According to the rules. Towards Ukraine’s recovery

According to the Reconstruction of Ukraine report released by the Warsaw Enterprise Institute (WEI) in November 2022, a minimum of 750 billion US dollars will be required over ten years to recover the country from Russia’s war of aggression launched on 24 February 2022. Securing such an amount of money will be an enormous challenge – even if $300b+ will come in the form of Russian assets that got frozen outside the country following its unlawful attack – not to mention putting it to effective use, which will include domestic and foreign coordination and control. However brutal it might sound when bullets still fly, Ukraine can build back better – and stronger future-wise – as a modern EU economy within the country’s pre-2014 borders and without self-serving oligarchisation and the corruption its sows, and crucially – free from Kremlin’s meddling.

Ukraine has received $100b from 850 sources by 16 August 2022, chiefly of military and humanitarian support, counts Devex, a social enterprise and media platform for the global development community from Washington, D.C. “However, we know that this is not the total support that has been provided to Ukraine,” WEI experts note. They further, “It should be recognised that part of the support has already been partially used in the Ukraine’s reconstruction process. This is especially true of critical infrastructure, which suffered mainly in the first month of the war and had to be rebuilt immediately to allow the community to function in a quasi-normal way.” The current rebuilding process does not involve large-scale transport infrastructure, mainly for it not to be used by the aggressors in their war effort. Resetting up these bridges, key roads, and railways will have to wait until they are threatened no more (by July 2022, some 305 bridges, 6.5k km of railways, and 24.7k km of roads were destroyed).

Shortly after the launch of WEI’s analysis, The Kyiv Independent  reported in late November 2022 that the US would provide $4.5b direct budget support, while the EU give $2.5b for reconstruction. According to the United States Department of the Treasury, that sum levelled the country’s all-grant aid to $13b. “These funds will [...] help the Government of Ukraine defend against Russia’s illegal war by bolstering economic stability and supporting core government services, including wages for hospital workers, government employees, and teachers as well as social assistance for the elderly and vulnerable,” said Treasury Secretary Janet Yellen. At the same time, the EU announced its plans to provide €18b (some €1.5b/month) to Ukraine in 2023: “For urgent repairs and fast recovery leading to a successful reconstruction. We will keep on supporting Ukraine for as long as it takes,” Ursula von der Leyen, the European Commission’s (COM) President, underlined.

In October 2022, the Kyiv School of Economics said Russia devastated some $127b worth of infrastructure since its aggression. This sum is short of the damage caused by the Russian missile attacks the following November (and later ones) that primarily targeted Ukraine’s power-generating facilities (constituting yet another war crime, as per the Geneva Conventions, committed by the Kremlin and its accomplices; the first five mass attacks damaged some 40% of the country’s energy system).

“[...] there is no denying that the support of individual countries, institutions and especially the private sector will be greater the more secured Ukraine’s post-war situation,” reads Reconstruction of Ukraine. As such, WEI brings forth three scenarios. First, freezing the conflict, with Ukraine still facing a hostile Kremlin and unexplained border situation. Second, “peace with stipulations on the borders and bilateral relations of Russia and Ukraine,” but with a cabinet in Moscow continuing to plot anti-Ukrainian schemes. Lastly, ‘clean peace,’ i.e., driving off the attackers, securing pre-2014 borders, and resetting relations with a post-Putin government. Consequently, the scenarios rank from the least to the most favourable in terms of getting Ukraine’s reconstruction rolling with sufficient funding. It goes without saying that public & private organisations will be the more eager to inject recovery money, the less likely the Russians will blow it away again.

“So far – WEI authors say – the promises of support look extremely promising and bring some optimism, as the reconstruction plan is to be implemented even if the conflict does not cease.” Arguably, the major victories the Ukrainians struck in the south-east and west-south of the country in the autumn of 2022 fuel this optimism. With an increasing number of modern heavy armaments, intelligence and know-how supplied by the West, Ukraine shows more and more often that it can advance, sparking hope that regaining the annexed regions is well within reach. This staunch resistance will also have its consequences once the war is won and Ukraine progresses towards full EU membership from today’s candidate status: the military and the arms industry (alongside sectors catering to their needs) will continue requiring development to deter any future threat.

