Compensation to Ukraine and Ukrainians for the losses caused by Russian aggression may become the largest reparations process since the World Wars. Yet a key question remains unresolved: how to finance future compensation payments. As experts directly involved in the creation and operation of the compensation mechanism have acknowledged, it cannot be considered entirely successful “without appropriate funding for paying awards.”

In the absence of Russia’s consent to pay reparations, and with other potential financing mechanisms still unimplemented, the only tangible source remains approximately $300 billion in reserves of the Central Bank of the Russian Federation, which have been frozen in countries that imposed sanctions in response to Russia’s full-scale aggression against Ukraine.

Amid shifting policy priorities under the new U.S. administration, the risk of these assets remaining indefinitely frozen is increasing. This heightens the urgency of their confiscation and the need to accelerate the search for practical solutions.

However, it is still far from guaranteed that these reserves will be used to finance reparations for Ukraine. Recent suggestions that they could be diverted for other purposes risk undermining efforts to secure meaningful compensation for the damage caused by Russian aggression.

General Framework for the Confiscation of Russian Assets

In the three years since the start of the full-scale invasion, significant progress has been made in utilizing frozen Russian assets in the interests of Ukraine. Particularly, in 2024, Ukraine began receiving proceeds from immobilized Russian assets accrued from the placement of these assets in deposit bank accounts.

Additionally, in July of 2024, the G7 countries agreed to provide Ukraine with a so-called “reparation loan” (Extraordinary Revenue Acceleration, or ERA Loans) in the amount of $50 billion. This loan is secured by the proceeds generated from the frozen assets and is expected to be repaid using that revenue in the future.

However, the ultimate confiscation of the assets themselves remains a key unresolved issue regarding their long-term use.

The legal basis for such confiscation is generally clear and was outlined in a memorandum by a group of international lawyers and experts published in early 2024. This document affirms that the confiscation of assets can be carried out as a collective countermeasure against Russia, a state that has violated the international legal order- much like the sanctions already imposed. Since those sanctions have not achieved their intended objectives, the use of confiscation as a countermeasure is, according to the memorandum's authors, legitimate under international law.

This memorandum currently stands as the most comprehensive and authoritative legal justification for the potential confiscation of Russian reserves.

While punishing Russia for its aggression is a central objective of confiscating the frozen reserves of the Central Bank of the Russian Federation, it is equally important to clearly define the intended purpose or purposes of using these assets. The willingness of the states holding these reserves to proceed with confiscation largely depends on a shared understanding and alignment around these goals.

Representatives of the Ukrainian government and civil society have put forward various proposals regarding the use of the funds. While the overarching aim - compensating Ukraine for the losses caused by Russian aggression - remains constant, two primary goals are most frequently articulated: the purchase of weapons for the Armed Forces of Ukraine and the financing of post-war reconstruction.

In particular, on November 8, 2024, at a press conference in Budapest, Ukrainian President Volodymyr Zelenskyy statedthat, in the event of the confiscation of $300 billion, Ukraine “will support our people and use this money to buy weapons in all countries of the world.” Similar statements have since been echoed by other representatives of the government and civil society.

While both of these goals - strengthening Ukraine’s defense capabilities and funding post-war reconstruction—are morally justified and emotionally compelling, they also raise a number of legal and political challenges. These challenges make it difficult to regard either area as the optimal use for confiscated Russian assets.

What Are the Challenges?

First and foremost, both proposed uses - military support and post-war reconstruction - raise questions about their legal and political admissibility.

For example, the idea of directing confiscated funds toward the purchase of weapons may face resistance, even in the context of Europe’s de facto remilitarization. For financial institutions such as Euroclear and Clearstream, which together hold approximately $210 billion of the Central Bank of the Russian Federation’s reserves, such an objective could be particularly sensitive from a compliance and regulatory standpoint. Political leaders responsible for decisions on confiscation may also exercise caution, mindful of the potential reputational and political risks involved.

Similarly, the use of these assets for restoration and reconstruction raises its own set of complexities. Such purposes can lead to ambiguities when it comes to the legal justification for confiscation, especially in the absence of a universally accepted post-war framework. There have even been reports suggesting that, during negotiations in Saudi Arabia, Russia proposed using the frozen assets to fund reconstruction—including in temporarily occupied territories. From Ukraine’s perspective, this idea is diplomatically and morally unacceptable.

Secondly, both of these options are likely to be economically disadvantageous for Ukraine. While the states holding the frozen assets may genuinely intend to use them in support of Ukraine, they will also likely seek to ensure that the funds benefit their own national economies. For instance, the funds could be channeled toward purchasing weapons from manufacturers based in those same countries.

A relevant example is the simultaneous announcement of a £2.26 billion allocation under the G7 “reparation loan” initiative (ERA), alongside a separate £1.6 billion loan to Ukraine for the purchase of 5,000 anti-tank missiles from the British arms manufacturer Thales. Although there is no formal connection between the two transactions - and Ukraine’s urgent need for weaponry is unquestionable - this case illustrates how similar logic could be applied to arms procurement funded by confiscated Russian assets.

