In every war, the turning point comes when the question shifts from how to keep fighting to what terms can make the killing stop. The theory of “information wars” has long suggested that the real obstacle to peace isn’t just a failure to grasp the enemy’s strength, but the lack of clarity over what the postwar order will look like—and who will enforce it. Ukraine is now a textbook case of this dilemma.
On one hand, Europe keeps talking about “security guarantees” for Ukraine once the fighting ends. On the other, Washington, wary of stumbling into a direct clash with Moscow, nods politely but won’t even outline the basics. The result is a paradox: the guarantees remain vapor, and the trust in them is equally flimsy.
The Hedgehog Strategy
As the stalemate drags on, another approach has gained traction: turning Ukraine into a hedgehog bristling with spikes—too costly for Russia to attack again. That doesn’t mean U.S. or NATO boots on the ground, or binding promises to intervene, but rather a massive build-up of Ukraine’s own defense capacity. It’s a plan that hinges on an open-ended pipeline of Western aid—financial, technological, and military.
For the West, this is the compromise: avoid the nightmare of a direct war with Russia, but pay a staggering bill instead. In effect, it’s a system of “non-military security guarantees” purchased with dollars and technology. The big question is whether the West is ready to shoulder that kind of burden.
Kyiv’s Three Postwar Priorities
Here’s the crux of the problem. Once the shooting stops, Ukraine will face three colossal tasks at once:
- Keeping the lights on. The country’s annual budget deficit already tops $40 billion, with more than half of revenues covered by foreign aid.
- Rebuilding the country. The World Bank estimates total damage at over $486 billion—nearly four times Ukraine’s GDP before the war.
- Fortifying the military. NATO sets 2 percent of GDP as the baseline for defense spending. For Ukraine, given the threats, it’s closer to 6 or 7 percent. That’s tens of billions of dollars every single year.
Without sustained external support, these goals are simply out of reach.
The Russian Assets Gambit
Europe has already broken a taboo, moving to tap frozen Russian assets for Ukraine. Roughly $300 billion is on the table, about $200 billion of it parked in European banks. That sounds enormous—until you realize it won’t cover Kyiv’s needs for even the next five years. And seizing it comes with a catch: the precedent risks spooking global investors and sparking capital flight from the EU.
Even if the money can be found, oversight looms as another problem. Donors know Ukraine’s institutions struggle with corruption. Transparency International ranked Ukraine 104th in 2024—alongside countries in Africa and Latin America. Without tough external audits and watchdog mechanisms, aid risks vanishing into a black hole.
So the West faces a brutal choice: either take on the risk of direct confrontation with Moscow by offering hard security guarantees, or take on a crushing long-term financial obligation by turning Ukraine into a fortress. Both are ruinously expensive. One risks global war. The other risks endless bills landing on European and American taxpayers.
Between Illusions and Reality
As political scientist Cynthia Roberts recently noted in Foreign Policy, negotiations only become possible when expectations finally collide with battlefield realities. Early in the war, Moscow and Kyiv clung to irreconcilable visions of the future. Now, both sides are being forced to reckon with their limits.
Kyiv openly admits that regaining every inch of occupied territory is unrealistic in the near term. Even massive Western arms shipments can’t offset shrinking manpower and wrecked infrastructure. By mid-2025, defense spending consumed more than 60 percent of Ukraine’s budget, and the national debt ballooned to nearly $160 billion. Another blow: some 7 million Ukrainians remain abroad, draining the country’s mobilization pool.
Moscow, for its part, has hit a wall too. Its offensive near Kharkiv, meant as a show of force, has bogged down into bloody attrition. Ukrainian drone strikes on Russian refineries have triggered fuel shortages, driving retail gas prices up 25 percent over the summer. Moscow’s budget is hemorrhaging: revenues that once covered 90 percent of spending now cover only 80, leaving deficits to be plugged with debt, dwindling reserves, and heavier taxes on business.
