Considerations on COM(2024)426 - Ukraine Loan Cooperation Mechanism and providing exceptional macro-financial assistance to Ukraine

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dossier COM(2024)426 - Ukraine Loan Cooperation Mechanism and providing exceptional macro-financial assistance to Ukraine.
document COM(2024)426 EN
date October 24, 2024
 
table>(1)Since the beginning of Russia’s unprovoked and unjustified war of aggression against Ukraine on 24 February 2022, the Union, its Member States and European financial institutions have mobilised unprecedented support for Ukraine’s economic, social and financial resilience. That support combines support from the Union budget, including exceptional macro-financial assistance and support from the European Investment Bank and the European Bank for Reconstruction and Development, fully or partially guaranteed by the Union budget, as well as further financial support by Member States.
(2)The provision by the Union of macro-financial assistance of up to EUR 18 billion under Regulation (EU) 2022/2463 of the European Parliament and of the Council (2) was considered an appropriate response to Ukraine’s financing gap for 2023 and helped to mobilise significant financing from other donors and international financial institutions. It constituted a major contributing factor to Ukraine’s macroeconomic and financial resilience at a critical time.

(3)On 29 February 2024, Regulation (EU) 2024/792 of the European Parliament and of the Council (3) established the Ukraine Facility as an exceptional medium-term instrument that brings together the bilateral support provided by the Union to Ukraine, ensuring coordination and efficiency (the ‘Ukraine Facility’). Over the period 2024 to 2027, the Ukraine Facility helps address Ukraine’s financing needs and contributes to its recovery, reconstruction and modernisation needs, while at the same time supporting Ukraine’s reforms effort as part of its path towards accession to the Union. The Ukraine Facility has put into action the Union’s unwavering commitment to providing continued financial support to Ukraine and its people.

(4)Russia’s war of aggression against Ukraine has caused tremendous damage in Ukraine, with estimated recovery and reconstruction costs of USD 486 billion as of 31 December 2023. Moreover, Ukraine has lost access to international financial markets and experienced a significant drop in public revenue, while public expenditure has increased substantially. Against that background, substantive funding needs for the coming years can be foreseen.

(5)On 30 March 2023, the International Monetary Fund (IMF) agreed with Ukraine a USD 15,6 billion four-year programme under the Extended Fund Facility (EFF) to sustain economic and financial stability at a time of exceptionally high uncertainty, restore debt sustainability, and promote reforms that support Ukraine’s recovery in the post-war period. The IMF programme, together with financing assurances from the G7 Leaders, the Union and other donors, is designed to address Ukraine’s balance-of-payments financing needs and restore medium-term external viability. To date, Ukraine has successfully completed four programme reviews under the EFF, thus underscoring the Ukrainian authorities’ steadfast commitment to conducting reforms and prudent policy-making. The baseline total financing gap over the IMF programme period is estimated by the IMF at USD 121,9 billion.

(6)In view of the exceptionally elevated uncertainty surrounding the outlook regarding the situation in Ukraine, on the occasion of the fourth programme review under the EFF, the IMF presented an updated downside scenario which factors in the economic shock resulting from a more intense war running into 2025. As a consequence of the adverse impact on economic sentiment, migration, increasing pressure on energy supply, impairment of export capacities, and in particular defence spending, the total financing gap under that downside scenario would risk increasing to USD 140,7 billion over the IMF programme period. Given the continued intensity of the war, and the damage to Ukraine’s critical civilian infrastructure from increased large-scale attacks by Russia, Ukraine needs to mobilise significant additional resources for its budgetary and long-term recovery and reconstruction priorities. As a result and given that a residual financing gap remains over and above the resources already provided by the Union, other donors and international financial institutions, including the IMF, the Union should continue to provide an appropriate response.

