BRUSSELS — The European Commission on Wednesday unveiled a €90 billion loan to Ukraine aimed at saving it from financial collapse as it continues to battle Russia while aid from the U.S. dries up.

About one-third of the cash will be used for normal budget expenditures and the rest will go to defense — although countries still need to formally agree to what extent Ukraine can use the money to buy weapons from outside the EU. A Commission proposal gives EU defense firms preferential treatment but allows Ukraine to buy foreign weapons if they aren’t immediately available in Europe.

While the loan is interest-free for Ukraine, it is forecast to cost EU taxpayers between €3 billion and €4 billion a year in borrowing costs from 2028. The EU had to resort to the loan after an earlier effort to use sanctioned Russian frozen assets ran into opposition from Belgium.

The race is now on for EU lawmakers to agree on a final legal text that’ll pave the way for disbursements in April, when Ukraine’s war chest runs out. Meetings between EU treasury and defense officials are already planned for Friday. The European Parliament could fast-track the loan as early as next week.

The financing package is also crucial for unlocking additional loans to Ukraine from the International Monetary Fund. The Washington-based Fund wants to ensure Kyiv’s finances aren’t overstretched, as the war enters its fifth year next month.

The €90 billion will be paid out over the next two years, as Moscow shows no sign of slowing down its offensive on Ukraine despite U.S.-led efforts to agree on a ceasefire.

“Russia shows no sign of abating, no sign of remorse, no sign of seeking peace,” Commission President Ursula von der Leyen told reporters after presenting the proposal. “We all want peace for Ukraine, and for that, Ukraine must be in a position of strength.”

When EU leaders agreed on the loan, Ukrainian President Volodymyr Zelenskyy called the deal an “unprecedented decision, and it will also have an impact on the peace negotiations.”

Adding to the pressure on the EU, the U.S. under President Donald Trump has halted new military and financial aid to Ukraine, leaving it up to Europe to ensure Kyiv can continue fighting.

Once the legal text is agreed, the EU will raise joint debt to finance the initiative, although the governments in the Czech Republic, Hungary and Slovakia said they will not participate in the funding drive. 

The conditions on military spending are splitting EU countries. Paris is demanding strict rules to prevent money from flowing to U.S. weapons manufacturers, while Germany and other Northern European countries want to give Ukraine greater flexibility on how to spend the cash, pointing out that some key systems needed by Ukraine aren’t manufactured in Europe.

Meeting halfway

The Commission has put forward a compromise proposal — seen by POLITICO. It gives preferential treatment to defense companies based in the EU, Ukraine and neighboring countries, including Norway, Iceland and Liechtenstein, but doesn’t rule out purchases from abroad.

To keep the Northern European capitals happy, the Commission’s proposal allows Ukraine to buy specialized weapons produced outside the EU if they are vital for Kyiv’s defense against Russian forces. These include the U.S. Patriot long-range missile and air defense systems.

The rules could be bent further in cases “where there is an urgent need for a given defense product” that can’t be delivered quickly from within Europe.

Weapons aren’t considered European if more than 35 percent of their parts come from outside the continent, according to the draft. That’s in line with previous EU defense-financing initiatives, such as the €150 billion SAFE loans-for-weapons program.

Two other legal texts are included in the legislative package. One proposes using the upper borrowing limit in the current budget to guarantee the loan. The other is designed to tweak the Ukraine Facility, a 2023 initiative that governs the bloc’s long-term financial support to Kyiv. The Commission will also create a new money pot to cover the borrowing costs before the new EU budget enters into force in 2028.

Russian collateral

Ukraine only has to repay the €90 billion loan if it receives post-war reparations from Russia — an unlikely scenario. If this doesn’t happen, the EU has left the door open to tapping frozen Russian state assets across the bloc to pay itself back.

Belgium’s steadfast opposition to leveraging the frozen assets, most of which are based in the Brussels-based financial depository Euroclear, promises to make that negotiation difficult. However, the Commission can indefinitely roll over its debt by issuing eurobonds until it finds the necessary means to pay off the loan. The goal is to ensure Ukraine isn’t left holding the bill.

“The Union reserves its right to use the cash balances from immobilized Russian assets held in the EU to repay the Ukraine Support Loan,” Economy Commissioner Valdis Dombrovskis said alongside von der Leyen. “Supporting Ukraine is a litmus test for Europe. The outcome of Russia’s brutal war of aggression against Ukraine will determine Europe’s future.”

Jacopo Barigazzi contributed to this report from Brussels.