Summits Without Solutions
The August summits—Putin and Trump in Alaska, followed by meetings in Washington with Zelensky and European leaders—only highlighted the deadlock. Putin demands recognition of Russian control over seized territories. Zelensky ties any concessions to ironclad Western security guarantees. But the West still can’t put anything concrete on the table.
Former U.S. ambassador to Moscow Michael McFaul argues that Trump blundered by trying to negotiate on two fronts at once. First, he says, Washington should have nailed down firm U.S.–EU–Ukraine security guarantees. Only then should it have broached territorial compromises with Putin. After all, the lack of guarantees is exactly what made the 1994 Budapest Memorandum worthless.
The war, in other words, is no longer just about trenches and tanks. It has become a staggering financial and political puzzle—one that could decide not just Ukraine’s survival, but the resilience of the Western system itself.
The Core Paradox
Here lies the central paradox. For Kyiv, “territorial questions” mean only one thing: the peaceful return of its land over the long haul. For Moscow, “territorial concessions” mean something else entirely—the ceding of additional regions it doesn’t even hold today. That split in interpretation turns any attempt at dialogue into a dead-end exercise.
Political scientist Cynthia Roberts pushes the point further: no international guarantees can really be considered reliable. Europe is neither mentally nor militarily ready to wage a direct war with Russia. Washington, meanwhile, wavers between wanting to stop the conflict and refusing to assume fresh obligations. In this climate of half-information, the Kremlin sees every Western promise as something to test, probe, and potentially break.
The Only Real Guarantee
For Ukraine, the only real guarantee is its own military muscle. The war has shown that Russia’s overwhelming advantage in numbers and firepower didn’t bring victory. Modern technology—drones, precision-guided rocket systems, real-time battlefield intelligence—has narrowed that gap dramatically.
According to the Stockholm International Peace Research Institute (SIPRI), Ukraine received more than $70 billion in military aid in 2024, including cutting-edge air defense systems and long-range missiles. Translation: any future Russian offensive will cost Moscow far more dearly than before.
But the real question is money. Ukraine cannot afford to maintain a standing force of more than 700,000 troops without consistent Western support. Europe is stumbling through its own energy-price crisis, industrial stagnation, and ballooning deficits. The U.S. is heading into a new political cycle where military aid to Kyiv is a flashpoint in partisan warfare.
The Price of the “Steel Porcupine”
The idea of a “steel porcupine” isn’t just a catchy metaphor—it’s the West’s strategic project: arm Ukraine to the teeth so that a new Russian invasion would be suicidal. But behind the slogan lies a compromise. Washington won’t give Kyiv a “mini-Article 5,” and Brussels would love to shift ultimate responsibility to the U.S. Inside the coalition of the “willing,” too many partners are really “half-willing.” Moscow, spotting hesitation, sees an opening for pressure and revanšist maneuvers.
In practice, the porcupine strategy is an attempt to replace collective defense guarantees with technological integration of Ukraine’s defense industry and a steady infusion of cash. Yet in wartime, these “non-military guarantees” are precisely the weakest part of the structure.
Ukraine’s economy is running on life support. The Finance Ministry projects a $60 billion budget deficit in 2026—nearly half of GDP. Without external aid, Kyiv can’t pay for either its army or its basic social spending.
After talks with the IMF, the government revised its financing needs upward: from $38 billion to $65 billion for 2026–2027. For this year, Ukraine is receiving $54 billion. For 2026, confirmed commitments add up to just $22.2 billion:
- $11 billion from the G7’s ERA emergency lending program, which runs out by year’s end;
- $7.8 billion from the European Commission’s Ukraine Facility;
- $2.2 billion from the IMF;
- $1.2 billion from assorted other sources.
For 2027, only a final $1 billion IMF tranche is locked in. That’s $45.4 billion in hand against needs of $110 billion. The gap: $65 billion.