Reconstruction of Ukraine details the Ukraine Recovery Conference URC2022, held in Lugano in early July this year, as the most comprehensive event on the prospects of rebuilding the country up to date. URC2022 rallied the country’s allies that condemned the aggression and started backing Ukraine with arms, along with several international organisations such as COM, the Council of Europe, the European Bank for Reconstruction and Development, the European Investment Bank, and the Organization for Economic Co-operation and Development.

The parties agreed on the recovery governing principles, summed by WEI as cooperation; domestic reforms; transparency, accountability and the rule of law; self-governance and social co-responsibility for decisions; reconstruction with the participation of all stakeholders; gender equality; and sustainable development. These strike Ukraine’s pain points, say WEI experts, especially “[...] the need for internal reforms, placing them, not coincidentally, second among the objectives, as Ukraine’s problems of corruption, malfunctioning democracy, monopolisation and oligopolisation of the market, including the privileging of oligarchs, were known even before the outbreak of war in 2014.”

Before the war, Ukraine was used as a contrast to accentuate the development other post-Iron Curtain economies achieved after 1989/1991, notably whose efforts made them join NATO and the EU. It is not that the Ukrainians didn’t fight for their country – the Orange Revolution and especially Euromaidan brought about the hope of a profound change for the better. But the system and the Kremlin struck back. In the 2021 edition of the Legatum Institute Prosperity Index, Ukraine found itself in the 78th spot (out of 167), down from 64th in 2013. We are talking about the Baltic’s neighbour, with the region’s countries regularly occupying top places (Denmark’s 1st and Sweden’s 3rd in 2021), with the region’s EU “worst” Poland placed at 36th. This shows how deeply rooted are Ukraine’s problems, even excluding the “state sponsor of terrorism” to its east (as declared by the European Parliament on 23 November 2022, with national assemblies of Estonia, Latvia, Lithuania, and Poland doing so even earlier).

Then again, Ukraine ranked pretty well in the 2020 edition of the Global Innovation Index – 45 out of 131, up two places on the anterior ranking and landing on the silver spot in the lower-middle-income group. In 2022, the country was placed in the 57th spot and 4th in its income cohort. Interestingly, “Despite the war, the Ukrainian IT sector recorded an increase in service exports by 23 percent in the first half of 2022 compared to the same period in 2021. Even at the height of the Russian onslaught in early March 2022, Ukraine’s IT sector maintained 96 percent of its service exports, an unprecedented phenomenon,” highlights Reconstruction of Ukraine. The country’s Ministry of Digital Transformation wants Ukraine to become Europe’s fifth in the number of start-ups. To that end, works on favourable tax e-residency are underway for IT professionals.

Long story short: Ukraine regained independence following the dissolution of the Soviet Union. Like other European nations formerly under Moscow’s heel, the country wanted to westernise. Yet, entire industries & regions were captured by men who started earning exorbitant sums of money, consequently channelled towards politics and media (read: instruments of rule).

This situation created a vicious circle of corruption, symbolised by the outcast president Viktor Yanukovych and his gold-dropping Mezhyhirya Residence, nowadays a museum (and a shelter for the residents of nearby villages since late February 2022). The successor, Petro Poroshenko (also an oligarch), was charged with state treason in late 2021, accused of aiding & financing terrorists by organising the purchase of coal from separatist-controlled areas of Ukraine together with another oligarch (and a personal friend of Putin) Viktor Medvedchuk.

Yet another oligarch, Ihor Kolomoyskyi, supported the campaign of Ukraine’s current president, Volodymyr Zelenskyy, apparently wanting to play king-maker and pull strings from the back seat (among others, to get back his PrivatBank nationalised under Poroshenko in the wake of some $5.5b in financial frauds), a move that backfired as Zelenskyy proved to be an independent individual. “As business sharks, you must have nerves of steel. I’m surprised you don’t feel that the country has changed and is starting a new chapter in history. According to the new rules. Not even that, just – according to the rules. You can accept them: be a big, transparent business with the support of the state or you will be out of the game,” Zelenskyy said in 2021.

