Explanatory Memorandum to COM(2024)426 - - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2024)426 - . |
|---|---|
| source | COM(2024)426 |
| date | 20-09-2024 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
The EU is steadfast in its support to Ukraine, whose future lies within the EU. The EU supports Ukraine’s independence, sovereignty and territorial integrity within its international recognised borders and is unwavering in its commitment to provide political, financial, economic, humanitarian, military and diplomatic support1. In light of the escalating Russian aggression, it is necessary to act swiftly to ensure Ukraine has access to the resources it urgently needs. This proposal is designed to ensure the establishment of a new mechanism before the end of this year to mobilise funds for Ukraine and also provides for exceptional Macro-Financial Assistance (MFA) to address those urgent needs.
On 24 February 2022, Russia launched a full-scale military invasion of Ukraine, with devastating consequences for Ukraine and its people. Russia’s recent escalation of its brutal war of aggression against Ukraine confirms its readiness to violate the fundamental rights of Ukraine to independence, sovereignty and territorial integrity within its internationally recognised borders, and to destroy its viability as a State. The bravery, courage and determination shown by the Ukrainian people to defend their country deserve profound respect and gratitude.
The EU, together with its Member States, has unequivocally condemned Russia’s actions and has offered unprecedented support to Ukraine. The EU, its Member States and European Financial Institutions have together provided wide-ranging assistance to Ukraine and its people since the outbreak of the war, amounting to EUR 118 billion. This reflects the EU’s commitment to help Ukraine for as long as it takes and as intensely as needed.
However, Russia’s intensified aggression has increased Ukraine’s financing needs. It is clear that additional sources of funding both from the EU and the international community will be needed. Ukraine’s financing needs for 2025 will outstrip existing projections by the International Monetary Fund (IMF), whose fourth review of the IMF Programme assumed the war would conclude by the end of 2024. This assumption looks increasingly unlikely, and Ukraine’s recently adopted budget declaration, developed in cooperation with the IMF, adds a projected additional USD 12 billion to its financing needs for 2025, bringing the total to USD 38 billion. Whilst Ukraine has been implementing measures to increase revenues and reduce non-essential expenditure, there is now limited room for additional cuts, and little scope for domestic measures to address the additional needs. Further broad-based tax increases could harm economic activity, already at extra risk following ongoing attacks on key energy and other infrastructure, and labour shortages caused by the continued displacement of people and mobilisation of soldiers. Swift financial support is vital to help Ukraine maintain essential state functions, ensure macroeconomic stability and rehabilitate critical infrastructure. These needs come on top of significant requirements for medium-term recovery and reconstruction.
In their summit statement of 14 June 20242, G7 Leaders reaffirmed their determination to continue providing military, budget, humanitarian, and reconstruction support to Ukraine. To this end, G7 Leaders announced the launch of the Extraordinary Revenue Acceleration Loans for Ukraine, to make available approximately USD 50 billion in additional funding by the end of 2024.
The proposal put forward today takes this step forward by ensuring that continued support to Ukraine can come through a collective approach of the international community. This will be enabled by the creation of a mechanism that provides support to Ukraine to service and repay loans from G7 partners alongside a new exceptional MFA loan from the EU.
Leveraging extraordinary revenues to support loans to Ukraine
As part of the sanctions imposed by the EU on Russia in response to its actions in Ukraine, assets of the Central Bank of Russia held by financial institutions in the Member States have been immobilised since February 20223. The assets held in the EU, worth approximately EUR 210 billion, represent the majority of such immobilised assets worldwide. The prohibition of transactions on these assets generates an extraordinary and unexpected cash accumulation on the balance sheets of central securities depositories4. Depending on the level of interest rates, the extraordinary revenues have been estimated at up to EUR 4-5 billion a year.
These unexpected and extraordinary revenues do not constitute sovereign assets, and do not have to be made available to the Central Bank of Russia under applicable rules, even after the immobilisation ends. As they result from the implementation of the restrictive measures5, central securities depositories cannot expect to gain from them.
