Will Ukraine war intensify after EU's $105bn loan to Kyiv? — Inside Story

[0:00] The end to a long-running standoff. [0:03] Ukraine reopens a pipeline enabling the delivery of Russian crude to some EU countries. [0:09] In return, it gets a multi-billion dollar loan while Moscow breaks in oil revenue. [0:14] How will this complex deal play out on the battlefield? [0:17] This is Inside Story. [0:18] Hello again, I'm James Bayes. [0:38] A loan drama tied to geopolitics. [0:41] Kiev is getting a much-delayed lifeline from Brussels [0:44] as it fights Moscow's invasion with nearly empty coffers. [0:48] That's after Ukraine repaired a pipeline carrying Russian crude to Hungary and Slovakia. [0:53] The oil revenues are substantial and will bolster Moscow's war chest. [0:59] And Ukraine's only had to repay the funds if Russia pays reparations. [1:03] So is this complex EU deal going to intensify the conflict? [1:07] And considering the mistrust between the parties, will the agreement even last? [1:12] We'll put those questions to our panel of guests in a moment. [1:14] But first, Imogen Kimba unpacks this multi-layered saga. [1:19] Ukraine is waiting for a $105 billion loan from the European Union. [1:25] But in return, it had to fix a Soviet-era pipeline. [1:28] Called Drushba, or Friendship, it delivers oil from Russia through Belarus and Ukraine [1:33] to Hungary and Slovakia, as well as other countries in Europe. [1:37] A suspected Russian drone strike on western Ukraine in January damaged part of the pipeline. [1:44] Moscow and its trade partners say the repairs were stalled deliberately. [1:49] Deliveries have been halted since the beginning of the Kiev regime's blackmail. [1:53] Everything depends on the Kiev regime. [1:55] So, Hungary and Slovakia blocked an EU loan, which Ukraine desperately needs after four years of war. [2:04] But the leadership in Hungary changed this month, and the prime minister-elect said he'd drop the veto on the loan [2:10] as long as the oil started flowing again, which it has. [2:14] Slovakia, however, has not budged. [2:16] The government did not agree to this loan, and we are not participating in it. [2:21] Similar to Hungary and the Czech Republic, it is a war loan. [2:25] Two-thirds of the $105 billion will be used to purchase weapons for Ukraine. [2:32] And on the day the pipeline was restored, the prime minister questioned the reliability of the deal. [2:38] There would be a huge deepening of mistrust between the European Union and Ukraine [2:42] if, after all this, Ukraine were to interrupt oil supplies again in a few days. [2:47] But we must also take into account such a scenario, because this is a war, [2:51] and during a war all sorts of things happen. [2:55] Up to 1.4 million barrels of Russian oil flow through the pipeline every day. [3:00] At current prices, that amounts to billions of dollars a month. [3:03] At the same time, the EU is increasing sanctions on Russia, which were also being vetoed by Hungary. [3:09] We must continue to support Ukraine and its struggle for freedom against Russia. [3:15] After a blockade that lasted far too long, we have finally succeeded in pushing through [3:20] the 20th sanctions package in Brussels, which sends Russia a clear signal that it must not continue this war. [3:26] The restrictions affect the energy sector. [3:29] So Russia will benefit from the increase in revenue from the Drushpa pipeline, [3:34] but lose because of the EU sanctions. [3:36] While Ukraine will benefit from the EU loan, but lose if Russia uses its oil money to buy more weapons. [3:44] Imogen Kimber, Al Jazeera, for Inside Story. [3:51] A story with very many strands. [3:53] Let's try and untangle them all with our guests who are joining us today on Inside Story. [3:58] And joining us from Munich, Marina Miron, a researcher in defence studies at King's College London. [4:03] Maximilian Hess is in London. [4:06] He's the founder of political risk firm Enmatena Advisory and the author of Economic War, Ukraine and the Global Conflict between Russia and the West. [4:15] And in Brussels, Peter Klepper, a European policy analyst and editor-in-chief at BrusselsReport.eu. [4:23] Thank you for joining us. [4:25] Let me start with you, Marina. [4:27] This has gone on for months. [4:29] It was supposed to be quite simple, a big loan to Ukraine. [4:34] It became a saga, did it not? [4:35] Do you think European leaders, they are not currently in Brussels, [4:39] they're having one of