In recent weeks, the issue of confiscation of Russian frozen assets has been discussed globally. Yesterday, Reuters published a story with an alternative scenario – the issue of “reparation bonds” to be secured by future reparation payments to Ukraine from the Russian Federation for damages caused by armed aggression. The efficiency rate of this mechanism and related challenges – Ruslan Vogel, international economist, commented for the Dnistrianskyi Centre

The idea of “reparation bonds” is not bad as such. They will be military bonds of Ukraine acting as collateral for future reparations for the aggression of the Russian Federation against Ukraine if ever paid. The advantage of this approach is that creditors will not “seize” directly the frozen international reserves of the Central Bank and the Government of the Russian Federation. It means that the bonds will be secured not by reserves, but by future reparations. And if there is no actual payment of reparations on the part of the Russian Federation, then its international reserves will be used.

This plan is acceptable for the USA and the European Union as it does not undermine the USD and EUR stability as reserve currencies.  The concern about the possible impact of the confiscation decision or other use of Russian assets is one of the main counterarguments filed by leading financial institutions, including the European Central Bank.

This plan can be supported by private financial institutions that could act as underwriters of the bond issue, for example, the Rothschild and Co. Bank, as already happened during the Napoleonic Wars and both World Wars.

However, the solution has its disadvantages, the main of which are the following. The first, economic disadvantage, will be high interest rates. They are influenced by two factors.

First of all, such “reparation bonds” issue will happen without known precedent. Therefore, to make them attractive to investors (apart from the discounted price mentioned in the Reuters article), their rates are likely to be quite high. Potentially, this may lead to additional costs for Ukraine when paying them off.

Second, Ukraine has currently frozen its payments on domestic government loan bonds. Officially, this was by agreement with creditors, but in fact, it was the result of an ultimatum set to Ukraine by allies and international financial institutions.

However, the rate level depends on this decision's legal basis, which poses the next challenge. So that such rates become a reality, a decision obligating Russia to pay reparations after the war is required. In that case, if Russia refuses to pay reparations and no other ways to collect them are found, the “reparation bonds” will be repaid at the expense of the international reserves of the Russian Federation.

Such a decision is the main prerequisite, otherwise, it will seem as if Ukraine has started to borrow money on the world market secured by a construct without any approval.  It can be taken by the Group of Seven (G7) as the issue of the Russian assets confiscation discussed within this association has been widely reported by the media in recent weeks.

The format of this decision adoption and the level of its approval will depend on the bond interest rates and the subsequent economic scenarios of this plan. Creditors will take it that otherwise the bonds will be repaid by Ukraine, namely, by the population of Ukraine, which is currently about 29 million people with less than 10 million of working-age persons. It will be difficult to find bond buyers under this scenario, and interest rates will be very high, which will make the plan economically unprofitable for Ukraine.

On the other hand, if the government is faced with the issue of the state's existence and its comprehensive functioning, interest rates on “reparation bonds” are not a priority problem. The attraction of up to USD 300 billion on international markets eliminates the catastrophic dependence on the decisions taken by individual governments of the EU countries or domestic political issues in the United States.