Council Decision (CFSP) 2024/5776 provided for measures applying from 15 February 2024, laying down rules for the setting aside of the extraordinary revenues stemming from the immobilisation. This was followed in May 2024 by measures for the use of the ensuing net profits for the benefit of Ukraine7. These are currently being used in the form of a financial contribution to support both military and reconstruction objectives. At present, Union restrictive measures provide that 90% of the financial contribution is allocated to the European Peace Facility and 10% to the Ukraine Facility. This reflects Ukraine’s urgent military needs. The relevant rules on restrictive measures allow, however, for a revision of this allocation.
A Ukraine Loan Cooperation Mechanism
In June 2024, the European Council invited the Commission, the High Representative and the Council to take work forward to provide additional funding for Ukraine by the end of the year. In line with the results of the G7 summit, this would take the form of loans serviced and repaid by future flows of the extraordinary revenues. The European Council made clear that this construction was designed to make possible the servicing and repayment not only of an EU loan, but also those of other G7 partners. The European Council also concluded that Russia’s assets should remain immobilised until Russia ceases its war of aggression against Ukraine and compensates it for the damage caused by the war. This represents a commitment to maintain the immobilisation of the assets and therefore the collection of the financial contribution raised on the extraordinary profits, offering a source of funds to service and repay loans of Ukraine until such time as compensation from Russia is available to pay off the loans.
The current proposal will support G7 partners in issuing loans to Ukraine in parallel to the EU’s exceptional MFA loan, with a view to reaching the total amount envisaged at the G7 summit. Specifically, this proposal would create a Ukraine Loan Cooperation Mechanism to provide Ukraine with non-repayable financial support to assist it in repaying loans provided by G7 partners. The repayment of the loans would be supported by proceeds from future flows of the extraordinary profits stemming from Russia’s immobilised assets in the Union, as well as being open to other sources, including extraordinary revenues generated in other relevant jurisdictions.
The Ukraine Loan Cooperation Mechanism would disburse these received amounts on a regular basis, so that Ukraine can cover the principal and interest of eligible loans to the EU and other G7 lenders on a pro-rata basis according to the principal of each loan.
Residual risk is carried by each lender for their respective loans. A loan agreement with Ukraine will clarify that once compensation is paid by the aggressor, these funds will ensure repayment of the loans by Ukraine. Since the loans are underpinned by the revenues from the immobilised Russian assets, they will not add to the debt burden of Ukraine.
To operationalise the Ukraine Loan Cooperation Mechanism, the allocation of the amount paid by central security depositories as set out in Council Decision (CFSP) 2024/1470 and Annex XLI to Council Regulation (EU) No 833/2014 will have to be adjusted. The Commission and High Representative are preparing the legal proposals for implementing acts modifying the allocation. Furthermore, in order to smoothen the payment profile of all Union budget support to Ukraine, the Ukraine Facility’s payment schedule may be amended. The Commission is monitoring the total level of financial support to Ukraine and may prepare a proposal to amend this payment schedule as and if necessary.
The coming months will be decisive to demonstrate the collective G7 commitment in the form of such loans, requiring a coordinated international effort and close cooperation among international partners. It is urgent to adopt the proposals before end October, so that the Union loan can be released before the end of 2024 for future disbursements in tranches and allow using the already granted headroom guarantee.
EU financial assistance to Ukraine
This proposal will complement support already under way. The EU, its Member States and European Financial Institutions have together provided over EUR 118 billion in grants and loans supporting the Ukrainian war effort, its economy, helping to maintain basic services and offer early reconstruction, humanitarian assistance and help to those fleeing the war. As part of the military assistance, the EU is providing EUR 6.1 billion in military support through the European Peace Facility, which will increase in 2024 using revenues from immobilised Russian assets. Of the total amount, over EUR 45 billion have been provided or guaranteed by the EU budget in budget support, as well as humanitarian and emergency assistance. This includes EUR 25.2 billion of disbursements under four macro-financial assistance operations to help Ukraine address urgent financing needs, and EUR 12.2 billion in disbursements thus far under the Ukraine Facility.