Likewise, in the context of post-war reconstruction, a substantial portion of the funds is likely to be spent on contracts awarded to European, American, and other international companies. While this may undoubtedly accelerate the rebuilding process, the direct economic benefit to Ukraine - particularly to its domestic industries and labor market - would likely be more limited as it could be.

A third challenge is that such proposals often fail to address the issue of financing compensation for victims of Russian aggression - particularly the compensation to be awarded through an international compensation mechanism. Although Deputy Head of the Presidential Office Iryna Mudra recently described these goals as interconnected - specifically, the “transfer of frozen Russian sovereign assets for the defense of Ukraine and Europe, as well as reconstruction and compensation for victims of Russian aggression” - in practice, the issue of victim compensation is often overlooked or not clearly prioritized.

If this continues, the compensation mechanism may be left without a single, realistically accessible source of funding, calling into question its ability to function effectively in the future.

Why Is It Important to Transfer Assets to an International Compensation Mechanism?

Transferring the frozen reserves of the Central Bank of the Russian Federation - or at least a significant portion of them - to an international compensation mechanism appears to be the most legally, politically, and economically sound course of action. These assets could be allocated to a future Compensation Fund, which, together with the Register of Losses and the Compensation Commission, is intended to form the core of the international compensation mechanism.

Although the establishment of the Compensation Fund is planned by the end of 2027, if the confiscation of assets occurs earlier, interim arrangements can be made to hold the assets in a way that ensures their proper transfer and use in accordance with the mechanism’s objectives.

Importantly, such a decision aligns with the legal framework proposed for the confiscation of Russian reserves, particularly in the form of collective countermeasures. As emphasized in the aforementioned memorandum by international legal experts, the transfer of confiscated assets to a future international compensation mechanism should not be seen as optional - it should be considered an integral and essential component of the confiscation process itself.

Further use of the seized assets of the Russian Federation, according to the authors of the memorandum, is possible within the framework of an international compensation mechanism, to which these assets should be transferred (§§31, 67–68, 78). The purpose of the mechanism, in this case, would be "to ensure the effectiveness of the transfer of funds in compensating Ukraine and others for the injuries they have suffered" and to ensure that the compensation process is "transparent, evidence-based and equitable to all interested parties" (§68).

The use of confiscated Russian assets for purposes outside the institutional framework of the international compensation mechanism risks reinforcing arguments about the alleged “illegitimacy” of such confiscation and could undermine the broader, coordinated efforts to advance this cause.

In contrast, transferring these assets to the international compensation mechanism would provide the confiscation decision with stronger political and moral legitimacy. Of particular significance is the victim-centered approach - already declared and implemented through the work of the Register of Damages for Ukraine - which prioritizes compensation for individuals directly harmed by Russian aggression.

From an economic perspective, this approach may also be more advantageous for Ukraine. Both the state and affected businesses are likely to be among the principal beneficiaries of the mechanism in terms of total compensation received. These funds would be disbursed directly, and in the case of business entities, specific conditions could be introduced to ensure that the funds are used exclusively within Ukraine, creating additional positive impact for the national economy.

Ultimately, the most compelling argument is that transferring the confiscated reserves of the Central Bank of the Russian Federation to an international compensation mechanism would ensure a dedicated and credible source of financing for reparations to the victims of Russian aggression.

Conclusions and Recommendations

We are entering the most critical phase of the process to confiscate the reserves of the Central Bank of the Russian Federation that are currently frozen in Ukraine’s allied states. At this stage, it is essential that the Ukrainian government—together with civil society, the media, and all relevant stakeholders—speaks with a unified and coherent voice regarding the objectives of confiscation.

Diverging narratives and competing proposals regarding the use of these assets risk undermining the formation of a clear, consistent position that international partners can support.

While financing Ukraine’s defense and post-war reconstruction are undoubtedly important priorities, the most justified and strategic use of confiscated Russian assets—from legal, political, and economic perspectives—is to finance reparations through the international compensation mechanism. This approach is not only more defensible, but also aligns with Ukraine’s ongoing efforts to establish a comprehensive and victim-centered reparations framework.

It is equally important to recognize that the total damage caused by the Russian Federation’s aggression likely already exceeds $300 billion. As such, it is vital to begin developing additional instruments to finance reparations, particularly in the absence of Russia’s voluntary consent. One such proposal, recently voiced by Prime Minister Denys Shmyhal, is the introduction of special taxes on Russian energy and raw materials after the war—an initiative that merits serious discussion and thorough analysis.

Ultimately, compensation for Ukraine is not merely a matter of financial recovery—it is a matter of justice for the victims of Russian aggression. While no sum will ever be truly sufficient, we must ensure that available resources are used in the most principled, fair, and effective way possible.

The material was prepared with the support of the International Renaissance Foun-
dation as part of the project “#Compensation4UA/Compensation for war losses for
Ukraine. Phase IV: Addressing Specific Issues to Ensure Compensation.