(7)The G7 Leaders, in their Communiqué adopted on 14 June 2024 in Apulia, reaffirmed their unwavering support for Ukraine and their strong commitment to helping Ukraine meet its urgent short-term financing needs, as well as to supporting its long-term recovery and reconstruction priorities. To that end, G7 Leaders announced the launch of the ‘Extraordinary Revenue Acceleration Loans for Ukraine’ initiative, in order to make available approximately USD 50 billion in additional funding for Ukraine’s military, budget and reconstruction needs by the end of 2024. G7 Leaders announced their intention to provide financing that will be serviced and repaid by future flows of extraordinary revenues stemming from the immobilisation of Russian sovereign assets held in the Union and other relevant jurisdictions.

(8)In its conclusions of 27 June 2024, the European Council invited the Commission, the High Representative and the Council to take work forward, while addressing all relevant legal and financial aspects, in order to provide additional funding for Ukraine by the end of the year in the form of loans serviced and repaid by future flows of the extraordinary revenues together with G7 partners as discussed by G7 Leaders, to support Ukraine’s current and future military, budget and reconstruction needs. The European Council also stated that, subject to Union law, Russia’s assets should remain immobilised until Russia ceases its war of aggression against Ukraine and compensates it for the damage caused by this war.

(9)In the context of Russia’s continued war of aggression against Ukraine, it is necessary to ensure that Ukraine is provided with sufficient and continuous financial support. To that end, a Ukraine Loan Cooperation Mechanism (the ‘Mechanism’) should be established to provide Ukraine with non-repayable financial support with a view to assisting the country to repay loans provided to support it. The Mechanism should receive resources, including from future flows of the extraordinary profits stemming from Russia’s immobilised assets, and disburse those resources on a regular basis to Ukraine to cover the principal, interest and any other related costs of loans. Furthermore, in order for the Union to directly help Ukraine meet its financing needs, the Union should provide exceptional macro-financial assistance to Ukraine in the form of a loan (the ‘MFA Loan’) to be supported by the Mechanism.

(10)On 21 May 2024, the Council adopted Decision (CFSP) 2024/1470 (4), which amended Council Decision 2014/512/CFSP (5). Decision (CFSP) 2024/1470 states, in recital 28, that the restrictive measures linked to the prohibition of transactions related to the management of the assets and reserves of the Central Bank of Russia should remain in place until Russia ceases its war of aggression against Ukraine and compensates Ukraine for the damage caused by this war.

(11)On 21 May 2024, the Council adopted Regulation (EU) 2024/1469 (6), which amended Council Regulation (EU) No 833/2014 (7). Regulation (EU) 2024/1469 gives effect to certain measures provided for in Decision (CFSP) 2024/1470. Those measures comprise the rules on how the net profits ensuing from the unexpected and extraordinary revenues accruing to central securities depositories as a result of the implementation of the prohibition laid down in Article 1a(4) of Decision 2014/512/CFSP and in Article 5a(4) of Regulation (EU) No 833/2014 are to be directed to support Ukraine, including through Union programmes which are financed from the Union budget, consistent with applicable contractual obligations, and in accordance with Union and international law, in coordination with partners. In particular, central securities depositories holding assets and reserves of the Central Bank of Russia with a total value exceeding EUR 1 million are to make a financial contribution to the Union equivalent to 99,7 % of the net profits stemming from the immobilisation of Russian sovereign assets and accumulating since 15 February 2024.

(12)The financial contribution from the central securities depositories to the Union should be due as long as the restrictive measures linked to the prohibition of transactions related to the management of the assets and reserves of the Central Bank of Russia are in place, and should remain in place until Russia ceases its war of aggression against Ukraine and compensates Ukraine for the damage caused by that war.

(13)On 24 October 2024, the Council adjusted to 95 % the percentage of the amounts of the financial contribution due by central securities depositories to be used to support Ukraine through Union programmes set out in Decision 2014/512/CFSP. On the same date, the Council adjusted the allocation of the amounts of the financial contribution paid to the Union budget as external assigned revenue, set out in Annex XLI to Regulation (EU) No 833/2014, and allocated 100 % of that contribution to the Mechanism. The Union has therefore taken the necessary steps to ensure the continued use of the financial contribution for the Mechanism.