The EU’s substantial macro-financial assistance to Ukraine in 2022 and 2023 has made a major contribution to Ukraine’s macroeconomic stability. The stabilisation of public finances has allowed Ukraine to maintain essential services for its people, as well as freeing up resources for the imperative of military defence against the Russian aggression. It has also helped to advance the implementation of crucial economic reforms. In 2024, Ukraine’s proven reform track-record paved the way for the adoption of the EUR 50 billion Ukraine Facility, a medium-term instrument to provide Ukraine with a continued, predictable and flexible source of financing to 2027, while ensuring that Ukraine continues essential reforms, particularly in view of its accession path. In this context, the Ukrainian authorities adopted the Ukraine Plan, the overarching reform agenda for the period 2024-2027. Financing under the Facility will help Ukraine to keep its administration running, provide basic public services, and support recovery and reconstruction. The Ukraine Plan contains key reforms and investments that can boost sustainable economic growth and attract investments, to amplify the country's growth potential in the medium-to-long term. In 2024 alone, the Facility is expected to disburse EUR 16 billion under its Pillar I, mainly subject to the timely and successful implementation of the Ukraine Plan measures, making it not only an important source of financing, but also the key framework underpinning Ukraine’s reform efforts.
This proposal provides for exceptional MFA to address the increased needs. This assistance will be delivered in a predictable, continuous, orderly, and timely manner to finance immediate needs, rehabilitate critical infrastructure, and offer initial support for sustainable post-war reconstruction, supporting Ukraine on its path towards European integration. Disbursement will be linked to preconditions and policy conditions to be set out in a Memorandum of Understanding between the Commission and Ukraine (‘MoU’). Those conditions should be consistent with the qualitative and quantitative steps contained in the Ukraine Plan.
The EU contribution through the exceptional MFA will provide fiscal space to Ukraine to make its spending choices according to its most urgent needs, including its recovery and reconstruction as well as its self-defence against Russia’s war of aggression. In that context, it is appropriate that Ukraine takes a commitment to promote the cooperation with the Union on the recovery, reconstruction and modernisation of Ukraine’s defence industry, in line with the objectives of the European Defence Industry Programme (EDIP) and other relevant Union instruments.
To ensure a sound financial underpinning, the MFA loan to Ukraine should (in the same way as the MFA+ instrument and the loan part of the Ukraine Facility which have provided financial support to Ukraine since 2023) be backed by a guarantee from the EU budget headroom, i.e., the budgetary space above the ceiling for payments of the multiannual financial framework (MFF) up to the limit of the own resources ceiling. This would provide a high degree of protection and reassurance to investors, and avoid the provisioning of loans or establishment of national guarantees, without requiring changes to the size or ceilings of the MFF8. Therefore, the decision on the release of the new MFA loan should be taken before the end of this year.
• Consistency with existing policy provisions in the policy area
The support under the MFA operation will be consistent with and complementary to activities financed under Regulation (EU) 2024/7929, Regulation (EU) 2021/94710 and Regulation (EC) No 1257/9611 in line with the respective objectives, intervention logic and rules of these instruments.
In particular, the MFA loan comes in addition and is complementary to the support provided by the EU under the Ukraine Facility. Specific attention is paid to the consistency and mutual reinforcement of the MFA operation and the implementation of the Facility. Most notably, the release of the MFA loan will be linked to the satisfactory fulfilment of the policy conditions laid down in an MoU, which will be consistent with the qualitative and quantitative steps contained in the Annex to the Council Implementing Decision (EU) 2024/1447 on the approval of the assessment of the Ukraine Plan12, and any amendments thereof until the entry into force of the MoU. Moreover, the sound financial management and control mechanism established under the Ukraine Facility as well as the rights, responsibilities and obligations provided in the Framework Agreement under the Facility that should ensure the Union’s financial interest should be applied for the purpose of the MFA loan.
• Consistency with other Union policies
The support under the Ukraine Loan Cooperation Mechanism will be consistent with the application of restrictive measures (sanctions) against Russia. It will also be consistent with the European Council Conclusions from 27 June 2024, inviting the Commission, High Representative and the Council to take work forward on providing additional funding to 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, to support Ukraine’s current and future military, budget and reconstruction needs.
