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22 April, 2022updated 04 May 2022 09:13

“Entire cities will have to be rebuilt”: How Ukraine is preparing for reconstruction

Rebuilding Ukraine's infrastructure, homes and businesses will cost up to $1trn. International organisations and investors will play a leading role in footing this bill.

By Viola Caon and Sebastian Shehadi

The war in Ukraine is certainly not over. At the time of writing, Vladimir Putin’s second round of invasion is under way on the country’s eastern front, with fierce fighting still taking place across Kharkiv, Mariupol and other key cities. 

“The losses caused by the war are catastrophic,” said Ukrainian Minister of Finance Sergii Marchenko in a speech to the European Council in April. “The Russcist occupiers continue to destroy not only military facilities but also transport, energy and industrial infrastructure, which was built by generations of Ukrainians [and many of which] survived World War Two.”

On top of this are the thousands of homes that have been destroyed, not to mention, more importantly, the thousands of civilians and resistance fighters that have been killed by Putin’s war. 

The material cost of the war 

Putting a price tag on Ukraine’s overall reconstruction cost remains difficult, not least since the war is not over. 

“In the scenario in which all of Ukraine has been liberated and there is a state that is under Ukraine’s control, there might be a sort of Marshall Plan [like after World War Two], which is likely to be a $1trn programme,” says Daniel Bilak, former chief investment adviser to the prime minister of Ukraine. 

“Entire cities will have to be rebuilt and that is a big undertaking. Cities such as Mariupol and Kharkiv will need new residential buildings, business manufacturing facilities and so on,” he adds. 

Bilak’s estimate is higher than the official figure of $565bn (Hrv16.7trn) put out by the Ukrainian government.

Meanwhile, researchers from the Centre for Economic Policy Research think it will cost between $220bn and $540bn (the upper figure being more than three times Ukraine’s pre-war GDP).

Sergiy Tsivkach, executive director at UkraineInvest, the country’s investment promotion agency, helps break down some of these figures. He explains how, thus far, infrastructure damage – including destroyed bridges, roads, housing, buildings, etc – as well as military infrastructure, is estimated at $270bn. Then there is the cost of damage to commercial buildings and operations, with losses to the Ukrainian economy estimated at $290bn.

In his speech, Marchenko explained that the war has unfolded in areas that amount to almost three-quarters of Ukraine’s GDP, and where, before the invasion, almost ten million people were employed, two-thirds of Ukraine’s total employed population. Approximately 30% of the country’s companies have completely stopped their activities, while 45% have reduced production. 

Numbers aside, some experts believe there is little point in estimating how much money will be needed to reconstruct Ukraine. “There is a war going on in the country, new infrastructure facilities are being destroyed every day, so the numbers that are [given] today change from day to day,” says Professor Iryna Zapatrina, chairwoman of the Ukrainian PPP Development Center.

“It is incorrect to make an assessment of the necessary funds based on the cost of the destroyed infrastructure,” she adds. “It is necessary to assess the financing needs of creating new infrastructure facilities that will be built using modern technologies and which should have a high level of resiliency. [Lastly], since many cities in Ukraine were almost completely destroyed as a result of hostilities, before making such assessments it will be necessary to determine the spatial distribution of new infrastructure facilities.” 

Where should reconstruction efforts begin?

Although almost all of the Ukrainian government’s focus remains on the war effort, it has, with the support of the international community, already begun work on plans for the reconstruction of the country. 

In early April, Ukraine’s Prime Minister, Denys Shmyhal, said that a plan for the renewal of Ukraine is already being prepared, under the name U-24, and that it will be carried out in three stages. 

“The first stage involves the temporary restoration of destroyed objects, such as bridges and life support systems. It has already begun,” explains Zapatrina. “The second stage is a quick recovery after the end of hostilities. It includes the resumption of water and electricity supplies in the devastated territories. The third stage is a full-fledged renewal of cities, infrastructure and the country as a whole.”

The government is already starting to finance priority restoration of infrastructure in the Kyiv, Sumy, Chernihiv and Zhytomyr regions, with a budget of $34m, according to Tsivkach. In terms of sectors, he says that, based on the country’s needs and damages, the priority industries are building materials, agriculture, food production and metals manufacturing.

Bilak contends that the initial focus must be on infrastructure, agriculture and IT, since those sectors can pick up right away and were worth a significant amount of GDP before the war, thereby stimulating other industries too. 

In the longer term, Bilak thinks that redeveloping Ukraine’s gas and nuclear potential will be essential if the country is to meet carbon reduction targets and become a large exporter. He also says that the defence industry is also going to remain very important: “We have to remain armed to the teeth.”