Put differently, the shortfall is larger than France’s entire 2025 defense budget ($62 billion) and roughly equal to the GDP of countries like Slovakia or Bulgaria.
Russian Assets in Play
Against this backdrop, the EU and G7 are moving toward what once seemed unthinkable: tapping frozen Russian assets. Euroclear alone holds about €190 billion, of which roughly €175 billion could, in theory, be mobilized. Realistically, the usable sum is closer to €130 billion, once €45 billion is set aside to service ERA debt.
If that money is unlocked, Ukraine would, for the first time, receive “reparations paid by the aggressor” without the formality of a peace treaty. But it sets a precedent with global consequences. From Beijing to the Gulf, governments are openly questioning whether their reserves in Europe or the U.S. can ever again be considered safe.
The steel porcupine, then, is not just a military strategy but an economic vortex, sucking in hundreds of billions of dollars. In practice, it’s the creation of a new security model: Ukraine as a forward operating base, bankrolled by partners but without their troops on the ground.
The price tag? Roughly $50–60 billion a year just to cover baseline needs—before factoring in military modernization. That’s on par with what Washington spends annually to maintain its bases across Europe.
If Europe can’t stomach that level of commitment, the porcupine risks becoming a costly illusion—one that won’t stop Moscow but could bleed Kyiv and its allies dry.
The Legal Tightrope
The mechanism the EU and U.S. are building to funnel frozen Russian assets into Ukraine may be the most complex financial-legal construct in recent memory. At its core is the so-called “reparations loan,” an idea floated back in 2022 by British journalist Hugo Dixon: if Russia will eventually owe reparations, why wait for the war to end? Put its frozen reserves to work now.
According to Reuters, the plan hinges on creating a special-purpose vehicle (SPV) by EU governments, possibly with G7 backing. Assets frozen in Euroclear—about €190 billion—would be transferred into this SPV. In exchange, Euroclear would receive zero-coupon bonds guaranteed by the SPV. On paper, Europe isn’t “confiscating” Russian funds, just reshaping them. In practice, the money would start flowing to Ukraine.
The political twist lies with Hungary and Slovakia, both of which have consistently blocked full-scale asset seizures. EU lawyers are exploring ways to launch the SPV without them. If that happens, it would not only set a precedent in EU law but also shake the very principle of consensus that underpins Europe’s political system.
Berlin’s Pivot
The turning point came when Berlin flipped its position. Under the previous government, Germany had blocked any move toward confiscating Russian funds, citing fears of eroding trust in the EU’s financial system. But this spring, Chancellor Friedrich Merz announced: “If a legal path is found, Germany will support transferring reserves to Ukraine.” That statement was a game-changer. As the EU’s largest economy, Germany knows the stakes: either Moscow’s frozen money flows to Kyiv, or Berlin must pony up tens of billions from its own budget.
According to Bloomberg, the tab could run to €40 billion a year—that’s the cost of the “alternative scenario” in which the reparations loan isn’t implemented. For Merz, whose CDU trails the surging far-right AfD in the polls, such a budget hit could be politically lethal.
The Legal Achilles’ Heel
The weakest link in the scheme is international law. Formally, only the International Court of Justice can order reparations—but Russia, with its permanent Security Council seat, can veto any binding resolution. The UN General Assembly did pass a resolution in late 2022 recognizing Ukraine’s right to compensation, but its recommendations carry no weight.
An alternative path is the Council of Europe’s newly created Claims Commission for Ukraine (CAHEC), which is tasked with documenting damages and laying the groundwork for future lawsuits. Germany and France are pushing hard for the Council of Europe to serve as the legal umbrella for the reparations loan. Merz himself stressed in a Financial Times op-ed: “Frozen assets will only be released once Russia fulfills its obligations to pay compensation.”
