US and Europe near deal on novel funding plan for Ukraine

The idea relies on the investment returns—mainly interest payments—generated by the roughly $300 billion in Russian sovereign assets that the U.S. and Europe froze in their jurisdictions after the invasion of Ukraine. Biden administration officials have proposed creating a new financial instrument that would deliver many years worth of expected profits on the Russian assets to Kyiv in the short term while leaving the underlying Russian assets untouched.

The funding could provide another stream of aid for Ukraine as support for the war-torn nation has become mired in political divisions in the U.S. Presumptive Republican nominee Donald Trump has opposed money for Kyiv and officials involved in the talks see a narrow window to strike a deal before elections in Europe and the U.S. this year.

Finance ministers from the Group of Seven advanced democracies are discussing the funding questions in meetings this week in Stresa, a resort town along the mountainous coast of Lake Maggiore in northern Italy. The U.S. goal is to refine the idea enough that the heads of governments that lead the G-7 could endorse it at their own gathering in the coming weeks, even if some technical work is left for the summer.

“The details of the proposal have not been decided," Treasury Secretary Janet Yellen said during a press conference Thursday. “We are looking for general agreement on the concept and if we’re able to obtain broad agreement on the concept, we’ll spend the next several weeks" finalizing details, she said.

Kremlin spokesman Dmitry Peskov told the state news agency TASS last month that the U.S. would have to answer for the confiscation of any of Russia’s frozen assets. Russian President Vladimir Putin signed a decree this week giving Moscow jurisdiction over American property in Russia to compensate for damages from any future seizure of Russian assets.

Under the discussed structure, Western nations would lend to a newly created financing entity, which would, in turn, disburse the money as grants to Kyiv, according to people familiar with the matter. The profits on the frozen Russian assets would then go toward paying back Western nations for the loan to the financing entity.

With this system, U.S. officials believe they could make the loan without Congress and at little cost, an advantage also for cash-strapped European governments. Because a financing entity would take out the loan, this structure would also avoid adding to Ukraine’s debt burden.

The U.S. plan has started to gain traction after months of divisions between Washington and European capitals over what to do with the frozen assets. With the support of the U.K. and Canada, the Biden administration has been pushing for seizing the Russian assets outright. Congress last month gave the U.S. the legal authority to take the small portion of the Russian assets under U.S. jurisdiction and use them to support Ukraine.

But other European countries have resisted seizing the assets, arguing that such a move could violate international law. Two-thirds of Russian central bank assets were in Belgian clearinghouse Euroclear when the assets were frozen days after Russia invaded Ukraine, giving Europe significant sway over the use of the money.

The latest plan avoids the thorny legal questions raised by confiscating another nation’s sovereign wealth. It also draws from an existing European plan to send the returns on the Russian assets to Ukraine this year. The first €1 billion, roughly $1.1 billion, from the Europe plan is expected to go to Ukraine by July 1, the first of what officials said could be up to 4 billion euros this year.

The American idea is to accelerate multiple future years of Russian interest payments into one, larger financing package available to Ukraine as soon as this year. “I would like to thank the U.S. for changing their position and putting on the table a position that is consistent with international rule of law," French Finance Minister Bruno Le Maire said in Italy.

Le Maire said he would propose a European variation of the U.S. plan, which will be discussed over dinner Friday evening, a French official said. The person said the French idea mainly involved the structure of the plan, in particular how the risk is shared across the G-7 countries.

For the financing proposal to succeed, the European Union would have to amend its plan to send returns on the Russian assets directly to Ukraine. The timing of that change will be sensitive, European officials said, but they could still channel proceeds from the assets into the U.S. proposal next year. Another open issue is whether Kyiv should be allowed to buy weapons with the money or whether the G-7 should restrict the use of the money to fund Ukraine’s reconstruction.

The size of the package would depend on how far into the future Western officials lay claim to returns generated by the Russian assets. One question hanging over the talks is a possible end to the war in Ukraine, when Russian assets may be returned to Moscow. That could cut off the revenue stream dedicated to paying back the loan, meaning G-7 nations may have to ultimately bear the cost of the plan.

European countries want to ensure that the plan fairly accounts for the possibility that the G-7 nations have to pay for the funding. Yellen said on Thursday that even if the West eventually loses control of the Russian assets and their proceeds, Moscow would still likely be forced to pay for the Ukraine aid.

“I don’t believe as a general matter that it’s necessary to block the assets until the money is paid back," Yellen said. “We hope that there is a peace agreement. In the course of such an agreement, decisions could be made for Russian compensation for Ukraine."

Write to Andrew Duehren at andrew.duehren@wsj.com and Laurence Norman at laurence.norman@wsj.com