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?
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.
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.
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.
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?
- 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.
- 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.
- 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.
- 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.
- 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.
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