Stealing $140 billion in Russian assets won't change the outcome of the war in Ukraine

Better for EU leaders to accept this now although, of course, they won't.

Caught between a rock and a hard place, European leaders continue to deny the obvious realities of the dire situation in Ukraine, which will only worsen over time. Yet I see no evidence of any willingness to change course, despite the obvious political hazard they face and the increasingly grim forecast for Europe and for Ukraine should they continue to push an unwinnable war.

The war in Ukraine is now entirely dependent on the ability of European states to pay for it at a cost of at least $50bn per year, on the basis of Ukraine’s latest budget estimate for the 2026 fiscal year. Ukraine itself is bankrupt and has no access to other sources of external capital, beyond that provided by the governments sponsoring the ongoing war.

That then brings the conversation back to the expropriation of $140bn in assets currently frozen in Belgium which the Commission would like to use for a reconstruction loan. The term ‘reconstruction loan’ is itself disingenuous, on the basis that any expropriated Russian assets would not be used for reconstruction, but rather to fund the Ukrainian war effort. Indeed. Chancellor Merz of Germany recently suggested that the fund could allow Ukraine to keep fighting for another three years.

The most likely scenario, in the terrible eventuality that war in Ukraine did continue for another three years is that the Russian armed forces would almost certainly swallow up the whole of the Donbass region – comprising Donetsk and Luhansk oblasts. This – Ukraine’s departure from the Donbas - appears to be the basis of President Putin’s conditions for ending the war now, together with a Ukrainian declaration of neutrality and giving up any NATO aspirations. More likely, the Russian Armed forces might also capture additional swathes of land in Zaporizhia and Kherson oblasts, and also in Dnipropetrovsk, where they have made recent incursions.

So, there is a strong likelihood, at the currently slow pace of the war effort in which Russia claims small pieces of land on a weekly basis, that three years from now Ukraine would have to settle for a peace that was even more disadvantageous to it than that which is available now, having lost more land, together with potentially hundreds of thousands of troops killed or injured.

Logically, European policymakers would be able to look into the future to see this grim predicament with clear eyes and encourage Zelensky to settle for peace now.

But European policy is driven by two key considerations. Firstly, an emotional belief that an extended war might so weaken Russia that President Putin was forced to settle on unfavourable terms. The idea of a strategic defeat of Russia – which is often spoken by European politicians – however, doesn’t bear serious scrutiny.

Russia doesn’t face the same considerable social and financial challenges that Ukraine faces. Its population is much larger and a wider conscription of men into the Armed forces has not been needed – Russia can recruit sufficient new soldiers to fight and, indeed, has increased the size of its army since 2022. Ukraine continues to resort to forced mobilisation of men over the age of 25, often using extreme tactics that involve busifying young men against their will from the streets.

Critically, Russia could likely continue to prosecute the war on the current slow tempo for an extended period of time without the need for a wider mobilisation of young men, which may prove politically unpopular for President Putin domestically. Yet, the longer the war continues, Ukraine will come under increasing pressure, including from western allies, to deepen its mobilisation to capture young men below the age of 25 to shore up its heavily depleted armed forces on the front line.

There has been considerable resistance to this so far within Ukraine. Mobilising young men above the age of 22 would prove unpopular for President Zelensky but it would also worsen Ukraine’s already catastrophic demographic challenge: 40% of the working age population has already been lost, either through migration or through death on the front line and that number will continue to go south, the longer the war carries on.

Russia’s financial position is considerably stronger than Ukraine’s. It has very low levels of debt at around 15% of GDP and maintains a healthy current account surplus, despite a narrowing of the balance in the second quarter of 2025. Even if Europe expropriates its frozen assets, Russia still has a generous and growing stock of foreign exchange reserves to draw upon, which recently topped $700bn for the first time.

Russia’s military industrial complex continues to outperform western suppliers in the production of military equipment and munitions. In the currently unlikely event that Russia started to fall into the red in terms of its trade – what commentators in the west refer to as destroying Russia’s war economy – it would still have considerable scope to borrow from non-western lenders, given the strength of its links with the developing world, aided by the emergence of BRICS.

Ukraine is functionally bankrupt because it is unable to borrow from western capital markets, on account of its decision to pause all debt payments. With debt expected to reach 110% in 2025, even before consideration of any loan backed by frozen Russian assets, it depends entirely on handouts from the west. Ukraine’s trade balance has continued to worsen throughout the war, reinforcing its dependence on capital injections from the west to keep its foreign exchange reserves in the black.

So while the determination of Ukraine to fight is unquestionable, the emotional belief in the west that this will overcome the enormous social and economic challenges the country faces in an extended attritional war with Russia is wildly misplaced.

So, let’s look at the rational explanation for Europe’s continued willingness to prolong the fight in Ukraine. The uncomfortable truth is that Europe’s political leaders have boxed themselves into this position because of a hard boiled determination not to concede to Russia’s demands in any peace negotiations. Indeed, there is a steadfast and immovable objection to talking to Russia at all, which has been growing since 2014.

However, across much of Europe, the political arithmetic is turning against the pro-war establishment with nationalist, anti-war parties gaining ground in Central Europe, Germany, France, Britain and even in Poland. And despite positive overtures made by President Trump towards negotiation with President Putin, Trumpophobia provides another brake on the European political establishment shifting its position.

So, changing course now and entering into direct negotiations with Russia would have potentially catastrophic consequences, politically, for European leaders, which they must surely be aware of. A full 180 degree change in diplomatic course by Europe would require an acceptance that the war against Russia was unwinnable, and that Russia’s underlying concerns – namely Ukrainian neutrality – would finally have to be accepted as a political reality.

On this basis, European politicians would face the prospect of explaining to their increasingly sceptical voters that their strategy of defeating Russia had failed, having spent four years of war saying at all times that it would eventually succeed. And that would lead potentially to internationalist governments falling across Europe starting in two years when Poland and France will again go to the polls, and in 2029 when the British and German governments will face the voters.

There are deeper issues too. An end of war would accelerate the process of admitting Ukraine into the European Union with potentially disastrous consequences for the whole financial basis of Europe. The European Commission will face the prospect of accepting that a two-tier Europe is inevitable, admitting Ukraine as a member without the financial benefits received by existing member states; for probably understandable reasons, this would cause widespread resentment within Ukraine itself, having sacrificed so much blood to become European, precipitating widespread internal dissent and possibly conflict in a disgruntled country with an army of almost one million. Alternatively, the European Commission would need to redraw its budget and face huge resistance from existing Member States, who would lose billions of Euros each year in subsidies to Ukraine.

Caught between hoping for a strategic defeat of Russia which any rational observe can see is unlikely, and accepting the failure of their policy, causing a widespread loss of power and huge economic and political turmoil, Europe’s leaders are choosing to keep calm and carry on. If they had any sense, the likes of Von der Leyen, Merz, Starmer or Macron would change tack and pin their hopes on explaining away their failure before the political tide in Europe evicts them all from power. But I see no signs of them having the political acumen to do that. So we will continue to sit and wait, while storm clouds grow ever darker over Europe.