In a bid to support Ukraine's war effort and address its shaky state finances, allies are grappling with the challenge of tapping into frozen Russian assets. The urgency of the matter has grown as Russia continues to gain territory on the battlefield. Finance officials from the Group of Seven (G7) nations are convening in Stresa, Italy, from Thursday through Saturday to discuss the issue.

At the heart of the discussion is the fate of Russian central bank reserves frozen in response to the invasion of Ukraine on February 24, 2022. While Ukraine and its supporters have called for the confiscation of $260 billion in frozen Russian assets located outside of the country, European officials have expressed concerns regarding legal and financial stability.

A European proposal suggests utilizing only the interest earned from these frozen assets. However, at current interest rates, this approach would generate a meager $2.5 billion to $3 billion annually, which would scarcely cover a month's financing requirements for Ukraine's government.

Seeking more ambitious options, U.S. Treasury officials and outside economists have proposed the issuance of bonds repaid by future interest income. This approach would enable Ukraine to access a larger chunk of upfront cash, addressing its immediate needs. On Saturday, the finance ministers will meet with Ukrainian Finance Minister Sergii Marchenko to discuss potential strategies.

Speaking at a news conference in Stresa, U.S. Treasury Secretary Janet Yellen expressed support for utilizing the windfall profits from Russian assets and mentioned that achieving a sum of $50 billion has been discussed. However, the specific approach is still under deliberation.

The issue of frozen Russian assets has been thrust into the spotlight once again following the signing of the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act by U.S. President Joe Biden in April. This legislation grants the administration the authority to seize approximately $5 billion worth of Russian state assets situated within the United States. The act is part of a comprehensive aid package for Ukraine, which includes $61 billion earmarked for defense.

As the Stresa meeting commenced, Russia published a decree from President Vladimir Putin allowing for the confiscation of assets belonging to U.S. companies and individuals as compensation for any Russian assets seized in the United States.

While the specific utilization of the income from Russian assets remains open, the focus primarily lies on bolstering Ukraine's state budget. With almost all tax revenue currently allocated to the military, Ukraine requires an additional $40 billion annually to sustain old-age pensions, as well as the salaries of critical professionals such as doctors, nurses, and teachers who serve as the backbone of society during wartime.

Ukraine's dependence on allies for financial support stems from its inability to access international bond markets due to the ongoing conflict. Printing money at the central bank presents the alternative but carries the risk of hyperinflation.

This year's budget appears financially reasonable due to EU support and the U.S. aid package; however, next year poses greater challenges, according to Benjamin Hilgenstock, a senior economist at the Kyiv School of Economics Institute.

The G7 finance ministers aim to establish consensus ahead of the G7 national leaders summit scheduled for June 13-15 in Italy. During the meetings, Secretary Yellen also plans to address China's state-backed production of green energy technology, which the U.S. views as a global economic threat. After recent discussions with Chinese counterparts, the U.S. has imposed substantial tariffs on various Chinese imports to protect its economy.

Secretary Yellen pointed out that China's overcapacity poses a problem not only for the U.S. but also for other G7 and developing countries, as it undermines competition worldwide. The objective is to send a united message to China, conveying opposition to their strategy.

In addition to economic matters, the finance ministers will also discuss providing humanitarian aid to Gaza and strengthening sanctions against Iran for its support of terrorist groups. The G7 annual meetings serve as a platform to coordinate economic policies and address various issues concerning security and energy.