Rebuilding Ukraine: Realities and prospects | In Principle

The NYSBA 2023 Warsaw Spring Meeting raised two intertwined topics: new investments into the region and the upcoming reconstruction of Ukraine.

Below we suggest an overview of the current state of affairs with respect to Ukraine’s recovery needs, prospects of attracting new investments, and the beginning of the reconstruction process in Ukraine.

Estimated recovery needs from the first year of war

According to the Ukraine Rapid Damage and Needs Assessment: February 2022 – February 2023, the second such report developed by the World Bank Group, the Government of Ukraine, the European Commission, and the United Nations, the total estimated reconstruction and recovery needs resulting from the first year of full-scale war exceed USD 411 billion, which is 2.6 times Ukraine’s gross domestic product in 2022. The highest estimated needs are in:

• Transport (22%)
• Housing (17%)
• Energy (11%)
• Social protection and livelihoods (10%)
• Explosive hazard management (9%)
• Agriculture (7%).

These estimates are considered the minimum, as needs will continue to rise as long as the war continues.

The role of the Ukraine Recovery Conferences

The first Ukraine Recovery Conference (URC 2022), in Lugano on 4–5 July 2022, served as the international kick-off for the recovery process in Ukraine. The Ukrainian government presented “Ukraine’s National Recovery Plan,” covering 10 years and worth USD 750 billion. URC 2022 resulted in the Lugano Declaration, establishing a framework for the political process of Ukraine’s reconstruction and setting out seven principles as common benchmarks for the future:

1. Partnership. The recovery process is led and driven by Ukraine and conducted in partnership with its international partners. The recovery effort has to be based on a sound and ongoing needs-assessment process, aligned priorities, joint planning for results, accountability for financial flows, and effective coordination.
2. Reform focus. The recovery process has to contribute to accelerating, deepening, broadening and achieving Ukraine’s reform efforts and resilience in line with Ukraine’s European path.
3. Transparency, accountability, and rule of law. The recovery process has to be transparent and accountable to the people of Ukraine. The rule of law must be systematically strengthened and corruption eradicated. All funding for recovery needs to be fair and transparent.
4. Democratic participation. The recovery process has to be a whole-of-society effort, rooted in democratic participation by the population, including those displaced or returning from abroad, local self-governance, and effective decentralisation.
5. Multi-stakeholder engagement. The recovery process has to facilitate collaboration between national and international actors, including from the private sector, civil society, academia and local government.
6. Gender equality and inclusion. The recovery process has to be inclusive and ensure gender equality and respect for human rights, including economic, social and cultural rights. Recovery needs to benefit all, and no part of society should be left behind. Disparities need to be reduced.
7. Sustainability. The recovery process has to rebuild Ukraine in a sustainable manner aligned with the 2030 Agenda for sustainable development and the Paris Agreement, integrating social, economic and environmental dimensions, including green transition.

The next international Ukraine Recovery Conference will be held on 21–22 June 2023 in London. URC 2023 is intended to focus on mobilising international support for Ukraine’s economic and social stabilisation and recovery from the effects of war, including through emergency assistance for immediate needs and financing private-sector participation in the reconstruction process.

Financial support for Ukraine since the start of the full-scale invasion

The ongoing financial support for Ukraine from the international community and international financial organisations is playing a tremendous role in Ukraine’s ongoing resilience. For a better understanding of the scale of financial assistance provided to Ukraine since the beginning of the full-scale war, we suggest referring to:

• Paper outlining multilateral financial assistance provided to Ukraine by the European Union and its bodies (European Investment Bank), international financial institutions (International Monetary Fund, the World Bank, and the European Bank for Reconstruction and Development) and informal groups of bilateral creditors
• The Ukraine Support Tracker, administered by the Kiel Institute for the World Economy. The tracker lists and quantifies military, financial and humanitarian aid to Ukraine since the beginning of the full-scale war, covering 40 countries, specifically the EU member states, other members of the G7, as well as Australia, South Korea, Turkey, Norway, New Zealand, Switzerland, China, Taiwan and India.