their away summits in Cyprus, which is the current president. [4:43] Do you think there'll be a real sigh of relief now? [4:46] Well, it is possible that something will move essentially because of the entire global situation. [4:53] But as you said correctly, it has been a turmoil for European leaders specifically because the European Union doesn't really have the money. [5:02] When we're talking about the 90 billion euro loan, it's not that the money is ready and can be given to Ukraine. [5:09] So firstly, there was a disagreement about what financing mechanism to use. [5:15] How do you get that money to Ukraine? [5:17] And the second thing, of course, is getting all EU members on board. [5:20] And who knows that Hungary back then under Viktor Orban and Slovakia were against this. [5:28] So they were essentially blocking this loan with Hungary taking the lead. [5:33] And now the situation has also changed because of the change of leadership in Hungary with Petra Magyar now not opposing the loan. [5:44] So there is a possibility that this could essentially go through and also demonstrate the results that the European Union has been trying to demonstrate throughout this war, but many times very unconvincingly. [5:59] Maximilian, I'd like to talk about some of the divisions in the EU a little later, but let's first look at the need for this loan. [6:07] I mean, Ukraine is a country that's been at war because of the Russian invasion now for more than four years. [6:14] How desperate is its economic situation? [6:17] In fact, would Ukraine go bankrupt if it didn't get this loan soon? [6:24] So it would probably not be immediate, but Ukraine faced a major fiscal cliff in June and has real budgetary needs that are dependent on external financing. [6:33] This is not the first such package that we have seen for Ukraine. [6:37] Brussels and the European Union have really taken the lead in funding Kiev ever since the change of administration in the White House last year. [6:46] The first major package like this was another euro 50 billion loan agreed last year, secured over some of those Russian frozen assets. [6:56] And then here the initial plan was to potentially seize or otherwise instrumentalize additional Russian frozen assets, of which there are some 220 billion euros sat in the country of Belgium at an institution called Euroclear. [7:09] That was ultimately not agreed last December. [7:12] And instead, what is being done now is the European Union will borrow this money on the capital markets. [7:18] It will itself repay that. [7:20] But the potential for Ukrainian repayment will be contingent on future reparations claims against Russia. [7:27] The World Bank already estimates that the damage incurred to the Ukrainian economy and the recovery cost alone from Russia's full scale invasion is more than 350 billion dollars. [7:38] That's a number that will continue to rise as Russia says no sign of halting its aggression. [7:43] So Kiev needed this money. [7:45] It got this money. [7:46] Europe will have to come back to this question for how to address it going forward. [7:50] This funding should last most of Ukraine's current forecast budget through the end of 2027. [7:55] But that very large pile of Russian funds will either be under question again in the future or ultimately be instrumentalized in potentially repaying some of these loans under the reparations that are due to Kiev. [8:08] Yeah, Peter, as Maximilian says that this what we've got now and what has been agreed now certainly was not the original plan. [8:15] And Europe made a very big deal of that original plan. [8:19] The president of the European Commission, Ursula von der Leyen, backed by the German Chancellor Friedrich Mertz, [8:25] very much pushing this idea they could do this by seizing the Russian money. [8:31] What went wrong with that plan? [8:34] Because it went wrong where you are in Brussels, the host nation of the European institutions. [8:40] Belgium was where it went wrong. [8:45] Well, indeed, all to sum up where it went wrong. [8:48] They looked at the detail. [8:49] Now, Germany actually changed its position. [8:52] Somehow, Friedrich Mertz suddenly supported seizing the Russian assets, not realizing the consequences of this. [9:01] Because in the first place in Russia, there's still lots of European assets. [9:07] It's not so evident for companies to sell these assets because a large part of that would be seized by the Russian state. [9:15] So if