Whereas pre-war, the deoligarchisation of Ukraine and connected anti-corruption efforts have brought about limited successes only – though a significant piece of legal work from September 2021 was intended to ban oligarchs from funding political parties – in July 2022, news broke out that Kolomoyskyi and other tycoonocrats may be stripped of Ukrainian citizenship, with their fortunes confiscated.

The war has, therefore, created a new environment, say Reconstruction of Ukraine’s authors; one in which Zelenskyy rules with decrees that make it easier to cut the Gordian Knot of oligarchisation. Called “the great purge,” it may help the country eliminate one of the biggest plagues haunting it for three decades. Among many other things, post-war reconstruction is to bolster Ukraine’s small- and medium-sized enterprises (SMEs), the backbone of any modern economy. Privatisation will play a key role in market liberalisation, too, with 420 companies up for sale and only 100 to be left in the hands of the state.

That said, reports the Ukrainian Economic Truth, there is also the risk of managers who run state-owned enterprises delivering such poor results that will drive down their companies’ appraisals, enabling them to take the firms over for a fraction of what they are truly worth. Consequently, a new wave of oligarchs will emerge. Again, the €750b+ recovery fund isn’t needed for Ukraine’s reoligarchisation, but the state’s reconstruction.

The recovery will come in a few waves. The cabinet in Kyiv speaks of $65b out of that $750b+ figure making for immediate costs: defence, energy supplies, running the government, and supporting SMEs. WEI underlines in this context, “Maintaining state liquidity is crucial to maintaining Ukraine’s credibility as a debtor. Undoubtedly, the non-bankruptcy of Ukraine, as well as the absence of excessive debt, will contribute to faster recovery of macro economic stability after the war, as well as sustain the potential of Ukrainian companies [...].”

Second, a five-year reconstruction is expected to start as early as next year, with some $300b spent on infrastructure (energy, housing, and transport) and further upgrading the country’s deterrence capabilities. “Government documents assume that subsidies will be necessary, as well as development support, bank guarantees so as to enable companies to raise capital. Reduced post-war economic activity will help keep budget revenues low, not much higher than during the war. This will cause the Ukrainian government, in part, to have to be financed from outside in order to remain liquid and credible,” reads Reconstruction of Ukraine.

Finally, after those five years, the focus will shift from recovery to modernisation, with $400b+ channelled towards not only heavy-duty projects but also social infrastructure: the health care system, education, culture, and sports. Also, “[...] investments in green energy and energy independence will become increasingly important,” say the experts from WEI. Ukraine is to become like other EU countries – growing towards a green economy, leaving behind its heavy reliance on fossil fuels and oligarchic conglomerates to keep the wheels spinning. In this context, there are talks about re-establishing a connection from the 1980s between Ukraine and Poland for electricity transmission from the former’s nuclear power plants (some 7.0GW of export capacity, according to Polish MP Przemysław Koperski, cited by WEI).

Alongside that movement, another systemic change is to take place: decentralisation. More power is to be handed over to local authorities, who are to actively partake in the reconstruction as they and their communities, including NGOs, should have a better understanding of what needs fixing. WEI cites PAX, the largest Dutch organisation for peace with experience in post-war recovery across the Balkans, Colombia, the Middle East and sub-Saharan Africa, saying that “[...] reconstruction has the best results if it is planned and led by local authorities, with the participation of the local community, and if it is citizen-oriented, for human capital will be the most important pro-development factor once reconstruction is complete.”

Though Ukraine implemented the anti-corruption Prozorro and Dozzoro systems in 2015, likewise set in motion a few institutions tasked with fighting graft, the state still ranks poorly – landing the 122nd place (out of 180) in the 2021 edition of Transparency International’s Corruption Perceptions Index. Certainly, here, too, the Baltic Sea region can lend a helping hand, as Denmark and Finland ranked 1st, Sweden – 4th, and Germany – 10th. Since the current president “[...] took office in 2019 until the outbreak of the war, not much has changed either. The Constitutional Court of Ukraine and the parliament were used to paralyse the activities of all anti-corruption bodies,” highlights Reconstruction of Ukraine. Here again, WEI experts make it explicit that oligarchisation and corruption go hand-in-hand, as “a significant number of deputies and other public officials act on behalf of the oligarchs who finance them, or more precisely, corrupt them. This causes a certain spiral of corruption that is difficult to break, aimed at sustaining the influence of the oligarchs.”

