Reconstruction of Ukraine will require enormous human and financial resources. As of March 2023, reconstruction of Ukraine will cost 411 billion USD, i.e. 2.6-fold exceeding GDP of Ukraine in 2022.
Over the past 60 years, no conflict or disaster has provided more recovery funds than the Marshall Plan: ca. 140 billion USD (calculated as of 2022). As for Ukraine, it is a unique case.
Recovery will affect all areas of social life: now both state and business are discussing specific mechanisms for reconstruction of Ukraine. Legal aspects of reconstruction are one of the keystones to understanding the intricacies of future recovery. Below are some aspects to keep in mind.
1. Time is money
It usually took at least 5-10 years for countries that were able to recover from a war (return to pre-war GDP level), but many countries either did not recover at all or took decades to rebuild.
Average amount of financial assistance received by post-conflict countries for reconstruction makes up 40% of their losses.
For simplicity, financial sources for recovery can be defined as follows:
- State budget of Ukraine
- Donors
- Development banks
- Confiscated Russian assets and reparations
- Private money of investors
Each source has its limitations and requires specific solutions.
Ukraine’s state budget is currently out of resources for recovery, because everything is spent to social and defense needs. Sovereign donors, international financial organizations and development banks have their own conditions and time limits. As shown by world-known cases of post-war reconstruction, for the first 5-10 years international donors cover only ca. 50% of the budget of the respective country.
Average amount of financial assistance received by post-conflict countries for reconstruction makes up 40% of their losses. Confiscation of russian assets and reparations is a unique case of imposing sanctions. Recently, the Government of the Netherlands officially approved creation of the Register of damages caused to Ukraine by russian aggression. This Register will contain information about all damages caused by the war to citizens, enterprises and the state of Ukraine. It should become the first component of a comprehensive compensation mechanism designed to secure that the aggressor state will pay in favor of Ukraine full compensation for incurred damage in accordance with the international law. However, lawyers are well aware that it will take years, not months.
2. Money is not a guarantee of success
Although post-war recovery is insufficiently covered by academic research, most experts believe that the amount of recovery aid is usually not related to success/failure of a country’s subsequent economic development. In a nutshell, if one has money for reconstruction, it does not always facilitate quick and sustainable recovery.
For example, both social and commercial infrastructure is one of the obvious priorities to begin rebuilding. However, such cases as reconstruction of Afghanistan and Iraq prove that rapid infrastructure restoration does not always facilitate magical recovery of the economy. When the amounts of donor money eventually dwindle, but private business has not yet restarted, there is still a long way to go before full recovery. In order not to lose the chance, aid should be quite quickly transformed into economic development.
2. Institutional capacity is a non-obvious factor
Recently, EBRD published the latest report Regional Economic Prospects which predicted one of the optimistic scenarios for reconstruction of Ukraine. A five-year recovery requires for GDP sustainable growth by 14% per year and attracting 50 billion USD in investment every year.
Over the past 13 years, Ukraine has almost never grown more than 5% of real GDP annually. Single surges occurred after falls, being provoked either by global trend (2008) or by crises in Ukraine. Therefore, the outlined scenario looks a bit fantastic. Indeed, EBRD notes that only less than a third of economies managed to recover for such a short period of five years. Others have worked for decades. Both the State and the Office of Reforms expect annual GDP growth not lower than 7% (survival point) and up to 10% as a moderately optimistic scenario.
One of the success factors emphasized by the EBRD is Ukraine’s institutional ability to accept and properly use aid (socalled absorption capacity). Visible progress depends on actual ability to process everything that donors are ready to give Ukraine, followed by re-launching economy. However, it is necessary to start with building a management structure that is ready to develop and involve partners in complex projects. In a nutshell, a new type of effective public administration is first and foremost.