Europe were to not just freeze but seize Russian central bank assets, there would be Russian retaliation. [9:25] And then, of course, secondly, there's lots of non-Western powers that hold assets, not just in Belgium and Euroclear, but all throughout the West. [9:37] So this would send a terrible precedent signal. [9:42] So wisely, European leaders decided not to start this risky experiment. [9:52] And instead, indeed, they took out a jointly financed loan. [9:58] Well, let's talk about exactly what they have decided upon. [10:03] And let's look at exactly what is the detail under the current plan. [10:07] The EU plans to raise the funds by issuing bonds to global investors, backed by its shared budget. [10:15] That means investors will lend money to the bloc, which it will repay with interest. [10:20] Hungary, Slovakia and the Czech Republic are exempt and won't take part in the joint borrowing. [10:27] The money will be lent to Ukraine without interest over this year and next. [10:31] Ukraine is expected to receive just over $52 billion each year, covering about two-thirds of its financial needs. [10:40] It only needs to repay the loan if Russia pays war reparations, compensation. [10:46] The EU plans to recover the money using frozen Russian assets. [10:51] Maximilian, that is how it's supposed to work. [10:55] Do you see problems with that? [10:56] Well, I don't see fundamental problems with it. [11:01] And I would disagree with the idea that there are significant risks to the European Union and to macrofiscal stability from potentially seizing these Russian funds in the future. [11:11] But that is, of course, the question. [11:14] It wasn't that they didn't agree to do so last December. [11:17] It was that they kicked the can down the road saying, we'll return to this question in the future. [11:23] Now, various legal mechanisms have been put forward, various arguments, whether this be done under something called third-party reparations for Russia's aggression. [11:33] I think there are a number of other mechanisms that can be used to have done so. [11:37] We didn't see any significant moves away from the U.S. dollar after the sanctions came in 2022 against Russia. [11:44] The euro has remained a strong and stable currency. [11:47] Russian businesses, that is, businesses owned by European companies in Russia, have increasingly been expropriated. [11:55] There are a number of Russian arbitration courts that have handed down nonsensical judgments against European companies as well. [12:02] So this kind of lawfare, legal warfare over funds and who owes what over sanctions and Russia's energy weaponization dating back to the war is beginning is something that is very much ongoing in the background. [12:15] And there are dozens and many other moving parts that equally are affecting those sort of seizures of assets. [12:20] That being said, it is true that a number of European companies still have assets in Russia that they haven't marked down to zero on their books, even if that's realistically probably what they're worth, because we've seen the Kremlin's rapacious appetite for seizing these assets regardless. [12:34] Now, when and where do we get to this question of how does the Russian funds sitting in Belgium be addressed? [12:42] That probably now can wait until 2027 unless Ukraine's financing needs again increase. [12:49] But the idea in particular that Russian threats that they would be able to seek some kind of judgment against Belgium or put them on the hook for repayment are nonsensical. [12:58] And we see this because there has been a 50 billion dollar judgment against Russia for its expropriation of an oil company handed down by a Dutch court 12 years ago, part of the same legal framework that governs that between Belgium and Russia. [13:11] And, of course, the Kremlin has paid a grand total of zero cents to those investors. [13:15] Marina, I'd like to drill down into some of the divisions among the EU nations. [13:19] We've already discussed Belgium and the fact it turned down or was the country that blocked the original version of this deal. [13:27] The deal that's now been done was agreed months ago and then Hungary, having agreed, changed its mind. [13:34] That's where we bring in the pipeline. [13:37] Explain the Druzhba pipeline and its relevance to this. [13:41] Well, it's a very good question because it is all related and we've just been looking only at the economic side of this. [13:52] Now, the Druzhba