Ukraine can win the war. But can Ukraine reboot its economy?

Ukraine must rely on its partners for funding to win the war and rebuild the country. This year’s Ukraine Recovery Conference (URC) was an oppor­tunity for Ukraine to build trust and trans­parency regarding its plans and goals for the funding. Now Ukraine should address its long-term challenges and its commitment to build a stable business environment, while preparing for the URC 2024. Despite or even because of the ongoing war Ukraine should make reforms its priority next to fighting Russia and liber­ating its territories.

Ukrainian Recovery Conference 2023 affirms support to Ukraine and evokes careful optimism

Last year, during  the  Ukraine Recovery Conference in Lugano, Ukraine presented a plan requiring more than $750 bln in funding in the next decade: 40% in grants, 40% in national loans, and 20% in private invest­ments. Ukraine asked for $60 bln in 2022 and a range of $65–100 bln in grants and loans for the period from  2023 to 2025.

That was in 2022, and the damages from the war keep rising. Several inter­na­tional partners and experts expressed concerns about the feasi­bility of Ukraine’s assess­ments, deeming them overly optimistic and unreal­istic. Some doubted the predictability of military outcomes, while others questioned Ukraine’s ability to effec­tively absorb such substantial funding. Ultimately, the primary limitation faced by the partners was their inability to allocate such a large amount of funds.

The URC 2023 in London marked  an important milestone in Ukraine’s recovery efforts. Instead of one single presen­tation, Ukraine’s officials provided more detailed visions for different sectors. Inter­na­tional partners also brought pledges for medium-term support. Ukraine managed to get $40–50 bln in fiscal support in 2023 and received pledges for $60 bln for 2024–2027. The biggest pledge of €50 bln is coming from the EU’s Ukraine Facility: €39 bln in fiscal support and €8 in guarantees and blending to mobilise up to €18 bln in investment, supported with €3 bln of technical assis­tance. Additionally, Brussels is asking member states to chip in an extra €66 bln on top of these commitments.

While these pledges are signif­icant, they still fall short of meeting the World Bank’s current estimate of more than $400 bln needed over a decade for Ukraine’s recon­struction. There is a growing realization among allies that partners’ support alone cannot cober the entirety of the recon­struction costs.  It’s clear that to rebuild Ukraine, Russia must contribute as well, whether through confis­cated assets or repara­tions. Putting the confis­cation of Russian assets on the URC’s agenda was a big achievement.

Crucially, conver­sa­tions have shifted from providing emergency help to maintaining public spending to recovery packages. Most discus­sions in London were around war risks insurance.  Unlike the uncer­tainty witnessed in the previous year’s Lugano conference, donors are now more confident in Ukraine’s ability to withstand the conflict and win the war. Private investors are also looking into hefty oppor­tu­nities. Would they believe in Ukraine’s ability to rebuild and modernise the economy?

An ambitious vision needs a clear strategy

Ukrainian officials’ presen­ta­tions were full of ambition. The first vice PM Svyry­denko shared a vision leading to $1 trn GDP in 10 years. Deputy head of Office of the President Shurma and Minister of Energy Galuschenko presented an Energy Strategy with total electricity demand tripling by 2050 to almost 300 TWh and energy export to the EU exceeding internal demand by 400 TWh. Officials envision a  trans­for­mation of Ukraine’s economy from post-indus­trial to a service-oriented economy, focusing on producing high-added-value products. However ambitious the visions are, they also raise questions about how they can be realis­ti­cally attained.

To achieve a  $1 trln GDP in 10 years, Ukraine would have to grow 20% annually or add $84 bln to GDP each year on top of last year’s $160 bln. However, IMF’s projec­tions for Ukraine only foresee a growth rate of 4–6% until 2027. Electricity demand must grow 7.5% annually to reach the estimated 700 TWh. These are all overam­bi­tious growth rates, which any economy would find hard to achieve. One would expect a strong message on reforms and measures to get to this fairy tale of prosperity. However, the URC presen­ta­tions left blind spots on how exactly Ukraine is going to get where it wants. This is not the first time Ukraine presents a bright vision and big projects from state-owned enter­prises. What everyone expects by now is a practical strategy and a realistic roadmap.

As condi­tions for the funding facility, the EU is expecting Ukraine to present a concrete plan for recon­struction and reform to the multi-donor coordi­nation platform by the end of autumn. Reforms is the key word, as the release of the EU funding will be bound to condi­tion­al­ities, similar to the IMF approach. Other potential donors are observing the process closely seeking reassurance that Ukraine is genuinely commiteted and capable of effec­tively managing that amount of funding.

Moreover, it is evident   that state support certainly won’t be enough to rebuild Ukraine. Private invest­ments are crucial for the economy,and businesses are closely monitoring the reform progress. The condi­tion­ality of fiscal support aims to push Ukraine towards effective reforms, making it more attractive to big companies willing to invest and “test the waters” . But typically private investors require more guarantees. Foreign direct invest­ments in Ukraine were “booming” between 2004 and 2012. Since the Russian occupation of Crimea and the invasion of Donbas in 2014, war-related risks provided for a less than inviting environment for invest­ments. Never­theless, those who ventured into Ukraine faced other challenges. There is still a cautious stance towards Ukraine, notorious for its weak judicial system and systematic corruption. Business is willing to help rebuild the country, but it won’t do that if the risks are too high.

Ukraine’s homework  for URC 2024

URC 2023 was supposed to showcase Ukraine’s preparedness to address its long-term challenges and its commitment to build a stable business environment. Instead, despite some progress, signif­icant gaps and unresolved questions remained. What exactly was missing from the presentations?