Furthermore, the candidate status granted by the European Council on 23 June 2022 and the decision by the 14-15 December 2023 European Council to open accession negotiations with Ukraine anchor Ukraine firmly on its European path. This is why the whole EU response in support of Ukraine’s resilience and recovery – including through the Ukraine Loan Cooperation Mechanism and the MFA operation, which will in turn be consistent with and supporting the implementation of the Ukraine Facility – will also contribute to the early phase of Ukraine’s pre-accession process.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
Article 212 TFEU is an appropriate legal basis for financial assistance programmes granted by the Union for third countries, which are not development countries, and is a legal basis that has been used for previous MFA loans.
• Subsidiarity (for non-exclusive competence)
The subsidiarity principle is respected as the need for a common response in providing support to Ukraine on adequate scale cannot be sufficiently achieved by the Member States alone and, by reasons of its scale and effect, can be better achieved by the EU. The main reasons are the fiscal capacity and budgetary constraints faced at the national level and the need for strong donor coordination in order to maximise the scale and effectiveness of the support, while limiting the burden on the administrative capacity of Ukrainian authorities, which is very stretched in the current circumstances. The EU is in a unique position to deliver external assistance to Ukraine to cover urgent financing needs, notably by providing concessional short-term and long-term relief in the form of loans and of non-repayable financial support in a predictable, continuous, orderly and timely manner.
• Proportionality
The Ukraine Loan Cooperation Mechanism and the MFA operation are proposed as a targeted response to the specific circumstances of Ukraine due to the Russian war of aggression.
The continued unprovoked and unjustified military aggression by Russia requires granting of additional financial assistance to Ukraine in line with the objectives and modalities described under this proposal.
The proposed financial support to Ukraine is considered adequate in size, based on the elevated funding needs, while taking into account the high uncertainty of the war circumstances.
The overall amount of funding made available to Ukraine through the exceptional MFA operation and eligible bilateral loans, that will be serviced and repaid by future flows of extraordinary revenues through the Ukraine Loan Cooperation Mechanism, conforms to an initiative by the G7 that ensures broad international burden sharing with partners, and does not go beyond what is necessary for the sought purpose to support Ukraine’s projected budgetary needs.
• Choice of the instrument
A Regulation is the appropriate instrument as it provides directly applicable rules for the implementation of the Ukraine Loan Cooperation mechanism and the macro-financial assistance.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
The proposal follows a series of macro-financial assistance operations provided to Ukraine since 2015. Past ex-post evaluations of previous MFA operations to Ukraine have shown that in general they were highly relevant in terms of their objectives, financial envelope and policy conditions. In particular, MFA operations proved crucial to support Ukraine in addressing its balance-of-payment problems and implementing key structural reforms to stabilise the economy and enhance the sustainability of its external position. They allowed for fiscal savings and financial benefits, and acted as a catalyst for additional financial support and investor confidence. The conditionality attached to the MFA operations was found complementary to the related IMF programmes. It created a politically reinforcing effect that contributed to the mobilisation of the Ukrainian authorities around essential reforms, especially in structural policy areas that are less covered by other international donor programmes.
The MFA+ instrument in 2023 brought total financial support up to the maximum level of EUR 18 billion, which helped Ukraine cover its immediate funding needs in 2023 by means of a stable, predictable and sizeable financial support instrument. This funding was instrumental in maintaining macroeconomic stability and the underpinning reform conditionality allowed for broad-ranging improvements in the country’s structural economic fabric. Notably, this included the strengthening of the independence of the Specialised Anti-Corruption Prosecutor’s Office, an enhancement of the functioning of legal institutions such as through the appointment of a head of the anti-corruption authority and the improvement of the selection process for judges. Moreover, Ukraine improved the bankruptcy and insolvency framework and also made significant advances towards a more efficient energy system and in promoting a better business climate.
