by Finn Watson
With limited progress in Ukraine’s counter-offensive and recent instability within Russia, the future of the Russo-Ukrainian War is obscured. Nonetheless, Western and Ukrainian leaders should carefully consider and plan for Ukraine’s reconstruction because even if Ukraine wins the war, they may not win the peace.
Ukraine’s Economic Past and Present
While the recent conflict has significantly damaged the Ukrainian economy, economic issues have haunted the country since its independence from the Soviet Union in 1991 making it the poorest country in Europe. Like other post-soviet republics, the early years of statehood were rife with inflation, declining output, poor policy-making, and endemic corruption.
Initial Western optimism after the collapse of the Soviet Union quickly dissipated as visions of blossoming liberalisation and wealth had to be squared with the reality of a humanitarian crisis. From 1991 to 1997, Ukraine’s yearly GDP growth fell between -10% and -23%, and only turned positive in 2000. Furthermore, inflation peaked at over 4700% and remained high until after the old currency, karbovanets was replaced with the hryvnia.
It was in this lost decade that Ukraine had to build strong markets, compatible institutions, and a democratic rule of law. In this way, what has been achieved since then should not be underappreciated. From the 2000s onwards and despite the Global Financial Crisis, the European debt crisis, and the War in Donbas, Ukraine demonstrated economic growth and potential not only in the established metallurgical and agricultural sectors but also in a budding tech sector. In fact, the technology sector has been one of the most resilient in the post-war economy as there are over 4,000 technology companies
with specialised, educated, and comparatively cheap labour to support them. While the bedrock of Ukraine’s economy is in being a top producer of many important minerals, metals, and produce globally; the success of their software development and IT sectors suggests that without the recent devastation, Ukraine would have been on their way to relative economic advancement and success. In these ways, the Ukrainian economy has lots of potential to grow and bolster economic success across the region.
Unfortunately, Ukraine has not been able to live up to its potential due to factors both in and out of Kyiv’s control. The effects of war are self-evident enough: it tragically destroys the factories, fields, and people that make up the economy. But more impediments to economic growth can also be found in the oscillating conditions of the international financial market. When Ukraine began to stabilise in the early 2000s, capital rushed into the country with broad money growing around 35% a year, but when the GFC and the euro debt crisis intensified, these capital flows dried up and put immense pressure on the hryvnia and the central bank. This is not to say that international markets were unjustified or particularly unfair in this activity. However, seeing as the turbulence of foreign investment has been crucial in directing the Ukrainian economy, maintaining investor confidence through international cooperation and policy is a vital step in ensuring that Ukraine can achieve its productive capacity. Economic prosperity has also been held back by internal issues such as corruption, monetary and fiscal mismanagement, as well as one of the largest informal economies relative to GDP in the world.
Western and Ukrainian leaders must recognize the failures of the past so that the economic recovery plan does more than just return Kyiv to the status quo ante bellum.
Ukraine’s Economic Future:
Due to the scale of the war and the damage it’s caused, the project to rebuild Ukraine is a multigenerational undertaking that requires sustained commitment from the West. Economic damage from the war has been a catastrophe that manifests across all levels of society. By some estimates, total infrastructure damage totals $134 billion and the World Bank estimates the total cost of reconstruction at around $411 billion which is over two times Ukraine’s GDP. While it can be reductive to view war damages in purely economic terms, these figures demonstrate the scale of recovery and show that the recovery plan must be equally as extensive and profound.
The West has many reasons to commit to long-term support for Ukrainian reconstruction as doing so constitutes both an ethical imperative and a means to achieve their own economic and energy goals. Russian imperialism and acts of aggression are a threat to the West and its international security arrangements and since Ukraine is on the frontline of this fight, there is an ethical obligation to reciprocate these deeds through post-war support. However, appealing to Western altruism isn’t the only – or most compelling – reason to support Ukraine as it is in Europe and America’s self-interest that the Ukrainian economy flourishes after the end of the fighting. Ukraine’s economy is uniquely aligned to provide the metallurgical needs for the European green energy transition and a strong Ukrainian economy would have spillover effects that would strengthen the European economy as a whole. Furthermore, like how the post-WWII Marshall Plan was designed to quell the emergence of radical ideologies across Europe through economic prosperity, a new Marshall Plan for Ukraine, if done right, would similarly insulate Europe from political risks and illiberalism. Therefore, on an ethical, ecological, and economic level, the West should continue to support Ukraine through peacetime.