(14)It should be possible to support the Mechanism by providing extraordinary revenues stemming from the immobilisation of Russian sovereign assets held in relevant jurisdictions other than the Union. To that end, it should be possible for third countries or other sources to contribute to the Mechanism. Additionally, it should be possible for Member States to contribute on a voluntary basis towards the Mechanism, in particular from revenues that accrue to the Member State concerned from the immobilisation of Russian sovereign assets. Such contributions should constitute external assigned revenue in accordance with Article 21(2), points (a), (d) and (e), of Regulation (EU, Euratom) 2024/2509 of the European Parliament and of the Council (8) (the ‘Financial Regulation’). Furthermore, it should be possible for third countries to directly use extraordinary revenues stemming from the immobilisation of Russian sovereign assets within their jurisdiction to reduce the repayment needs of any respective bilateral loan provided to Ukraine, thereby supporting the Mechanism by reducing the total level of support that would be required for that loan.

(15)Support under the Mechanism should be available to cover the overall amount of principal, interest and any other related costs of the MFA Loan taken by Ukraine through the signature of an agreement relating to the MFA Loan (the ‘MFA Loan Agreement’), as well as through bilateral loan agreements with bilateral lenders acting under the auspices of the G7 ‘Extraordinary Revenue Acceleration Loans for Ukraine’ initiative as set out in the G7 Leaders’ Communiqué adopted on 14 June 2024 in Apulia.

(16)Support under the Mechanism should be available and provided in a manner that ensures equal access both for bilateral lenders and for the Union. The provision of bilateral loans through an intermediary should not preclude the eligibility of such loans for the purposes of this Regulation. Non-repayable financial support should be allocated to Ukraine to repay the MFA Loan and eligible bilateral loans in proportion to the principal of the respective loan against the sum of the principal of the MFA Loan and all eligible bilateral loans. That allocation should be readjusted once the respective loans, including interest and any other related costs, have been fully repaid by Ukraine, in such a way that any future resources are allocated to remaining loans in proportion to the principal of the MFA Loan or eligible bilateral loan against the sum of the principal of all remaining loans. The principal of each loan should be considered as the initial principal committed in the respective loan documentation and not take into consideration other factors, such as repayments, additional financing or any capitalised amounts.

(17)In order to ensure that bilateral loans provided by bilateral lenders can swiftly and efficiently be supported by the Mechanism, the Commission should assess, and where relevant approve for support, the bilateral loans to be provided by bilateral lenders acting under the auspices of the G7 ‘Extraordinary Revenue Acceleration Loans for Ukraine’ initiative. Where such bilateral loan agreements are in draft form or have not yet entered into force, the Commission should monitor their entry into force. In order to ensure a timely disbursement of bilateral loans to Ukraine, bilateral loan agreements should be submitted to the Commission by 1 June 2025 and should enter into force by 30 June 2025.

(18)The release of support under the Mechanism should be contingent on the conclusion of an agreement between the Commission and Ukraine on the detailed provisions for the implementation of the Mechanism, and on the positive assessment by the Commission of a request for non-repayable financial support submitted by Ukraine. Ukraine should provide the Commission with the necessary information to ensure that the Mechanism supports bilateral loans up to the total amount due to the bilateral lender concerned. Exceptionally, and for duly justified reasons, the Commission could also assess requests for payments from bilateral lenders.

(19)In addition to the support under the Mechanism, an MFA Loan should be provided to support macro-financial stability in Ukraine and to ease Ukraine’s external financing constraints, in particular with a view to covering the country’s financing needs. Given the urgent nature of those financing needs, the MFA Loan should be available before the end of 2024.

