The G7 nations revealed a strategy on Thursday to deploy frozen Russian assets to finance a $50bn loan for Ukraine, which is striving to repel its neighboring adversary, more than two years into the conflict initiated by Moscow.

Leaders from the United States, United Kingdom, Germany, Italy, Canada, Japan, France, and the European Union disclosed this plan during their annual meeting in Puglia, Italy.

Ukrainian President Volodymyr Zelenskyy, who was present at the summit, praised the initiative as “a vital step towards providing stable support for Ukraine in its war efforts”.

However, in response, Russian Foreign Ministry spokeswoman Maria Zakharova issued a warning of potentially “severe” retaliatory actions from Russia.

Here’s an overview of the frozen assets, the loan structure, and the associated risks for Kyiv and its Western allies:

What are the frozen assets?

Following Russia’s invasion of Ukraine in 2022, many Western countries froze the assets of the Russian Central Bank within their jurisdictions, totaling around $300bn. These assets have been generating approximately $3bn annually in interest, and the US has advocated for utilizing this revenue to aid Ukraine.

The majority of these assets are managed within the European Union.

EU officials argue that the interest generated on these assets is not legally owed to Moscow, thus constituting an unforeseen gain to the holding nations. Nonetheless, transferring the principal frozen assets to Ukraine remains contentious, potentially requiring court approval and posing concerns about international law violations. Typically, frozen assets are regarded as belonging to their original owner, not the country seizing them.

Where are the frozen Russian assets?

Based on central bank data, here is the distribution of most Russian assets frozen overseas in 2022:

• France ($71bn)
• Japan ($58bn)
• Germany ($55bn)
• US ($38bn)
• UK ($26bn)
• Austria ($17bn)
• Canada ($16bn)

How will the assets be used?

The exact procedure is yet to be finalized, but the fundamental concept is: A G7 entity, such as the EU or the US, will secure a $50bn loan from international markets and deliver it to Ukraine.

The interest payments on the loan will be covered using the earnings generated by the seized Russian assets.

Ukraine is projected to utilize these funds for both armament and reconstruction purposes. A report from the World Bank in February estimated that Ukraine’s reconstruction might cost $486bn over the next decade.

When will Ukraine get this loan?

The funds are likely to be available to Kyiv by the end of the year, meaning that there may not be an immediate impact on Ukraine’s war efforts.

However, the loan is envisioned as a long-term support measure. Some analysts believe that US President Joe Biden is pushing this plan amidst his efforts to secure a new 10-year security agreement for training Ukraine’s military. This comes at a politically turbulent time ahead of his potential rematch with Donald Trump, who opposes US financial support for Ukraine, in November.

During his first term, Trump withdrew the US from major international agreements that were key to Obama’s administration, notably the Paris climate accord and the Iran nuclear deal.

Are there risks in the funding plan?

Yes. Should Russia regain access to its assets or if these assets are unlocked during peace talks, the G7 will need alternative repayment methods for the loan. If the frozen assets underperform in generating the required interest due to market volatility, G7 countries will again have to find different sources to fund the loan repayment.

Ursula von der Leyen, President of the European Commission, stated that all G7 members would contribute to the loan, though specifics remain unclear.

European sanctions on Russian assets mandate annual approval by the EU. A single veto, notably from Hungary, a country considered lenient towards Putin, could derail the Ukraine loan plan. Earlier this year, Hungary blocked an EU aid segment to Ukraine.

Additionally, Russia might retaliate by utilizing frozen Western assets in Russia, claimed to be of equivalent value to the $300bn Russian assets frozen in the West, to offset the losses.