pipeline has allegedly been damaged by a Russian drone in western Ukraine. [13:59] And so the Russian oil couldn't be transported to Hungary. [14:04] You said allegedly there is doubt about that. [14:09] How clear is the picture on that? [14:12] Both sides are reporting something different. [14:16] Where is the truces? [14:17] I don't know. [14:18] I have not inspected the damage on the pipeline. [14:22] So if depending on which source you look at, it will say something different. [14:28] The Ukrainian side says it was a Russian side. [14:30] The Russians are saying it was a Ukrainian side doing this on purpose in order to undermine the Russian economy. [14:40] And it's part of a broader strategy of what Ukraine is pursuing with long-range strikes. [14:45] So let's leave it in the air. [14:47] The pipeline, what we know for sure, is that the pipeline was damaged. [14:50] We don't know who it was at this stage with absolute certainty. [14:56] What I'm trying to get at is it was a critical element, the discussion about the reparation of the pipeline and the European Union has been pushing Ukraine to repair Druzhba in order to get Hungary, back then under Viktor Orban, on board to approve this 90 billion loan. [15:20] And so that has been going on since January and there has been some discontent within the European Union with the Ukrainian side because of the reparation not taking place, because the inspectors wouldn't be allowed to examine the damage and so on. [15:38] So it was quite an ongoing story, which was essentially affecting Ukraine, Ukraine's economy or its budget deficit. [15:49] And the Russian side is arguing that Ukraine was doing this on purpose in order to wait out who wins the elections in Hungary, only to then repair the, what the Russian side claims to be not such a significant damage to the pipeline, that it was all a strategic plot. [16:07] So that is a Russian position, but essentially what is happening here, Ukraine, of course, doesn't want Russia selling its oil to any European Union member, especially if Russia can use it as leverage. [16:23] And we have here Hungary, we had Slovakia, and now the Czech Republic is also on board here. [16:32] And so this block is being seen as problematic because of potential future loans to be agreed, to be given to Ukraine. [16:45] These countries are not actively participating. [16:49] So what has been explained before that EU bonds, but they will be guaranteed by member states, by EU member states. [16:57] It's now Hungary, the Czech Republic and Slovakia are extant. [17:01] So we're seeing that the dynamics within the EU itself are very disturbed because some European members are more pro-Ukraine and are trying to invest more into support of Ukraine. [17:17] Others, not so much, and the idea was, OK, if these three countries are not going to support Ukraine, at least they shouldn't be standing in the way. [17:28] And so it was a quid pro quo here with the Druzhba pipeline. [17:32] OK. Peter, I mean, I want to drill down more on whether some of these divisions in the EU are going to continue now we don't have a Viktor Orban. [17:43] But first may I ask this question? [17:46] Was the pipeline the real reason or was it because Hungary had this election that's just taken place? [17:52] Was it because this was a very useful issue for Viktor Orban, who was fighting for his political life, to bring up in an election to make to make the Ukraine issue all be about energy for Hungary? [18:09] Well, both can be true at the same time. [18:13] And I think it's pretty evident that Orban did use this in his election campaign. [18:17] But, of course, it was not just Hungary under Orban, it was also Slovakia under FITSO that has been complicating things. [18:28] It's also clear that Hungary is very dependent for its energy needs on Russia. [18:35] So I think that in the future also the new leadership in Hungary will continue to be a complicating factor for, you know, certain sanction policies. [18:47] And, you know, more to the heart of it, I think if you objectively look at this and you're asking yourself the question now, have the sanctions been helping the Ukrainians? [18:58] Frankly, I think the jury is still out on that. [19:02] It is very questionable. [19:04] The proponents says, yeah, not really yet, but wait for it. [19:07] At some point there will have an effect. [19:10] Okay, maybe. [19:10] On the other hand, if you ask yourself the questions, did the arms support for