Overview
Whiplash diplomacy has engulfed the Ukraine peace process. Following backchannel consultations led by US Middle East Envoy Steve Witkoff and Russia sovereign wealth fund manager Kirill Dmitriev, transatlantic allies frantically proposed their own plan (of which there are several versions), and the US and Ukraine hashed out a revision in Geneva. To cut through the noise, observers should understand the five core contentious issues that will make or break a Ukrainian peace: the status of Russian-occupied territory, a Ukraine security arrangement, Russia’s immobilized sovereign assets, Russia sanctions, and Ukraine’s reconstruction. Areas of alignment on the five issues are thin and have hardly moved since US-led mediation began in February, but not all necessarily need to be bridged for a final deal. In the short term, there are downside risks of transatlantic division, which could embolden Russia and undermine a sustainable peace agreement.
Ukraine’s Sovereignty, in Two Parts
First, there is the issue of territory. Russia seeks to control all of the Donetsk and Luhansk regions, which include territory that it does not control beyond Ukraine’s fortified defensive line. Ukraine and the EU fear that such a concession would allow Russia to mount a renewed offensive. Meanwhile, Ukraine seeks to recapture all Russian-held territory, including Crimea. However, without a military breakthrough, Ukraine will be forced to offer some sort of concession to Russia’s de facto authority. This could include an “East Germany” model, where Ukraine aspires to reintegrate its Russian-occupied sovereign territory but operates as if it were autonomous. Or this could look like a “Kosovo” model, where areas not under Ukraine’s control are put under transitional administration (either the UN or an international board), tabling discussions on final sovereign status to focus on other issues first. A “Minsk” model—where Russian ethnics gain additional autonomy and protections in a sovereign Ukraine—is Europe’s preferred option but likely off the table. One controversial aspect of the original Witkoff-Dmitriev plan is that the US would recognize Russia’s de facto controlled areas as its sovereign territory, contingent on ceasing aggression.
Second, and perhaps more important, is the issue of Ukraine’s security. The reality is that if the warring parties seek to freeze the fighting, they must agree to some form of negotiated settlement that challenges both Ukraine’s sovereignty and Russia’s objectives. This is not a death-knell for peace if a lasting security arrangement can prevent future conflict and provide structure for additional negotiations. However, this is also a contentious point and one that, after US-Ukraine consultations in Geneva, is reportedly being tabled for a future Russia-Ukraine bilateral track (one that has, so far, failed to jumpstart).
Russia’s ostensible security aims are to freeze NATO expansion and demilitarize Ukraine. This concern is reflected in the Witkoff-Dmitriev plan, which caps Ukraine’s military to 600,000 personnel (unclear if this includes reserves), bars Ukraine from joining NATO, and prevents Ukraine from cooperating with a NATO reassurance force—a coalition of the willing led by France and the UK—that stations troops in-country, either as a train-and-equip mission or as an expeditionary force acting as a “tripwire” deterrent. These demands have been rejected before and are the main subject of the European counterproposal, which embraces the opposite: no or lighter military limits in peacetime, a legally-binding security guarantee, European troops in-country, and Ukraine’s right to join NATO in accordance with the alliance’s consensus-based decision-making.
Reconstruction, in Three Parts
Beyond the political aspects of a peace plan, there remains significant disagreement on what to do with reconstruction, which is interlinked with Russian reparations as a key criterion for G7 sanctions removal. The original Witkoff-Dmitriev plan envisions deploying one-third of Russia’s immobilized sovereign assets—mainly matured bonds owed to Russia’s central bank—as investment in the US-Ukraine Reconstruction Investment Fund (with the US receiving 50% of the returns) and the rest into a separate US-Russian Investment Fund. To facilitate joint economic cooperation, the US considers “gradual” and “case-by-case” sanctions removal to reintegrate Russia into the global economy. These three issues—deploying immobilized Russian sovereign assets, Russia sanctions removal, and zero-sum investment deals—are key roadblocks to finding a final deal.
First, Europe has different ideas about Russia’s immobilized sovereign assets. Since over 80% of frozen Russian central bank bonds are denominated in euros and British pounds, Europe—not the US—holds the cards. To plug Ukraine’s projected $65 billion fiscal shortfall from 2026-27, the European Commission plans to issue a $161 billion “reparations loan” to Ukraine from a separate loan from depositories (like Euroclear) secured on the cash balance of matured bonds they owe to Russia but cannot pay back due to sanctions. To prevent liability risk for the depositories, Ukraine must repay the European Commission the loan’s value once Russia pays reparations (estimated as high as $524 billion as of February 2025 by the World Bank). If Russia does not pay for reconstruction, its sovereign assets remain frozen, but member state guarantees will ensure that Euroclear can pay Russia back the money it is owed if courts force restitution. The plan is not guaranteed to pass, but stragglers—namely Belgium, where Euroclear is based—have tended to their internal budget obstacles, and the UK and Japan intend to follow suit with smaller loans to prevent currency risks to the euro.