The society is throttled by large- and small-scale corruption alike, with 24% of Ukrainians saying in a survey from 2020 that they were asked for a bribe at least once during the year. However, there are also positive news bits, such as “[...] the possibility of dealing with an increasing number of issues over the Internet, thanks to which the official is separated from the client, significantly reducing the risk of corruption.”

It will likely be that those funding Ukraine’s recovery, America and Europe, will insist on implementing an anti-corruption scheme that mirrors the world’s strictest, such as the US’ Foreign Corrupt Practices Act, the UK’s Bribery Act of 2010, or France’s SAPIN II from 2016. Additionally, “[...] the States whose companies are to be involved in the reconstruction should have their NGO or association in Ukraine. The task of such an organisation would not only be to provide real business support, but also to carry out all possible activities to search for corrupt phenomena that have a real impact on a given tender [...],” says Sławomir Śnieżko , President of the Management Board of the Polish chapter of the Anti-Corruption Academy, in an interview he gave for Reconstruction of Ukraine. WEI experts add, “Previous experience in cooperation of Ukraine with [...] organisations, such as the International Monetary Fund shows that if financial tranches are at stake, then the Ukrainians can and are able to introduce extensive measures to obtain them.” Then again, Śnieżko points out, “There has been a perennial problem in Ukraine that cooperation between [anti-corruption] departments has not always gone well. The problem is mainly human and political. Not everyone wanted to head in the same direction.” Yet, he also observes that “the war has changed this to some extent.” This is probably because of the oligarchisation-corruption loopback. Kick power-mongering oligarchs out of the equation without remorse, and it turns out that a large portion of the problem has been resolved.

Then there is the fundamental issue of who will supervise those $750b+ recovery funds so that the money goes where it is genuinely needed. Various organisations analysing Ukraine’s reconstruction agree that one central body should be established towards that goal. The devil is, though, in the detail. Should this agency be run by the Ukrainians or foreign donors – or both? Should this body be in charge of distributing the funds and auditing the progress – or should independent organisations carry out these two roles? Authors of Reconstruction of Ukraine propose that one “[...] alternative could be to establish an institution that has a credential to centralise funds from reconstruction financiers and distribute them to specific projects submitted by Ukraine’s central government, municipal authorities or Ukraine’s institution responsible for coordinating reconstruction. The established institution would consolidate the various streams of public funding, allocate them, defining milestones and distribution into tranches, and monitor the progress of their disbursement on an ongoing basis.” They also note that this wouldn’t exclude other initiatives, e.g., private companies’ direct engagement in specific projects (say, reconstructing schools).

At the same time, WEI underlines that “[...] another body should control how the funds are spent to avoid pathological situations. Simultaneous control and coordination creates some conflict of interest. Doubts may arise that if funds were misspent, it means that some error may have occurred in the process of coordinating them. In such a situation, the coordinating and controlling institution may try to cover up some mistakes.”

Daria Kaleniuk , Executive Director of the Anti-Corruption Action Centre from Kyiv, is optimistic about the safety of foreign support, saying in Reconstruction of Ukraine that “businessmen can work with local agencies to report corruption and unfair practices. There is also a developed civic movement cooperating with investigative journalists. Cases are publicised and resolved. Entrepreneurs should not worry about potential corruption cases. Likewise in the case of public procurement. Pozzoro and Dozzoro have changed a lot in the fight against corruption and ensured a lot of transparency as well as fairness of proceedings. Transparency is paramount, and that’s what we want to attract capital with.”

Amidst the war, Ukraine’s president remotely ‘rang the bells’ of one New York Stock Exchange session, encouraging investors to back the country’s recovery. Specifically, Zelenskyy wanted to draw the investors’ attention (and some $400b) to the agriculture, energy, infrastructure (especially transport), metallurgy, military, pharma, raw materials, tech, wood & furniture industries. “In order to create a safe and transparent environment for attracting business, Ukraine seeks to obtain investment guarantees from G7 countries and the EU, and also wants to reform the tax system and is forming a legislative framework,” reported Ukrainska Pravda at the beginning of September 2022.

