{"id":55459,"date":"2023-07-31T15:09:21","date_gmt":"2023-07-31T13:09:21","guid":{"rendered":"https:\/\/libmod.de\/democracy-and-its-enemies-how-not-to-lose-the-battle-copy\/"},"modified":"2023-08-01T09:25:11","modified_gmt":"2023-08-01T07:25:11","slug":"ukraine-can-win-the-war-but-can-ukraine-reboot-its-economy","status":"publish","type":"post","link":"https:\/\/libmod.de\/en\/ukraine-can-win-the-war-but-can-ukraine-reboot-its-economy\/","title":{"rendered":"Ukraine can win the war. But can Ukraine reboot its economy?"},"content":{"rendered":"

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Photo: Ukraine Recovery Conference<\/figcaption><\/figure>\n

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Ukraine must rely on its partners for funding to win the war and rebuild the country. This year\u2019s Ukraine Recovery Conference (URC) was an oppor\u00adtunity for Ukraine to build trust and trans\u00adparency 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 liber\u00adating its territories.<\/h2>\n

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Ukrainian Recovery Conference 2023 affirms support to Ukraine and evokes careful optimism<\/h3>\n

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 invest\u00adments. Ukraine asked for $60 bln in 2022 and a range of $65\u2013100 bln in grants and loans for the period from  2023 to 2025.<\/p>\n

That was in 2022, and the damages from the war keep rising. Several inter\u00adna\u00adtional partners and experts expressed concerns about the feasi\u00adbility of Ukraine\u2019s assess\u00adments, deeming them overly optimistic and unreal\u00adistic. Some doubted the predictability of military outcomes, while others questioned Ukraine\u2019s ability to effec\u00adtively absorb such substantial funding. Ultimately, the primary limitation faced by the partners was their inability to allocate such a large amount of funds.<\/p>\n

The URC 2023 in London marked  an important milestone in Ukraine\u2019s recovery efforts. Instead of one single presen\u00adtation, Ukraine\u2019s officials provided more detailed visions for different sectors. Inter\u00adna\u00adtional partners also brought pledges for medium-term support. Ukraine managed to get $40\u201350 bln in fiscal support in 2023 and received pledges for $60 bln for 2024\u20132027. The biggest pledge of \u20ac50 bln is coming from the EU\u2019s Ukraine Facility: \u20ac39 bln in fiscal support and \u20ac8 in guarantees and blending to mobilise up to \u20ac18 bln in investment, supported with \u20ac3 bln of technical assis\u00adtance. Additionally, Brussels is asking member states to chip in an extra \u20ac66 bln on top of these commitments.<\/p>\n

While these pledges are signif\u00adicant, they still fall short of meeting the World Bank\u2019s current estimate of more than $400 bln needed over a decade for Ukraine\u2019s recon\u00adstruction. There is a growing realization among allies that partners\u2019 support alone cannot cober the entirety of the recon\u00adstruction costs.  It\u2019s clear that to rebuild Ukraine, Russia must contribute as well, whether through confis\u00adcated assets or repara\u00adtions. Putting the confis\u00adcation of Russian assets on the URC\u2019s agenda was a big achievement.<\/p>\n

Crucially, conver\u00adsa\u00adtions have shifted from providing emergency help to maintaining public spending to recovery packages. Most discus\u00adsions in London were around war risks insurance.  Unlike the uncer\u00adtainty witnessed in the previous year\u2019s Lugano conference, donors are now more confident in Ukraine\u2019s ability to withstand the conflict and win the war. Private investors are also looking into hefty oppor\u00adtu\u00adnities. Would they believe in Ukraine\u2019s ability to rebuild and modernise the economy?<\/p>\n

An ambitious vision needs a clear strategy<\/h3>\n

Ukrainian officials\u2019 presen\u00adta\u00adtions were full of ambition. The first vice PM Svyry\u00addenko 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  trans\u00adfor\u00admation of Ukraine\u2019s economy from post-indus\u00adtrial 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 realis\u00adti\u00adcally attained.<\/p>\n

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\u2019s $160 bln. However, IMF\u2019s projec\u00adtions for Ukraine only foresee a growth rate of 4\u20136% until 2027. Electricity demand must grow 7.5% annually to reach the estimated 700 TWh. These are all overam\u00adbi\u00adtious 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 presen\u00adta\u00adtions 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 enter\u00adprises. What everyone expects by now is a practical strategy and a realistic roadmap.<\/p>\n

As condi\u00adtions for the funding facility, the EU is expecting Ukraine to present a concrete plan for recon\u00adstruction and reform to the multi-donor coordi\u00adnation platform by the end of autumn. Reforms is the key word, as the release of the EU funding will be bound to condi\u00adtion\u00adal\u00adities, similar to the IMF approach. Other potential donors are observing the process closely seeking reassurance that Ukraine is genuinely commiteted and capable of effec\u00adtively managing that amount of funding.<\/p>\n

Moreover, it is evident   that state support certainly won\u2019t be enough to rebuild Ukraine. Private invest\u00adments are crucial for the economy,and businesses are closely monitoring the reform progress. The condi\u00adtion\u00adality of fiscal support aims to push Ukraine towards effective reforms, making it more attractive to big companies willing to invest and \u201ctest the waters\u201d . But typically private investors require more guarantees. Foreign direct invest\u00adments in Ukraine were \u201cbooming\u201d 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 invest\u00adments. Never\u00adtheless, 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\u2019t do that if the risks are too high.<\/p>\n