• Stakeholder consultations
The proposal delivers on the calls by the international community to remain strongly committed to helping Ukraine meet its urgent short-term financing needs, as well as supporting its long-term recovery and reconstruction priorities. It follows up on the commitment made at the G7 Summit in Apulia on 14 June 2024 to launch “Extraordinary Revenue Acceleration (ERA) Loans for Ukraine”, in order to make available approximately USD 50 billion in additional funding to Ukraine by the end of the year 2024. In the preparation of this proposal, the Commission services have consulted with international financial institutions and other bilateral (including Member States and G7 members) and multilateral donors, with significant expertise, including as regards the Ukrainian economy. The Commission has also been in regular contact with the Ukrainian authorities.
A formal stakeholder consultation could not be carried out due to the urgency of preparing the proposal so that it can be adopted in a timely manner by the co-legislators to render it operational by end of 2024. This will allow to take advantage of opportunities for financing which will expire at the end of 2024, as well as answering the new and growing economic and financial needs caused by Russia’s war of aggression which will have to be met, as well as recovery and reconstruction. The EU will ensure appropriate communication and visibility around the objectives and the actions delivered within the scope of the Ukraine Loan Cooperation Mechanism and the MFA operation, in Ukraine, within the Union, and beyond.
• Collection and use of expertise
The proposal builds on thirty years long experience with macro-financial assistance as well as on experience with Union’s external action support.
The Commission based this proposal on a careful analysis, also building on inputs from international financial institutions and other competent international institutions, of the financial needs and broader macro-financial situation of Ukraine. This includes discussions on a regular basis of the latest projections of Ukraine’s funding needs within international fora, such as the G7 and the Ukraine Donor Platform, as well as continuous direct contact with the Ukrainian authorities.
• Impact assessment
Due to the urgent nature of the proposal, which is designed to provide urgent assistance by the end of the year to a country at war, no impact assessment could be carried out. The ex-ante assessment of needs proposed to be covered by the loans supported under the Ukraine Loan Cooperation Mechanism (including the MFA operation itself) inter alia draw upon recent data from the International Monetary Fund. The support under the MFA operation should build upon the lessons learned from and the achievements of the MFA operations with Ukraine since 2015, including the Emergency and Exceptional MFA operations in 2022 and MFA+ instrument in 2023 in the specific circumstances of the ongoing war. Moreover, the policy conditionality of the MFA loan should be consistent with the steps in the Ukraine Plan and further strengthen incentives for its implementation.
• Regulatory fitness and simplification
The proposal is not linked to regulatory fitness and simplification.
• Fundamental rights
A precondition for granting support under the MFA loan is that Ukraine continues to respect effective democratic mechanisms and its institutions, 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.
The reform-commitment and strong political will by the Ukrainian authorities is a positive sign, in particular as evidenced by the European Council granting candidate status to Ukraine in June 2022 and the European Council decision of December 2023 to open accession negotiations with Ukraine, by the renewed successful completion of the structural policy conditionality attached to the recent MFA operations to Ukraine and the beginning of implementation of the Ukraine Plan. Since the Russian aggression, the Ukrainian authorities have shown an impressive degree of resilience and have remained committed to pursue these reforms in a transparent manner and working towards EU standards and in line with the country’s path towards EU integration.
To that end, the precondition for an MFA operation is considered to be satisfied at present. At the same time, the continuous adherence to this precondition will be further ensured by specific conditions in the future loan agreement for the MFA operation. The same precondition for support is applicable to the implementation of the Ukraine Plan.
4. BUDGETARY IMPLICATIONS
The proposal is fully compatible with the ceilings of the 2021-2027 multiannual financial framework (MFF).
The funding of the Ukraine Loan Cooperation Mechanism requires an adjustment of rules for the allocation of the financial contribution from central securities depositories established under Union restrictive measures. The amounts transferred to the Ukraine Loan Cooperation Mechanism will constitute external assigned revenue in accordance with Article 21(5) of the Financial Regulation. Furthermore, the Ukraine Loan Cooperation Mechanism may be funded by amounts received as additional financial contributions from Member States, third countries or other sources. Such contributions will constitute external assigned revenue in accordance with Article 21(2), point (a)(ii), (d) and (e) respectively of the Financial Regulation.
The exceptional MFA loan will make available support of up to EUR 35 billion in loans in one instalment that is available for release until 31 December 2024. This requires that the relevant conditionalities are met by Ukraine in 2024.