Building back better: An opportunity for sustainable developments

Most of Ukraine’s infrastructure – from roads to ports, offices and buildings – dated back to the Soviet era and was therefore in need of modernisation. Much of it has now been destroyed and needs replacing.

Observers see this as a unique opportunity for the EU, which is largely expected to foot most of the initial bill, to make Ukraine a testing ground as well as an example of sustainable and green development.

“The reconstruction offers a unique opportunity to upgrade Ukraine’s productive capacity, attracting foreign capital in modern technology, laying the foundations for long-term growth, and integrating Ukraine more tightly into the global economy,” says Tsivkach.

“We have to seize this unique chance and think over the country’s investment strategy for the long term. The cornerstone of Ukraine’s success, in the long run, lies in the coordination of investments for the future; for instance, creating a carbon-free economy,” he adds.

Susan Goeransson, head of infrastructure at the European Bank for Reconstruction and Development (EBRD), agrees: “Ukraine’s infrastructure has suffered great damage across the board. The government will be in the lead during reconstruction, and we are working towards ensuring that we will be ready when our help is needed.

“We see a strong opportunity for Ukraine to build back better, to make sure that the new infrastructure is modern, digital and in line with the Paris agreement. In a way, it is easier to do this from scratch.”

Ukrainians might have a lot to offer on the digital and technological front thanks to their creative mindset, according to Bilak. “Part of the reason why Ukrainians have performed so well on the battlefield is that they are strong in science, technology and engineering. The science, technology, engineering and mathematics (STEM) acronym becomes ‘STEAM’ in Ukraine, as the arts element should be included,” he says.

Investing in skills like this is in the EU’s best interest, Bilak argues. “It should be pretty clear by now that it is not possible to have a Europe that is free and at peace without a prosperous, democratic and free Ukraine,” he adds.

When will private foreign investors be able to help?

Most of the bill will initially be footed by the European Commission, which is working on a recovery fund for Ukraine’s reconstruction modelled on the Covid-19 recovery fund.

Although it is not clear how much will be provided through loans and grants, the bloc has already provided €600m ($650.75m) in soft loans since the war started and it is working on the approval of an additional €600m.

However, the estimated $1trn is likely to require the contribution of a broader range of investors at some point, and maybe even by the Russian government too if Western governments pressure the Kremlin in the right way or seize Russian assets

While the likes of financial development institutions and international financial institutions are already actively working with the EU and European Commission to leverage their investment, other sources of capital, including foreign direct investment, are likely to come in at a later stage.

Proper reconstruction of cities, infrastructure and the country as a whole will only take place after temporary restorations and quick recovery works have been carried out after the end of hostilities, according to Zapatrina.

“For private investors, it is necessary to ensure the coverage of their political risks as well as the comfort and transparency of the process of considering their proposals and organising their activities in Ukraine,” she adds. “Both the government and experts are working on this now.”

As private investors made their allocations based on the risk-return profile of the investment, a later stage, when initial and essential reconstruction have been completed and the economy has restarted, might be a more favourable time for them to contribute.

“I have no doubt that private investors will come back to Ukraine, but there needs to be a better perception of investment security in the country, which is hard to discuss now,” says Grzegorz Zielinski, head of energy for Europe at the EBRD.

“At present, we are seeing more active interest coming from donors who are willing to provide grants to leverage the EBRD and, in due course, private sector financing,” he adds.

While private investors might not be willing to open their wallets just yet, the interest is already there and investment promotion agency UkraineInvest has already been having those conversations.

“Despite the full-scale armed aggression of the Russian Federation against Ukraine, UkraineInvest has been approached by some foreign investors who see Ukraine as a destination for their investments after the war and are already interested in opportunities to be ready to quickly enter the market and expand,” says Tsivkach.

“So far, such appeals are mostly from companies working in the construction, construction waste and service sectors. Mostly these are appeals from US and UK companies; there are also some from Belgium, Turkey and India.”

Tsivkach adds that this appetite has gone as far as to include newcomers to the country.

“We also have had inquiries from companies that did not operate in Ukraine before, and despite this they are guaranteeing that they will enter the Ukrainian market immediately after the war ends,” he says. “These appeals are from countries such as Canada and Ireland. Moreover, despite the current situation, some investors have already expressed a wish to make appointments in Kyiv, to come here, and they are ready to invest in Ukraine.”

Some investors, especially EU institutions, will no doubt have grander ethical and political motivations in mind. Bilak concludes with this point: “[It is not about] reconstruction just for reconstruction’s sake. It has to be [about] EU integration [too].” 

How Ukraine is rebuilt, therefore, will have political consequences for many decades to come. 

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