Then again, various other factors will also play their part, not necessarily helping Ukrainians reconstruct their country. High inflation has already burdened many companies on their home turf. The low purchasing power of Ukraine’s market may deter foreign enterprises from entering it. This is also the question of whether – and when – the millions of refugees will return. The recovery will also be tasked with creating favourable re-entry conditions, including housing and employment opportunities (and it’s not that those fleeing the horror of war didn’t find jobs in exile). Demographics will undoubtedly be one of the central pieces in the recovery puzzle.

Still, WEI notes, “international companies operating on the Ukrainian market are likely to continue to operate on it.” Many western European transport & logistics enterprises haven’t withdrawn from Ukraine entirely; they and their employees have raised and carried significant amounts of aid to the country. In late November 2022, for example, HHLA Hamburger Hafen und Logistik AG (HHLA) shared that it transported three containers €150k worth of medical supplies to Odesa, a result of its employees raising €70k and the company topping that sum. “HHLA continues to uphold its responsibility towards its Ukrainian employees and their families in Odesa. Furthermore, we feel an obligation to provide humanitarian aid in view of the suffering of Ukraine’s population as a result of the ongoing Russian aggression,” Angela Titzrath , Chairwoman of HHLA’s Executive Board, said. The company has been running a container terminal in the Ukrainian port city since 2001, nowadays offline due to Russian aggression, but it is clear HHLA isn’t moving anywhere.

Not only HHLA but also “large Polish companies have invested their funds in Ukraine for many years, especially after 2008, and are present on the market there. During the initial phase of the war effort, they suspended their operations there, however, as the war dragged on and did not currently cover the western areas of the country – some of them restarted production and stores. Although it is not easy to operate in such conditions,” reads Reconstruction of Ukraine.

The last sentence of the above probably also pertains to the fact that at least some portion of foreign manufacturing in Ukraine was there simply for more accessible exports onto the Russian market, outweighing the Ukrainian one in size (144m vs 40m consumers pre-war). Gearing production taking place in Ukraine towards the EU market will require minimising tariffs (2-20% today). “The Free Trade Area Agreement, which has lowered tariffs on certain products (such as agriculture), has been temporarily applied since 2016, and is expected to cover minerals from 2023,” notes WEI.

From a concerned consumer point of view, one can already help SMEs from Ukraine by purchasing their products via e-marketplaces that offer EU-wide shipping, such as the Polish Allegro, where one can find, among many other things, long shelf life foods such as various sorts of Ukrainian crispbread or vegetable preserves. Every penny counts, and it is perhaps a sound idea to re-evaluate making corporate purses even longer by buying from a Ukrainian company instead.

As with any mega project – which tends to run over budgets and deadlines, especially if carried out by those lacking efficiency – reconstructing Ukraine will be titanically hard.

However, there are examples from the past that show it is possible – to recall the Marshal Plan only. Also, no law of the universe forbids Ukraine to advance by leaps and bounds, though it may take more than that the decade scrutinised by WEI – as it did for the now EU Member States from Central Europe or the so-called Four Asian Tigers. The example of modern South Korea is particularly poignant, as the country had been for many years poorer than its northern neighbour. The history of its development spells out that Ukraine’s fate doesn’t have to replicate that of the Kremlin – or even more tellingly of the cringe vassalage of ‘Sasha 3%.’ Taiwan proves that a state doesn’t have to choose between a flourishing economy or a vibrant democracy. The Baltic’s Estonia, Latvia, Lithuania, and Poland show that the post-Iron Curtain mess is cleanable.

Notwithstanding the article’s main body, there are also other visions of the Ukrainian future. One of the more unique – and polemic – is Oleksii Arestovych’s (Advisor to the Office of the President of Ukraine and a man with rich military, psychological and philosophical experience), in which he proposes a path that is separate from both the Kremlin but also the West. I highly recommend checking Good Times Bad Times ’ analysis of Arestovych’s views, which you can find in this video.