Ukraine help the Ukrainians? [19:19] I mean, everybody agrees, yes. [19:21] So if you're looking for future help for Ukraine, it's obvious that arms support should be, of course, in a careful way, because you don't want these arms ending up in the wrong way. [19:37] But that this should be the preferred route and that all these experiments with sanctions seems to be ending up just like sanctions have ended up in all the other cases in history where they have been applied from Cuba over Venezuela to South Africa to Iraq to even North Korea. [19:58] Now, the sanctions seem to be failing for 95% of the cases. [20:05] Okay, Maximilian, in terms of looking at this, if you're looking at this from afar and you don't follow every twist and turn of this, there'll be people looking at this who have heard the rhetoric from the top of the EU from people like Commission President Ursula von der Leyen [20:21] and might be surprised to learn that EU countries still get energy resources, still get oil and gas from Russia more than four years into this war. [20:33] Well, certainly. [20:37] And speaking at it from that very high level, I think there's two points that are important to remember. [20:41] Firstly, is that more than 90% of European-Russian energy relations have ended since Russia launched its full-scale invasion. [20:49] Much of that, Russia's own doing, turning off a lot of the pipelines to bring economic pain to Europe in 2022. [20:58] There are still phases to be brought in with cancellations of Russian natural gas deliveries to Europe. [21:04] LNG is the form in which it still comes, rather than via pipelines. [21:08] Those are due to come in in 2027. [21:10] The three countries here, Hungary, the Czech Republic, Slovakia, have themselves sought exemptions to keep buying Russian oil, [21:18] and in some cases gas as well. [21:20] But that trade has really ended quite significantly. [21:24] Vladimir Putin chose his war over the economic well-being of his own people, [21:28] and certainly over the Europeans for whom he sought to use this as a key pressure point, right? [21:34] Now, as to whether sanctions have been effective or not, I think the real question is, [21:38] is there sanctions effective at deterring an aggressor like Vladimir Putin, [21:42] particularly one who is not responsive to his own population's economic well-being? [21:47] Their average incomes on a PPP basis have never gone back to what they were in 2013, [21:51] when he invaded Ukraine for the first time. [21:54] Or are sanctions effective as a tool of war by other means in limiting the damage and the extent [22:00] of Russia's aggression, both against Ukraine and against other European Union and European countries, [22:06] who Putin has threatened or actively targeted their infrastructure in recent years. [22:11] And their sanctions are a tremendous success in limiting the Russian war machine. [22:16] So these are a part of that larger package. [22:19] This is part of the ultimate punishment in terms of how much Russia's cost that it will bear. [22:24] But really, the debate from a very high level comes down to the question of, [22:28] does one think that the economic opportunity that Russia offers even during wartime [22:33] is greater than the threat that the Kremlin poses? [22:37] And this is, of course, the trade-off imbalance made by countries when they consider their [22:40] foreign relations with any hostile aggressor, whether it be the U.S. and Iran, [22:45] or whether it be the questions around economic and political security related to China. [22:50] I think it's pretty clear that under Putin, the Kremlin has shown a willingness to attack its neighbors [22:54] and to engage in economically and militarily disruptive activity across the world, [22:59] whether that be in Europe or in Africa or even in Latin America. [23:03] So, you know, that threat really has to be taken seriously. [23:06] Tools of international law and sanctions regimes, these are certainly not perfect, [23:10] but they're the best that exist. [23:12] And while, yes, it's been a very painful process for Brussels, [23:16] if it could have been easy, we probably never would have been here in the first place. [23:20] Marina, let's talk about the impact of all of this on the battlefield in Ukraine. [23:26] But to do that, I have to bring in the other war, the Iran war, because Putin, [23:31] because of the oil price, his economy has had a huge jolt in the arm in recent weeks. [23:41] What