Russia wants to prevent this reparations loan from occurring. Perhaps it assumed that the Witkoff-Dmitriev plan would present a fait accompli, pressuring the EU to drop the proposal before it could approve it in mid-December. Meanwhile, for Ukraine, the reparations loan would be a lifeline, guaranteeing its fiscal solvency for at least two or three years and possibly outlasting Russia’s ability to finance the war, as evident by the depletion of the sovereign wealth fund to a third of its dollar value from when the war began. From the European perspective, immobilized Russian sovereign assets are the largest piece of financial leverage to compel Russia to pay reparations, so reinvesting most of the assets back into Russia is a non-starter.
Second, there is the broader issue of sanctions removal. Here, Europe also holds more leverage than the US. European partners manage the SWIFT interbank payment system, oversee most major Western marine insurers (the chokepoint behind the seaborne crude oil price cap), and have committed to fully diversifying from Russian fuel imports by 2027 (effectively stranding half of Russia’s prewar export market). The US has some leverage but not as much as it could: recent sanctions on Russian energy majors—like Rosneft, Lukoil, Gazprom, and Surgutneftegas—carry higher secondary sanctions risk than EU sanctions, but this has failed to prevent exports to other consumers (like China, India, and Türkiye) because the US has only recently hinted at enforcing secondary sanctions as a pressure tactic. Without coordinated G7 sanctions removal, a US-Russian investment partnership is doomed to fail. Russia’s export-oriented economy will continue to face constrained revenues, which could push the government to begin more ambitious deficit spending; private sector debt has skyrocketed, with corporate interest payments rising 58% year-on-year in Q1 2025; Russia’s central bank will maintain high interest rates (20%) to cool-down an economy overheated by the state’s wartime spending; and Russian banks will continue to utilize alternative payment systems, increasing costs.
Third, and more broadly, there is division on the means of Ukraine’s reconstruction. The US has embraced the US-Ukraine Reconstruction Investment Fund, which is essentially a joint mini-sovereign wealth fund to be backed by Ukraine’s mineral revenues and US capital investment, with shareholder ownership divided by their contributions (including in-kind US defense article transfers) and returns going exclusively to Ukrainian reconstruction investments for the first ten years. Ukraine shrewdly assumed this would bind the US to its reconstruction and act as an informal security guarantee. However, the Witkoff-Dmitriev plan applies the same model to a larger US-Russian investment partnership backed by two-thirds of Russia’s immobilized sovereign assets, overtaking the established Ukrainian fund. Some US-Russian investment will likely be interlinked in a final deal, but it is unclear if the Witkoff-Dmitriev plan envisions investment in Russian-occupied territory or the Arctic. Meanwhile, the EU has embraced its own €2.3 billion Ukraine Investment Fund, a public-private partnership to derisk private investments in Ukrainian infrastructure. The EU views Ukraine’s gradual integration into the Single Market as another means to stabilize the economy and promote investment, in addition to Russian reparations.
The Stakes
The aforementioned issues have narrow zones of agreement, and, barring surprises from the battlefield or creative diplomacy, a Russia-Ukraine peace remains as far off as February 2025, when US mediation began. US shuttle diplomacy between Ukraine and Russia has done little to bridge the gap, and without the Europeans on board with a plan, Russia will not be able to achieve its key goal of reintegrating into the global economy.
While the US has entertained Russia’s strategic interests, it has gradually grown frustrated with Russia’s continued assaults on Ukrainian cities and energy infrastructure during active dialogues. The US has slowly inched toward Ukraine’s position, allowing for long-range fires into Russian territory, adopting the Reconstruction Investment Fund in May, and sanctioning additional Russian energy majors in late October. Just before the leaking of the Witkoff-Dmitriev plan, the White House gave its blessing for Sen. Lindsey Graham’s Russia sanctions bill, which would impose 500% secondary tariffs on importers of Russian fuels. The US-Geneva revision—whittling down the 28-point Witkoff-Dmitriev plan to 19 points, tabling aforementioned issues for direct Ukraine-Russia talks—further reaffirms that the US continues to cherish, not sideline, Ukraine’s perspective.
As such, there are two kinds of downside risks for businesses to consider. First, and most likely, is that pressure on Russia—not Ukraine—will escalate in the short-term. The risks of secondary sanctions against importers of Russian fuels could escalate, creating energy market disruptions or forcing sell-offs of Russian-owned infrastructure assets abroad. A separate downside risk is that transatlantic cohesion around a peace plan could falter. The EU could fail to adopt financial assistance to Ukraine; the US could remove sanctions unilaterally in a gambit to end the war; or a security guarantee to Ukraine could remain weak and uncredible. This would embolden Russia and weaken Ukraine’s negotiating position, making renewed conflict more likely after an unsustainable peace.