But here lies another dilemma. Europe wants the assets spent primarily on weapons. “Every euro of frozen funds must serve the security of Ukraine and Europe as a whole,” Merz declared. Yet the World Bank estimates that Ukraine will need at least $15–18 billion a year in external support for basics like salaries, healthcare, and infrastructure. If all the funds are funneled into military needs, Kyiv risks facing a domestic crisis—soldiers armed to the teeth while civilians are left without basic social services.
The Trust Gap
Another thorny issue is trust in Ukraine’s government. Polls show confidence in its anti-corruption bodies stuck below 30 percent. European auditors worry that massive cash infusions, absent strong oversight, could leak into shadow schemes. If that happens, the political effect of the reparations loan could boomerang: instead of shoring up Europe’s credibility, it might fuel fresh criticism.
Launching the plan would be more than a financial maneuver—it would signal that the West is willing to build new mechanisms outside traditional international institutions. In practice, that chips away at the monopoly of the UN Security Council, where Moscow wields a veto. For Russia, the transfer of assets would mark its biggest loss since the Cold War: a direct blow to the myth of Moscow’s “financial inviolability.”
A Systemic Shock to Global Finance
The reparations loan isn’t just a technical fix. It’s a precedent that shakes the foundations of the postwar financial order born at Bretton Woods in 1944. Until now, sovereign reserves held in Western banks and clearinghouses were considered sacrosanct. Even at the height of the Cold War, the USSR parked billions in Western systems without fear of seizure.
But freezing and then funneling Russian assets to Ukraine would mark the first time the global financial system is explicitly weaponized as an instrument of collective punishment. And that’s already changing behavior.
China, India, Brazil, and Saudi Arabia are watching closely. According to the IMF, about 60 percent of emerging-market reserves are held in dollars and euros. If the Russia precedent goes forward, the signal is clear: any regime that collides with the West risks losing its reserves.
That’s why Beijing and New Delhi are fast-tracking alternatives. China’s CIPS payment system boosted transaction volumes by 35 percent in 2024, hitting nearly 20 trillion yuan. India is expanding rupee-based settlements with neighbors. Saudi Arabia and the UAE are negotiating oil deals in yuan and dirhams.
Until recently, the dollar was the world’s “currency of trust.” Even during political crises, countries kept reserves in U.S. Treasuries and European accounts because they believed those assets were untouchable. But Russia’s case cracks that principle. By 2024, the dollar’s share of global reserves had dropped to 57 percent—the lowest in a quarter century.
Experts at the Bank for International Settlements warn that if Moscow’s frozen assets are handed to Ukraine, diversification will only accelerate. Winners will include gold—its share of global reserves has risen from 13 to 18 percent in just two years—and alternative currencies like the yuan, rupee, and dirham.
Europe’s Double Bind
For Europe, the risk is double-edged. On the one hand, it shores up Ukraine. On the other, it weakens its own status as a global financial hub. Euroclear, custodian of roughly €190 billion in Russian assets, risks losing its reputation as a neutral clearing center. If major powers start pulling reserves, the stability of Europe’s entire financial system could be at stake.
That’s why the fight inside the EU isn’t just about legal form—it’s about scale. France insists the first step should be modest, no more than €3 billion—a test tranche to see if the machinery works. Germany, by contrast, wants to go all-in from the start, to show Europe is serious.
Washington’s Push
Washington has been the loudest voice urging Europe to take the plunge. The U.S. holds the trump card: more than 60 percent of global reserves are in dollars, controlled through American institutions. But Russia’s frozen assets in the U.S. are negligible. The bulk sits in Europe—leaving Brussels and Berlin to absorb the legal and financial fallout.
For Washington, it’s a double win: reinforcing American leadership while undercutting the euro’s viability as a reserve currency. Former Treasury Secretary Lawrence Summers spelled it out: the reparations loan “wouldn’t just support Ukraine—it would prove that the dollar is the only currency capable of serving as a true global guarantor.”