impact do you think this will all have on the battlefield? [23:44] Just briefly, to reply to what Maximilian was saying about the sanctions and about Russia's [23:53] ability to attack across the world, I think the EU perception of what Russia wants or how Russia [24:00] functions is somewhat skewed, thinking that Russia wants to attack militarily and the sanctions [24:09] are a tool to curtail Russia's ability to use its military against, say, the Baltic states. [24:17] Essentially, what Russia is using and what is central to Russian military thought and strategic thought [24:25] more broadly is psychological and information warfare, which cannot be fought with economic sanctions. [24:33] And in some ways, it all reinforces Russia's narrative and gets other countries like China, India, [24:40] the all the BRICS, essentially Latin America on board. [24:45] OK, Marina, we're running a little short of time with regard to the impact of the Iran war. [24:52] Putin clearly has a bigger war chest. [24:55] How quickly could that feed into developments on the battlefield, do you think? [25:00] I don't think it will be very quick because not all of this money, only part of the money [25:07] will be essentially used for the defense industry. [25:13] And you also need the same thing with Ukraine. [25:17] You also need to turn money into capabilities. [25:20] And Russia also has its economic problems. [25:22] It has its inflation problems. [25:24] The central bank is being criticized for tackling the economic situation in Russia in the wrong [25:30] way. [25:31] And so there are a lot of divisions. [25:33] That being said, of course, it's a huge moral boost. [25:37] And we have to assess it against other factors, such as Ukrainian long-range strikes and how [25:42] much impact do they have? [25:44] Does it get to some sort of a balance when it comes to what Russia is earning? [25:51] And of course, we have the monetary dimension here. [25:54] But we also have the workforce shortage that Russia is facing that you cannot easily fix with [26:02] money. [26:03] Then you also have the geopolitical situation in the Middle East. [26:06] Of course, in the short term, Russian economy will be benefiting from this. [26:11] But I don't think we will necessarily see a direct impact from this on the battlefield, at least [26:17] not one that one could measure scientifically. [26:20] OK, Peter, you take the temperature there in Brussels. [26:25] How worried are people that Putin might be getting an unexpected because of the war in [26:31] Iran lifeline at this point? [26:33] Well, it's a fact that income for the Russian Treasury has been on the increase, also because [26:42] of the increase of the gold price over the last year, by the way. [26:46] Yeah, the divisions in the EU are natural. [26:50] Spain and Poland look at this very differently because of their history, obviously, and their [26:55] geography. [26:56] And I think you get mixed signals. [27:01] Last week, a senior Swedish military source was warning against for a future Russian incursion [27:09] in the Baltic regions. [27:12] On the other hand, we have, I think it was General Petraeus in the United States who sort of made [27:19] the point that Ukraine has actually been relatively successful recently on the battlefield. [27:23] So, yeah, I mean, this war is largely in a stalemate. [27:29] It's not increasingly, it's not exactly clear what's going to happen. [27:32] In the First World War, one of the two sides suddenly collapsed. [27:35] Will this happen again? [27:36] I don't think anybody knows, frankly. [27:40] I think, in a way, the decision to send more money to Ukraine to buy weapons is a good decision [27:48] because this has been successful so far. [27:52] So that's what we know. [27:53] I have my doubts about the sanctions. [27:56] And, yeah, like, this is basically, in sum, what's going on. [28:01] Peter Klepper, Marina Miron and Maximilian Hess, thank you very much for joining us today on [28:07] Inside Story. [28:07] If you missed any of our discussion, you can see it again any time you want on our website, [28:11] aljazeera.com. [28:12] As ever, we'd like to canvas your views. [28:15] Leave us a comment on our Facebook page. [28:17] That's facebook.com forward slash AJ Inside Story, or on X, look for at AJ Inside Story. [28:22] For now, that's it from me, James Bayes, and the team here. [28:25] But stay tuned. [28:26] Al Jazeera's global coverage continues in just a moment.