The road to rebuilding Ukraine

Against this background, Ukraine has begun to rebuild itself. Civilian infrastructure, energy substations, schools and hospitals are continuously being rebuilt. The plan for the long restoration process that lies ahead, repairing and replacing infrastructure that has been damaged or destroyed, is based on the principle of build back better. An international effort has already begun to help Ukraine, but the Ukrainian government recognises that a 21st century Marshall Plan is needed: the largest of its kind in Europe for 80 years.

To that end, the European Commission and its partners have been actively mobilising international support for Ukraine’s economic and social stabilisation, reconstruction and recovery. President of the Commission Ursula von der Leyen has identified three essential elements for that to happen:

• making sure that Ukraine at all times gets the support it needs, from relief to rehabilitation, and to long-term reconstruction
• the right mechanism is in place to make support as broad and as inclusive as possible
• firmly embedding Ukraine’s reconstruction efforts as part of its path towards the EU.

“Ukraine’s recovery plan is already shaping up to be the most extensive reconstruction effort since World War II,” says Tetyana Dovgan, Partner at CMS Ukraine. “Its implementation is expected to attract numerous large- scale and technologically advanced restoration initiatives, presenting numerous compelling opportunities for international and domestic companies.”

Accounting for 70% of Ukraine’s total GDP, the private sector will be critical to its reconstruction. But opportunities for Ukraine’s international partners and global businesses will also be very significant.

“Infrastructure has suffered most − roads, rail, bridges, ports, and power are significantly damaged,” says Vitaliy Radchenko, Partner at CMS Ukraine. “The Ukrainian government’s priority is to complete some projects before the war is over, because otherwise it may be too late.”

Some big US companies have already taken the first steps to engage in the rebuilding process. In June 2023, Bechtel signed a reconstruction agreement with Ukraine’s State Agency for Restoration and Infrastructure Development relating to key infrastructure corridors, while AECOM formalised partnerships with Ukraine’s government to provide programme management and technical advisory support.

Contractors from many different countries will ultimately be involved in delivering new buildings and infrastructure: large scale projects will invariably require the use of joint ventures and public-private partnerships (PPPs) in sectors such as transport and energy.

“We observe increasing interest from foreign companies; often cautious, but it is there and growing,” says Maria Orlyk, Partner at CMS Ukraine. “We also see new foreign investors entering the market and establishing a business presence in Ukraine.” Some companies that were in Ukraine before the war have begun understand the risk profile and are expanding their business, according to Radchenko. “Nestle is expanding its factory and Bayer is building a new facility,” he says.

To meet the scale of the challenge once the war is over, a major global financial effort will be required. Although opinions vary on how much and when, a consensus exists that finance be comprised of public and international donor financing, as well as significant levels of private investment.

In March 2023, Rapid Damage and Needs Assessment, a joint assessment led by the World Bank, the United Nations and the European Commission, estimated that the cost of Ukrainian recovery and reconstruction would be USD 411bn − 2.6 times Ukraine’s estimated GDP before the war started. According to this assessment, the three sectors with the highest anticipated needs are transport (22%), housing (17%), and energy (11%).

But these figures only cover the one-year period from Russia’s invasion on 24 February 2022 to the first anniversary of the war. Inevitably, estimates have since risen further as Russia’s bombing of Ukrainian cities and civilian infrastructure continues.

In July 2022, the Ukraine government presented Ukraine’s National Recovery Plan (UNRP) which anticipated a total expenditure of at least USD 750bn for reconstruction, with more than USD 350bn earmarked for 2023–2025, and an additional USD 400bn over the subsequent seven-year period.

“Foreign governments and international financial institutions have pledged USD 1trn in support of UNRP,” says Anna Pogrebna, Partner at CMS Ukraine. “The UNRP envisions at least 7% annual GDP growth by 2032.” She notes that UNRP’s pillars are smart systems, renewable energy and sustainable construction. “It is expected that Ukraine’s infrastructure will leapfrog to innovative technologies,” she suggests.

One of the UNRP’s five guiding principles − integration into the EU − took a step forward in December 2023 when European leaders approved the opening of accession negotiations for Ukraine.

There are still challenges to be overcome. According to the Financial Times, “Ukraine has an embedded problem with corruption that is perhaps the biggest obstacle to its EU aspirations, apart from the war itself.” However, Ursula von der Leyen remains upbeat. “Some might think it is impossible, improbable or too distant to talk about a free and peaceful Ukraine in the European Union,” she said last year. “But Europe is about making the impossible possible.”

International public sector financing will inevitably form the primary bedrock of the reconstruction effort in which international financial institutions (IFIs) will play a pivotal role. Ongoing discussions focus on IFIs engaging in three key areas: providing grants and loans to the Ukrainian state, extending financial support to Ukrainian businesses, and offering war-related insurance.

“Given the multifaceted efforts in play, effective planning and structuring of financial assistance from IFIs are increasingly critical,” says Dovgan. To mitigate overlapping functions among the organisations involved, she suggests that robust supervision and control mechanisms must be established, as well as “a well- defined national policy on funds utilisation with a focus on supporting small- and medium-sized businesses.”

Key international players in the reconstruction efforts include the European Bank for Reconstruction and Development (EBRD), which has committed EUR 3bn in financing to Ukraine’s real economy in 2022–23, while the International Finance Corporation (IFC) has launched a USD 2bn package to support the Ukrainian private sector.

For companies investing in Ukraine, the EBRD is also facilitating a war-risk insurance scheme which works with key stakeholders to create a guarantee facility. In October 2023, the United Kingdom and the EBRD signed a Statement of Intent to establish the scheme. Initially focused on ensuring the transport of crucial cargo via trucks, the scheme will cover more sectors as it matures.

Frozen Russian assets are also being earmarked to meet part of the reconstruction bill. The European Commission has presented a plan to ringfence an estimated EUR 200bn in sovereign Russian assets that are currently frozen in the EU, predominantly in the Euroclear system. Aiming to generate up to EUR 15bn, profits will be channelled to help rebuild Ukraine. Since their freezing, sanctioned Russian assets held in Euroclear have generated EUR 3bn in profits.

Many questions relating to Ukraine’s eventual reconstruction programme remain unanswered: for example, should coordination be centralised or decentralised? The optimum solution could lie somewhere between the two. The best approach may be a non-political, technocratic body with a long-time horizon to coordinate and oversee this effort. From that perspective, the Marshall Plan is a good model. Similarly, putting ownership of the reconstruction process in sync with the EU may enable accession and reconstruction to work hand in hand.