On 26 January 2023, the Multi-agency Donor Coordination Platform to support Ukraine’s repair, recovery and reconstruction process was launched. It brings together high-level officials from Ukraine, the EU, and G7 countries, as well as partners from international financial institutions, notably the European Investment Bank, the EBRD, the IMF and the World Bank. The platform should ensure close coordination among international donors and financial organisations as well as coherent, transparent, and accountable support. It aims to ensure enhanced coordination among all key players providing short-term financial support but also longer-term assistance for the reconstruction phase.

Ukraine’s recovery and reconstruction priorities for 2023

The Rapid Damage and Needs Assessment Report presented five key recovery and reconstruction priorities for Ukraine as of February 2023:

1. Critical and social infrastructure (USD 5.7 billion) and delivery of basic services to vulnerable populations. This will include the renewal of residential utilities, repair and reconstruction of transport infrastructure, and repair and reconstruction of schools, healthcare facilities, and other social and administrative infrastructure.
2. Energy infrastructure (USD 3.3 billion), including restoration and repair of transmission and distribution lines and generation capacity, development of renewables, and protection of the power grid.
3. Housing (USD 1.9 billion), including quick repairs and capital reconstruction.
4. Private sector development (USD 2.7 billion), including grants, credit lines, and risk facilities to support SMEs, microenterprises, the agriculture sector, and exports.
5. Humanitarian demining (USD 0.4 billion), focusing on building the strategic and operational capacity for demining operations.

Even though the war continues, these priorities mean that the reconstruction of Ukraine is already on the agenda.

Establishment of the Ukraine Development Fund

On 6 May 2023, the Ukrainian government announced its plans to launch a national development finance institution, the Ukraine Development Fund (UDF). The UDF is intended to mobilise and attract public and private capital into the reconstruction of Ukraine by using a range of innovative and traditional financial instruments. The structure will comprise a multi-layered approach guided by strong governance and global standards for sound financial and risk management practices. The UDF will target key sectors of the Ukrainian economy, including energy, infrastructure, agriculture, manufacturing and IT.

The Ukrainian Ministry of Economy has appointed BlackRock’s Financial Markets Advisory Group to provide advisory services in support of the design of the UDF on a pro bono basis.

New investments are already underway

In March 2023, UkraineInvest, the investment promotion office of the Ukrainian government, released the guide “Rebuilding Ukraine with the Private Sector” to promote the message to the international business community that “Ukraine is not only strong and free but open for business.” Additionally, UkraineInvest from time to time hosts online forums on foreign investment and transformation opportunities in Ukraine.

Below are several examples of recent announcements on prospective investments into the Ukrainian economy in 2023:

• On 5 April 2023, Bayer announced its intention to invest an overall EUR 60 million from 2023 onwards in its corn seed production facility in Pochuiky (Zhytomyr region).
• The Mostyska Dry Port Industrial Park (Lviv region) plans to invest up to EUR 3 million by the end of 2023 to integrate the Ukrainian railway with the European gauge (Mostyska station), and to develop roads and communications in the park territory near the Polish border.
• On 28 April 2023, Horizon Capital Growth Fund IV announced that it had exceeded its target size, doubling commitments to USD 254 million at the second closing. This demonstrates the strong investor interest in compelling opportunities in high-growth, high-impact tech and export-oriented companies, including light manufacturing, food processing, innovative consumer goods, FinTech, etc. The fund’s investments are expected to contribute to Ukraine’s ongoing resilience, including support of growth and job creation, expansion of the tax base, an increase of capital availability for SMEs, and promotion of gender equality.

Already on the agenda

In summary, it is worth repeating that the reconstruction of Ukraine is already on the agenda. The success of reconstruction in Ukraine will massively depend on both public capital and private investments, as well as Ukraine’s stern adherence to a focus on reform and European democratic values. By combining these efforts, Ukraine’s economic growth can be further stimulated, ensuring transparent and sustainable rebuilding of the country.

Mariia Derechina, M&A and Corporate practice, Wardyński & Partners