While the Ukrainian people and their elected leaders should be principally in charge of their post-war organisation, the continuation of foreign private and public investment is a vital ingredient for post-war success. However, for this investment to take place, Ukraine must first be investable. This means developing a framework that clarifies the roles of public and private investment while addressing concerns about corruption, rule of law, and fiscal and monetary governance.
With multiple governments, international financial bodies, and private actors involved in the reconstruction of Ukraine, a coordination problem appears: which actors are responsible for what? At the core of reconstruction are foreign governments because they do not have the same fiduciary responsibilities to shareholders that private firms do and can therefore make investments without concerning themselves with the returns on investment. Furthermore, consistent public sector commitments provide the foundation for private investment by building investor confidence and ensuring a certain level of stability from which private endeavours can thrive. Therefore, public sector support will need to bear more of the burden at first while it helps establish an investable Ukraine.
One of the biggest barriers to confident investment is the looming possibility of continued or reemerging conflict and the risks that it poses to business. This is something that Rishi Sunak addressed during his speech at the Ukraine Recovery Conference in London this June in which he emphasised the role of insurance in providing coverage for political and war-related risks. The promised war risk insurance intends to de-risk investment in immediate reconstruction needs by offering payment in the event of economic damages sustained due to a war-related event. Similar policies are utilised elsewhere in the global economy, particularly in shipping and aviation. Enabling and expanding such policies to a broader range of commercial activities will enable Ukrainian companies to achieve their full commercial potential through higher lending volume without as much uncertainty from foreign and domestic credit. However, organising these policies is very difficult because of the challenge of assessing war-related damages and appropriately pricing premiums that are both affordable and won’t result in bankruptcy for the underwriter. For these reasons, the London Conference Framework on War Risk Insurance was created to begin the process of organising successful war risk insurance through a combined effort from private insurance companies as well as public institutions such as the EBRD MIGA, and the U.S. International Development Finance Corporation. These efforts are part of a larger push to establish an efficiently priced insurance market to provide coverage at scale to support investment and recovery.
Another vital obstruction to effective governmental support and confident private sector investment is corruption. The existence of corruption could derail international assistance because it’s happened before. After the fall of the Soviet Union, much of the US aid to Russia did not make it to the real economy, instead, it was dispersed to corrupt actors within the Yeltsin administration. Thankfully, Kyivv is aware of the risks that corruption poses and has taken actions intended to demonstrate its commitment to radically reduce corruption. Earlier this year, a wave of high-profile actions were undertaken by the Security Service of Ukraine (SSU) as well as the State Bureau of Investigation (SBI) against current and former government and business leaders, including the arrest of the Chair of Ukraine’s Supreme Court and suspensions for senior members of the Ministry of Defense and State Tax Service. Post-Euromaidan solidarity and ambitions to join the Euro-Atlantic community have motivated Ukrainians to continue the fight against corruption and although there is still more work to do, the West should applaud Ukraine’s wartime anti-corruption measures and continue to incentivize these changes. Anti-corruption policy is a central issue that decides both the scale and effectiveness of Western investment and needs to be stressed, not for the sake of Western investors, but for the benefit of the citizens of Ukraine.
Fortunately, private firms have already committed to concrete and actionable plans in support of Ukrainian reconstruction despite lingering doubts about the war’s end. JPMorgan and BlackRock are collaborating on a reconstruction bank that aims to direct private investment into reconstruction plans across the country. The plan aims to combine initial seed capital from governments and international financial bodies designed to attract private investment into different sector funds. Further private investment funds have been set up by various venture capital and private equity firms with the goal of Ukrainian economic growth and private profit. Despite the positive outcomes that many of these funds attempt to establish, Ukrainian ownership and leadership must remain at the forefront of reconstruction investment so that economic progress can be principally felt by those the war has affected.
As this tragic war continues well into its second year without many signs that it will end soon, The West must continue in its efforts to support Ukraine even past an eventual armistice. Instead of succumbing to pessimism and inaction, the West should view Post-war Ukraine and its reconstruction as a transformational opportunity to heal a wounded nation and promote economic well-being across the globe.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
Photo by Maksym Pozniak-Haraburda