(20)The MFA Loan should provide support in the form of a loan of up to EUR 35 billion. In order to cater for the potential requests for support of bilateral loans under the Mechanism whilst ensuring the sound financial management of Union support available under this Regulation, the amount of the MFA Loan should be adjusted taking into account bilateral loans to Ukraine approved as eligible under the Mechanism, together with the principal amount indicated in stated intentions of third countries communicated to the Commission under the auspices of the G7 ‘Extraordinary Revenue Acceleration Loans for Ukraine’ initiative. That adjustment should take place where the total amount of all loans for which support under this Regulation has been sought exceeds EUR 45 billion.

(21)The support to Ukraine under the MFA Loan should be additional and complementary to the Union support provided under the Ukraine Facility. The Commission should, wherever possible, seek to minimise the administrative and reporting burden on Ukraine.

(22)The support to Ukraine under the MFA Loan should be made available under the precondition that Ukraine continue to uphold and respect effective democratic mechanisms, including a multi-party parliamentary system and the rule of law, and to guarantee respect for human rights, including those of persons belonging to minorities. That precondition should also apply to requests for disbursement from the Mechanism as they pertain to the MFA Loan. The same precondition applies to the support provided under the Ukraine Facility and the Commission should conduct its assessment together for the two instruments.

(23)The Commission should duly take into account Council Decision 2010/427/EU (9) and the role of the European External Action Service, where appropriate.

(24)The MFA Loan should be linked to policy conditions to be set out in a memorandum of understanding between the Commission and Ukraine (the MoU). Those conditions should be consistent with the qualitative and quantitative steps contained in the Annex to Council Implementing Decision (EU) 2024/1447 (10), and with any amendments thereto made by the time the MoU is adopted. Additionally, the MoU should include a commitment by Ukraine to promote cooperation with the Union on the recovery, reconstruction and modernisation of Ukraine’s defence industry, in line with the objectives of Union programmes aiming at the recovery, reconstruction and modernisation of the Ukraine Defence Technological and Industrial Base and other relevant Union programmes. The necessary steps should also be taken to ensure coordination and complementarity of the bilateral loans, including the MFA Loan, with the other donors. In that regard, the Ukraine Donor Platform should be used as an already established forum for such exchange.

(25)In order to ensure uniform conditions for the implementation of this Regulation, and for reasons of efficiency, the Commission should be empowered to negotiate such conditions with the Ukrainian authorities under the supervision of the committee of representatives of the Member States in accordance with Regulation (EU) No 182/2011 of the European Parliament and of the Council (11). Considering the potentially significant impact of assistance, it is appropriate that the examination procedure as specified in Regulation (EU) No 182/2011 be used. Considering the amount of the MFA Loan to Ukraine, the examination procedure should apply to the adoption of the MoU, and to any reduction or cancellation of the MFA Loan.

(26)The release of the single instalment under the MFA Loan should be contingent on the positive assessment by the Commission of a request for funds submitted by Ukraine. The assessment of the policy conditions set out in the MoU should be without prejudice to the assessment of the fulfilment of aligned conditions under other Union programmes and instruments.

(27)In view of the principle of sound financial management, and to facilitate the Ukrainian authorities’ liquidity management and ensure predictability, the Commission should ensure that tranches of the MFA Loan are disbursed throughout the course of 2024 and 2025, avoiding to the extent possible significant deviations of disbursed amounts from quarter-to-quarter. The disbursement of those tranches should, where appropriate, be aligned with the timing of disbursements of loan or non-repayable financial support under Pillar I of the Ukraine Facility. Furthermore, it is appropriate to provide for the possibility to reassess the funding needs of Ukraine and to reduce or cancel the support under the MFA Loan if those needs decrease fundamentally during the period of the availability of the support under the MFA Loan as compared to the initial projections.

