ukraine will receive, it will not be enough to prevent a Russian win. Since January 2022, Western nations have pledged more than US$380 billion in aid to Ukraine, including nearly US$118 billion in direct military aid to Ukraine from individual countries. Pledging and actually giving are somewhat different things, but if we take the US$118 billion in direct military capital as a base line, that equates to just under US$5 billion a month over the past 24 months. With the new money to be spent on supporting Ukraine in the battlefield amounting to either US$14 billion (USAI) or the full US$25 billion (USAI plus the US regional military allocation) this sum will support Kiev based on previous spending, for another 3-5 months only.
So, what is the point? We suspect that this spend – which appears huge but when examined, is not so large, mainly benefitting the US weapons manufacturing sector and its military stockpiles – is to buy time. That means that over the summer we can expect significant frontline activity to try and push Russia back and obtain the best possible hand for commencing negotiations come the late Autumn. After that, with US elections about to take place, it’s anyone’s guess. This means that the current Biden Presidency has bought itself enough time to say it supported Ukraine against Russia to the best of its capability and politically, the Biden administration stood up to Putin and was not defeated. That can be politically powerful post the 2024 US elections, when afterwards, a Moscow victory is almost assured. But it does mean that Ukraine – and Russia – will be in for a tough and bloody summer.
The REPO Act
The cheekily named “REPO” (shorthand for repossession) Act allows US institutions to confiscate billions of dollars’ worth of Russian assets sitting in US banks and transfer them to Ukraine for reconstruction. That was also passed by the US House of Representatives over the weekend. The United States is in possession of about US$6 billion of Russian assets, meaning that the financial implications for Russia are relatively minor, albeit annoying.
However, we believe that this is not the main aim of this Act – which is only an issue if the Biden administration chooses to use it. Instead, we believe that this is a signal to the European Union, who retain a far larger US$293 billion of frozen Russian assets, mainly sitting in banks in Germany, France and Belgium. The aim, in our opinion, is to persuade the EU that as the United States has endorsed such behaviour, then it is OK for the EU to follow and do the same. Philip Zelikow, Botha-Chan Senior Fellow at Stanford University’s Hoover Institution and a former Counselor of the US Department of State has stated very firmly that “Some of the best international lawyers in the world have looked hard at this question. They find the REPO Act’s approach to be sound. And those who have actually analyzed the financial repercussions find positives, not negatives. So, the way is clear to act.”
We see it as American politicians leading EU politicians by the nose to do something completely against EU interests.
Consider firstly the basic risk ratio: the EU has 48 times more frozen Russian assets than the United States does. Should the EU follow Washington and pass similar legislation – and act upon it – it is likely to have an immense impact as concerns international investment attitudes towards the European Union. While much of the media attention has focused on the downside for the United States, this would only become reality should they actually use the REPO Act, while Washington’s reputational risk exposure is limited to a fallout of US$6 billion, which can easily be offset by providing incentives.
The EU however has far greater exposure: US$293 billion is a substantial chunk of money. Touching that and sending it to a third party country (Ukraine) can be expected to lead to capital flight on a global basis. The risk is Europe’s. The impact would drain the EU of reserves and irreparably damage the Euro as a currency. Where would the money fly to?
Interestingly, the three countries where global capital has been moving to during 2024 are the United States, the United Kingdom, and Japan, as their liquidity, transparency and pricing have propelled them to be the top destinations for global cross-border capital.
All the US and UK have to do is say to the Europeans ‘its ok to use frozen Russian capital’ – which has effectively just happened. But if European politicians follow that advise and act upon it – London will re-emerge as a post-Brexit safe haven and financial centre again, while the US will be largely untouched – as long as they don’t actually touch Russia’s capital. But now the temptation is for the Europeans to do just that. The US REPO Act is aimed at Europe, not Russia. It’s about the fiscal control of Europe.
The US capital flight risk and de-dollarisation issue is not therefore an immediate issue today, although the REPO Act is about to be signed into law. Any minor fall-out over the US$6 billion can be covered. But this doesn’t mean the United States is out of the woods either. The much-anticipated de-dollarisation issue will occur as and when the United States defaults on its debt. That is currently standing at US$34.6 trillion and is another reason Washington pushed the Ukrainian US$61 billion onto Kiev’s books. That is about 40% of Ukraine’s annual GDP. President Zelensky meanwhile has reportedly replied with thanks.