A Catastrophic Blow for Moscow
For Moscow, the transfer of assets would be devastating. Losing nearly $300 billion in reserves—including those held in third countries—would gut the Central Bank’s ability to maneuver, limit currency interventions, and deepen Russia’s reliance on China. Already by 2025, more than 40 percent of Russian foreign trade is denominated in yuan, with dependence on Chinese credit and technology only accelerating.
But the deeper wound is political. For the first time in history, Russia wouldn’t just see assets frozen—it would see them openly handed to its enemy. For the elite, the message is unmistakable: any holdings in the West—from sovereign reserves to personal bank accounts—can be weaponized.
That makes the reparations loan not just a question of Ukraine, but a turning point for the entire global financial order. Either the dollar and euro remain “currencies of trust,” with Western capitals convincing skeptics that Russia’s case is unique. Or the move sparks a broad retreat into alternatives—accelerating financial multipolarity.
The World After the Reparations Loan
If the scheme to channel Russian assets to Ukraine is implemented, the ripple effects won’t stop with Europe and Russia. What’s really being built is a new model of global governance—finance as a weapon wielded in broad daylight.
For Washington, it’s a long-awaited comeback. After the chaos of Afghanistan and Iraq, the 2008 financial crash, and the credibility drain of the Trump years, the U.S. is back in the role of system architect. By nudging Europe into a move that carries huge risks for Brussels, Washington tightens its grip on the world’s financial plumbing.
At the same time, with Russia and China trying to promote alternatives—BRICS, the Shanghai Cooperation Organization, local-currency settlements—America is betting that the fear of sanctions and asset freezes will keep most countries orbiting the dollar. In the short run, it will: small and mid-sized states will prefer reserves in a system where Washington makes the rules.
Europe, though, finds itself on the front line. Without Euroclear and its banking networks, the reparations scheme can’t function. But the EU is also the player most exposed to reputational and legal blowback. The move will accelerate Europe’s strategic dependence on Washington. The U.S. will not only shape the continent’s security but also its financial policy. For Berlin and Paris, that’s a bitter pill: another step away from true autonomy.
China as the Quiet Winner
Beijing may be the biggest beneficiary. In the short term, China is a cautious observer. Over the long term, the reparations precedent hands it an opening to speed up the yuan’s global ascent. Already, more than a quarter of China’s trade is denominated in its own currency. If states across the Global South start shifting reserves out of euros—and even partly out of dollars—the yuan is the likeliest safe harbor.
Russia’s deepening dependency makes the yuan a regional center of gravity. Shut out of Western capital markets, Moscow will lean harder on Beijing, granting privileges in energy, tech, and infrastructure.
For Russia, the reparations loan isn’t just a financial loss—it’s a public declaration of isolation. Negotiating from a position of parity becomes impossible. The economy contracts further, the export profile grows more primitive, and reserves in yuan and gold are the only fallback. For the Russian public and elites alike, the symbolism is brutal: wealth accumulated over decades is now officially paying for the war against them.
The Global South’s Dilemma
For countries across Asia, Africa, and Latin America, the burning question is how to protect reserves. On the one hand, the West has shown it’s willing to weaponize finance. On the other, alternatives like yuan holdings or gold still lack liquidity.
The likeliest outcome is gradual diversification. By 2030, the combined share of the dollar and euro could slip to 50 percent, the yuan rise to 15–20 percent, and gold to 25 percent. That would be the real face of financial multipolarity.
The End of the “Dollar of Trust”
The reparations loan for Ukraine is just the opening act of something much bigger. The West is abandoning the principle of neutrality in financial institutions, openly converting them into tools of geopolitics. The U.S. cements its leadership. Europe forfeits what remains of its independence. China seizes an opening. Russia suffers a strategic defeat. And the Global South scrambles for balance.
Historians may mark this as the pivot point: the moment when the “age of the trusted dollar” gave way to the “age of financial wars.”