(28)The MFA Loan Agreement to be concluded between the Commission and the Ukrainian authorities should contain provisions aligned with the rights, responsibilities and obligations provided for in the framework agreement under the Ukraine Facility referred to in Article 9 of Regulation (EU) 2024/792 signed between the Union and Ukraine that entered into force on 20 June 2024. That will ensure that the Union’s financial interests linked to the MFA Loan are protected efficiently, providing the appropriate measures relating to the prevention of, and fight against, fraud, corruption and any other irregularities linked to the assistance. It will also, in accordance with the Financial Regulation, grant the necessary rights and access to the Commission, the European Anti-Fraud Office (OLAF), the European Court of Auditors and, where applicable, the European Public Prosecutor’s Office, including from third parties involved in the implementation of Union funds during and after the availability period of the MFA Loan. Ukraine should also report irregularities in relation to the use of the funds to the Commission, in line with the procedures provided for in the framework agreement under the Ukraine Facility.

(29)In the context of Ukraine’s financing needs, it is appropriate to organise the financial assistance under the diversified funding strategy provided for in Article 224 of the Financial Regulation and established as a single funding method therein, which is expected to enhance the liquidity of Union bonds and the attractiveness and cost-effectiveness of Union issuance.

(30)By way of derogation from Article 31(3), second sentence, of Regulation (EU) 2021/947 of the European Parliament and of the Council (12), the financial liability from the MFA Loan should not be supported by the External Action Guarantee established by Regulation (EU) 2021/947. Support from the MFA Loan should constitute financial assistance within the meaning of Article 223(1) of the Financial Regulation. Given that the financial assistance of the MFA Loan is available in 2024 and is authorised in accordance with Article 223(1) of the Financial Regulation, it is appropriate that the guarantee for the MFA Loan to Ukraine be mobilised over and above the multiannual financial framework (MFF) ceilings and up to the limits of the ceilings referred to in Article 3(1) and (2) of Council Decision (EU, Euratom) 2020/2053 (13) in accordance with Article 2(3) of Council Regulation (EU, Euratom) 2020/2093 (14). When considering the financial risks and the budgetary coverage, no provisioning should be constituted for the support from the MFA Loan, to be guaranteed over and above the MFF ceilings, and, by way of derogation from Article 214(1) of the Financial Regulation, no provisioning rate should be set.

(31)Given the difficult situation of Ukraine caused by Russia’s war of aggression and in order to support Ukraine on its long-term stability path, it is appropriate for the Union to provide the MFA Loan to Ukraine on highly concessional terms with a sufficiently long duration to accommodate the capacities of the guarantee over and above the MFF ceilings.

(32)Union support to Ukraine under this Regulation should be managed by the Commission.

(33)In order to ensure that the European Parliament and the Council are able to follow the implementation of this Regulation, the Commission should regularly inform them of developments relating to Union support to Ukraine under this Regulation and provide them with the relevant documents.

(34)In order to ensure the continued effectiveness of the arrangements established by this Regulation, the Commission should regularly review their adequacy and report to the European Parliament and to the Council thereon, thereby guaranteeing transparency and accountability.

(35)In order to ensure uniform conditions for the implementation of this Regulation, implementing powers should be conferred on the Commission. Those powers should be exercised in accordance with Regulation (EU) No 182/2011.

(36)Since the objectives of this Regulation, namely to provide support to Ukraine to cover its financing needs, in particular by providing concessional short-term and long-term relief in the form of the MFA Loan and of non-repayable financial support under the Mechanism, cannot be sufficiently achieved by the Member States but can rather, by reasons of their scale and effect, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve those objectives.

(37)In view of the urgency entailed by the exceptional circumstances caused by Russia’s unprovoked and unjustified war of aggression, it is considered to be appropriate to invoke the exception to the eight-week period provided for in Article 4 of Protocol No 1 on the role of national Parliaments in the European Union, annexed to the Treaty on European Union, to the Treaty on the Functioning of the European Union and to the Treaty establishing the European Atomic Energy Community.

(38)In light of the situation in Ukraine, this Regulation should enter into force as a matter of urgency on the day following that of its publication in the Official Journal of the European Union,