Ukraine\u2019s homework  for URC 2024<\/h3>\n

URC 2023 was supposed to showcase Ukraine\u2019s preparedness to address its long-term challenges and its commitment to build a stable business environment. Instead, despite some progress, signif\u00adicant gaps and unresolved questions remained. What exactly was missing from the presentations?<\/p>\n

Realism<\/h3>\n

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. Unfor\u00adtu\u00adnately, Ukraine is not a new startup and investors seek stability and credi\u00adbility. Trust develops from honesty and realistic expec\u00adta\u00adtions. The conver\u00adsa\u00adtions might have benefited from the \u201chard truth\u201d approach employed by Zelensky in the inter\u00adna\u00adtional arena.<\/p>\n

Political cohesion<\/h3>\n

While the visions seemed promising at first glance, closer exami\u00adnation revealed discrep\u00adancies.  Economic targets and growth rates in presen\u00adta\u00adtions vary between different government repre\u00adsen\u00adta\u00adtives. 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\u2019s clear by now that the Office of the President exerts signif\u00adicant influence on the decision-making processes in Ukraine. Because of unilateral control of the parliament by the President\u2019s party, no signif\u00adicant political appointment happens without approval from the Office. But foreign spectators may question how independent the insti\u00adtu\u00adtions in Ukraine are and how free and secure they are in realising their policies. Empow\u00adering insti\u00adtu\u00adtions and ministers with the ability to champion reforms indepen\u00addently is vital.<\/p>\n

Prior\u00adities<\/h3>\n

Given the immense funding required to rebuild after destruction, Ukraine must prior\u00aditize short- and medium-term perspec\u00adtives 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 accel\u00aderate growth.<\/p>\n

Investment in human capital<\/h3>\n

 Investing in crucial indus\u00adtries like healthcare and education is imper\u00adative for trans\u00adforming 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 infra\u00adstructure. However, Ukraine\u2019s healthcare reform stalled somewhere in the beginning, and the education system is still pretty much outdated and signif\u00adi\u00adcantly lags behind trends. It is the govern\u00adment\u2019s task to show how it is going to guide the economy towards the final vision.<\/p>\n

Reforms<\/h3>\n

The presen\u00adtation 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 intro\u00adduced, and one more to come later this year. As if all reforms were finished, and there is nothing more to implement. Unfor\u00adtu\u00adnately, there were no planned reforms to show to businesses to make them inter\u00adested 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 under\u00adstand 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.<\/p>\n

How can partners support Ukraine?<\/h3>\n

Next year URC is hosted by Germany. Prepa\u00adra\u00adtions for it have already started: Ukraine is doing its \u201chomework\u201d, inter\u00adna\u00adtional partners are making their pledges a reality. How can Berlin help Kyiv  prepare for the URC 2024 and make it an even bigger success?<\/p>\n

    \n
  1. Help in winning the war and ensuring resilience: supporting Ukraine in its defense efforts and providing security guarantees can minimize risks and build confi\u00addence for partners and investors. Allies\u2019 continued support is crucial and long-term commit\u00adments will aid in sustaining Ukraine\u2019s resilience.<\/li>\n
  2. Encourage economic growth and investment: should the military activ\u00adities continue into 2024, Ukrainian economy needs to continue to grow to maintain its defence budget. The more taxes we raise domes\u00adti\u00adcally, 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 conver\u00adsation in URC 2023. It would be great to shift from conver\u00adsa\u00adtions to first insured projects already by URC 2024.<\/li>\n
  3. Prior\u00aditize anti-corruption and judicial reforms: Ukraine must show not only \u201csome progress\u201d 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. Inter\u00adna\u00adtional stake\u00adholders unilat\u00aderally point at paramount impor\u00adtance of funda\u00admental reforms: judicial, anti-corruption and gover\u00adnance. Ukraine has to build trust in its system and insti\u00adtu\u00adtions, not just promise high returns. Bench\u00admarks and condi\u00adtion\u00adality for funding histor\u00adi\u00adcally were strong drivers of change. However, there have been cases when reform was nominal, but didn\u2019t 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 condi\u00adtions for funding more thoroughly. This will help narrow the margin for political manoeuvres by political incum\u00adbents and help pro-reform politi\u00adcians and civil society to speed up change.<\/li>\n
  4. Support munic\u00adi\u00adpal\u00adities and local commu\u00adnities: Munic\u00adi\u00adpal\u00adities and commu\u00adnities are crucial players in rebuilding the country and attracting investment. So far, Ukrainian local commu\u00adnities are only learning to run a democ\u00adratic country.   Direct projects at the local level can be beneficial, as the capital has limited capacity to address all needs simultaneously.<\/li>\n
  5. Address the brain dran and invest in human capital: Ukraine is losing its best and brightest to the war. Those high-value profes\u00adsionals 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 achieve\u00adments. Encour\u00adaging investment in education, capacity building, and civil society organ\u00adi\u00adsa\u00adtions can bridge the gap and train skilled profes\u00adsionals. Advocating for inter\u00adna\u00adtional support inthose areas will bring long-term benefits and ensure the strength of the Ukrainian state.<\/li>\n<\/ol>\n

    The word \u201crecovery\u201d implies getting back to a certain state. It may be a pre-2022-Russian-invasion one. Winning the war is paramount for Ukraine\u2019s prosperity; there is no alter\u00adnative to that. Never\u00adtheless, reforming the long-standing issues is also important, even while fighting continues. The \u201cR\u201d in the name of the conference used to stand for Reforms when the format was estab\u00adlished back in 2017. Let\u2019s acknowledge the impor\u00adtance of it, and refocus on reforms while preparing for the URC 2024 in Berlin.<\/p>\n

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