The funds may be disbursed in one or more tranches. The disbursement of all such tranches will take place by 31 December 2025 at the latest.
Further details on the budgetary implications are provided in the Legislative Financial Statement attached to this proposal.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
For the purposes of implementing the Ukraine Loan Cooperation Mechanism, the Commission will enter into an agreement with Ukraine setting out the conditions and obligations to receive and use the non-repayable financial support.
Additionally, the European Union should make the exceptional MFA loan available to Ukraine, thereby contributing to the efforts by Ukraine’s international partners, notably expressed by the G7 Leaders in June 2024 in Apulia, to cover its budgetary needs. The support will contribute to covering the residual external funding gap of Ukraine in 2024-2025 and is planned to be disbursed in one instalment that can be disbursed in several tranches. The release of the instalment will be conditional on the satisfactory fulfilment of policy conditions as agreed in the MoU and referred to in this proposal. The Commission will work closely with the national authorities to monitor relevant developments and the application of the requirements and policy conditions, as agreed in the MoU. The support will be managed by the Commission. Specific provisions on the prevention of fraud and other irregularities, consistent with the Financial Regulation, are applicable, in line with the Framework Agreement concluded under the Ukraine Facility. Additionally, the management and control systems as proposed under the Ukraine Plan established under Regulation (EU) 2024/792 of the European Parliament and of the Council of 29 February 2024 establishing the Ukraine Facility will be applied for the MFA loan.
Finally, the Commission will submit to the European Parliament and to the Council a report on the implementation of the Union’s support to Ukraine under the Ukraine Loan Cooperation Mechanism and the MFA operation, including an evaluation. Not later than 31 December 2027, the Commission will submit to the European Parliament and to the Council an ex-post evaluation report, assessing the results and efficiency of the completed Union’s support under the MFA operation and the extent to which it has contributed to the aims of the support.
• Detailed explanation of the specific provisions of the proposal
Chapter I of the Regulation concerns its general provisions.
Article 1 provides the subject matter of the Regulation, which is the establishment of the Ukraine Loan Cooperation Mechanism and the provision of exceptional macro-financial assistance to Ukraine.
Article 2 provides for the definitions applicable under the Regulation.
Chapter II of the Regulation concerns the Ukraine Loan Cooperation Mechanism.
Article 3 defines the purpose of the Ukraine Loan Cooperation Mechanism.
Article 4 describes the financing of the support under the Ukraine Loan Cooperation Mechanism, including how Member States and interested third countries and parties may contribute to the Ukraine Loan Cooperation Mechanism.
Article 5 describes the available support under the Ukraine Loan Cooperation Mechanism.
Article 6 sets the eligibility criteria against which the Commission will assess whether a bilateral loan is eligible under the Ukraine Loan Cooperation Mechanism and provides that the Commission approves the eligibility of bilateral loans to the Ukraine Loan Cooperation Mechanism.
Article 7 stipulates that the Commission will conclude with Ukraine a ULCM Agreement for the Implementation of the Ukraine Loan Cooperation Mechanism and provides information on its content and amendment.
Article 8 provides how the support under the Ukraine Loan Cooperation Mechanism is released.
Chapter III of the Regulation concerns the exceptional macro-financial assistance.
Article 9 describes the support available under the Union’s macro-financial assistance, including its form, implementation and availability.
Article 10 sets the amount of the Union’s macro-financial assistance.
Article 11 provides for compliance with the preconditions necessary for the disbursement of macro-financial assistance.
Article 12 stipulates that the Commission will conclude with Ukraine a Memorandum of Understanding and provides information on its content and timing.
Article 13 lays out the conditions and process for releasing the MFA loan.
Article 14 empowers the Commission, on behalf of the Union, to borrow the necessary funds on the capital markets or from financial institutions.
Article 15 regulates the MFA loan agreement and its content.
Article 16 regulates the governance through committee procedures.
Chapter IV of the Regulation concerns final provisions.
Article 17 regulates the information provision to the European Parliament and to the Council.
Article 18 regulates the entry into force.