Realism

All the optimistic growth, production and export figures feel like a moonshot, akin to shooting for the stars and hoping to sell a fairy tale to investors. Unfor­tu­nately, Ukraine is not a new startup and investors seek stability and credi­bility. Trust develops from honesty and realistic expec­ta­tions. The conver­sa­tions might have benefited from the “hard truth” approach employed by Zelensky in the inter­na­tional arena.

Political cohesion

While the visions seemed promising at first glance, closer exami­nation revealed discrep­ancies.  Economic targets and growth rates in presen­ta­tions vary between different government repre­sen­ta­tives. The nature of some economic and energy visions presented by the chief economic adviser of the Office of the President are often different in comparison to ones coming from the government. It’s clear by now that the Office of the President exerts signif­icant influence on the decision-making processes in Ukraine. Because of unilateral control of the parliament by the President’s party, no signif­icant political appointment happens without approval from the Office. But foreign spectators may question how independent the insti­tu­tions in Ukraine are and how free and secure they are in realising their policies. Empow­ering insti­tu­tions and ministers with the ability to champion reforms indepen­dently is vital.

Prior­ities

Given the immense funding required to rebuild after destruction, Ukraine must prior­itize short- and medium-term perspec­tives within the realistic budget of support it receives.  This means investing rather than spending  to achieve positive feedback on each dollar and euro spent to accel­erate growth.

Investment in human capital

 Investing in crucial indus­tries like healthcare and education is imper­ative for trans­forming the economy into a modern service-oriented one. A strong and healthy population and an up-to-date education system are as vital as physical infra­structure. However, Ukraine’s healthcare reform stalled somewhere in the beginning, and the education system is still pretty much outdated and signif­i­cantly lags behind trends. It is the government’s task to show how it is going to guide the economy towards the final vision.

Reforms

The presen­tation on the energy strategy 2050 contained 25+ slides, and only one was dedicated to reforms and regulatory changes. And even this one showed 8 changes that have been already intro­duced, and one more to come later this year. As if all reforms were finished, and there is nothing more to implement. Unfor­tu­nately, there were no planned reforms to show to businesses to make them inter­ested and hopeful about the Ukrainian market. Moreover, the key point of strategies and forecasts is not to plan the billions of GDP or terawatts of hours to achieve. It is to under­stand the trends and design the policies to adapt to changes as agile and productive as possible. The government should focus on creating a safe and predictable environment, not only on investing in multi-million projects.

How can partners support Ukraine?

Next year URC is hosted by Germany. Prepa­ra­tions for it have already started: Ukraine is doing its “homework”, inter­na­tional partners are making their pledges a reality. How can Berlin help Kyiv  prepare for the URC 2024 and make it an even bigger success?

1. Help in winning the war and ensuring resilience: supporting Ukraine in its defense efforts and providing security guarantees can minimize risks and build confi­dence for partners and investors. Allies’ continued support is crucial and long-term commit­ments will aid in sustaining Ukraine’s resilience.
2. Encourage economic growth and investment: should the military activ­ities continue into 2024, Ukrainian economy needs to continue to grow to maintain its defence budget. The more taxes we raise domes­ti­cally, the less support we would need from the partners. War-risk insurance can help boost investment, both internal and foreign. It has been the biggest topic for conver­sation in URC 2023. It would be great to shift from conver­sa­tions to first insured projects already by URC 2024.
3. Prior­itize anti-corruption and judicial reforms: Ukraine must show not only “some progress” in the area of anti-corruption, but similarly as our army fights against the aggressor, Ukrainian government and society must fight and show huge progress in anti-corruption reform. Inter­na­tional stake­holders unilat­erally point at paramount impor­tance of funda­mental reforms: judicial, anti-corruption and gover­nance. Ukraine has to build trust in its system and insti­tu­tions, not just promise high returns. Bench­marks and condi­tion­ality for funding histor­i­cally were strong drivers of change. However, there have been cases when reform was nominal, but didn’t really change things on the ground. Donors may help Ukraine benefit from actual reforms by paying more attention to the details and designing technical support projects and condi­tions for funding more thoroughly. This will help narrow the margin for political manoeuvres by political incum­bents and help pro-reform politi­cians and civil society to speed up change.
4. Support munic­i­pal­ities and local commu­nities: Munic­i­pal­ities and commu­nities are crucial players in rebuilding the country and attracting investment. So far, Ukrainian local commu­nities are only learning to run a democ­ratic country.   Direct projects at the local level can be beneficial, as the capital has limited capacity to address all needs simultaneously.
5. Address the brain dran and invest in human capital: Ukraine is losing its best and brightest to the war. Those high-value profes­sionals who left the country might decide to stay abroad where their expertise is valued more.  We need expertise and resources channelled into devoted people to design, champion, realise reforms and protect their achieve­ments. Encour­aging investment in education, capacity building, and civil society organ­i­sa­tions can bridge the gap and train skilled profes­sionals. Advocating for inter­na­tional support inthose areas will bring long-term benefits and ensure the strength of the Ukrainian state.

The word “recovery” implies getting back to a certain state. It may be a pre-2022-Russian-invasion one. Winning the war is paramount for Ukraine’s prosperity; there is no alter­native to that. Never­theless, reforming the long-standing issues is also important, even while fighting continues. The “R” in the name of the conference used to stand for Reforms when the format was estab­lished back in 2017. Let’s acknowledge the impor­tance of it, and refocus on reforms while preparing for the URC 2024 in Berlin.