Ukraine has an excellent example of up-to-date digital approach to reconstruction project management: DREAM (Digital Reconstruction Environment for Accountable Management). This is an effective tool for reconstruction project transparent management based on the principle of open data and a single window for project financing, management and control. It is implemented by the main responsible bodies, namely the Ministry of Reconstruction, the Ministry of Digital Transformation and the Agency for Reconstruction.
3. An important aspect of recovery
Social considerations are paramount in view of reconstruction. Encouraging the private sector is important, inter alia, for combatting unemployment, demographic crisis and brain drain. Restoring a better labor market and a competitive economy to which immigrants should want to return – that is a challenge for the Ukrainian government.
The need for comprehensive education reform suitable for the digital economy in future and social reform for reintegration of veterans should be stimulated by renewal of Ukraine’s extremely outdated labor and social legislation. Ukraine still applies the outdated Soviet Labor Code, which does not comply with demands of up-to-date digital economy, creative industries and inclusiveness criteria.
4. Can EU integration accelerate recovery?
Integration into global economic system has a major impact on recovery and economic development. Ukraine received EU candidate status on June 23, 2022, and is planning to join the EU within 2-3 years.
Recently, the Supreme Council of Ukraine created a project office aimed at harmonization of Ukrainian legislation with EU rules. It covers four priority areas of European integration review of Ukrainian legislation: environment, intellectual property, financial services, consumer rights and health care. Therefore, all these industries will soon face regulatory modernization and the corresponding challenges of adapting business operations to the new requirements.
5. Is there a magic pill?
Successful cases of reconstruction have one common feature: engagement in private business restoration (for example, Croatia or Korea after 1961). Both local business entities and foreign investors will be a key engine to stimulate the economy while donor money is still available.
However, there are bottlenecks for involving the private sector. First, until the war is over, is insurance against military and political risks. Donors, jointly with Ukraine and international insurance industry, should offer low-cost insurance solutions so that the bravest ones could be the first to make investments. Insurance solutions offered by MIGA and allied export-import agencies are discussed as the only ones available so far but are not treated as a significant game-changer. If so, many strategic investors will just wait until the war is over.
On the other hand, there are currently obvious national champions in investment. Infrastructure and energy sectors focused on renewable energy sources and ecological reconstruction now rank first, followed by traditionally strong sectors such as IT, agriculture and manufacturing. New leaders such as logistics, defense, healthcare and education will not be left behind. For instance, demining, defense technology and medicine in terms of prosthetics are called the new unicorns to watch and to invest in. A special taxation regime is being discussed for some of them, which will certainly facilitate rapid growth of new industry ecosystems.
In addition, the discussion upon launching new tools for investment promotion is ongoing. First tool is an investment fund that will help attract international private money to Ukraine with the state support and by means of certain quasi-state guarantees. As declared recently, Ukraine will cooperate with BlackRock and J.P. Morgan for the purpose of creating an investment attraction structure that will become a pilot investment driver for the first projects and will help open Ukraine to global business. Second tool is the state fund of the national welfare of Ukraine which will manage selected state assets in accordance with global standards.
What can motivate the foreign capital flow to Ukraine en masse? Liberalization/deregulation reforms and the rule of law are keystones for that purpose. Top three priorities include tax and law enforcement reforms, as well as continuing judicial reform. Anti-corruption reform is still a top priority, as it was urgently necessary even before outbreak of the war.
Finally, if Ukraine implements all the expected changes and reforms, it may become the most attractive European country for impact investors. It means investments to be focused on facilities creating measurable positive change in the industry in addition to net financial return. Impact investors are also known as ESG investors because they consider environmental, social and corporate governance standards and the subsequent impact on ecology and communities. Such investors are desperately needed in Ukraine for obvious reasons: Ukraine should not rebuild the past but should take a leap into the future for sustainable, innovative and inclusive reconstruction of the country. Therefore, to become a focal point for investors who will contribute to the growth of whole new industries – that is a national strategy of Ukraine for decades.
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