Ukraine’s reconstruction: challenges and opportunities

On 24 February 2024, Ukraine and the rest of the world marked the second anniversary of Russia’s invasion. Despite extensive media coverage of the war and its geopolitical and socio-economic ramifications on Europe and the rest of the world, there is an opportunity for investors to explore the potential in Ukraine.  

This article aims to provide context from previous conflicts relevant to Ukraine’s future reconstruction requirements and highlight the current progress being made by national governments, international financial institutions (IFIs), development finance institutions (DFIs), and large private investors.     

Ukraine – back to basics

Ukraine is the second-largest European country after Russia, which borders it to the east and northeast. It also shares borders with Belarus, Poland, Slovakia, Hungary, and Moldova to the southwest, and has a coastline along the black Sea and the Sea of Azov to the south and southeast.

According to the IMF’s latest announcements in 2024, nearly a quarter of Ukraine’s 43 million population has been displaced by the war.[1]

In 2023, Transparency International’s Corruption Perception Index (CPI)[2] awarded Ukraine a score of 36 (0 signifies ‘highly corrupt’ and 100 means ‘very clean’) and was ranked 104^th out of 180 countries assessed. Whilst the progress in public procurement has been made in recent years, more progress expected in using natural resources (e.g., in mining and forestry), regulating monopolies and in large infrastructure projects[3]. The reliance on local expertise or in-country presence allows businesses and investors to assess and manage the corruption risk at acceptable levels.

In one of his early speeches, President of Ukraine Volodymyr Zelensky addressed the heads of large global corporates at an opening of the New York Stock Exchange as follows:

“The general project of Ukrainian reconstruction will be the largest economic project in Europe of our time. The largest for several generations. Its volume is already estimated at hundreds of billions of dollars. And with the necessary modernization of the Ukrainian infrastructure, considering security needs, it is more than a trillion dollars and in a short term – less than ten years. No company will find such opportunities anywhere else in the world as in Ukraine.”[4]

This quote sets out a unique challenge and opportunity for the global investor community to take part in the country’s recovery at the unprecedented scale and making tangible ESG impact.  

Key conversations on Ukraine’s recovery

2022 – early interactions

The initial conversations between Ukraine officials and the investor community began in autumn 2022. A significant milestone was the meeting of The Ukrainian government with Larry Fink, head of the world’s largest asset manager, Blackrock. This meeting, which took place in September 2022, aimed to brainstorm the creation of a future fund for both public and private investors to participate in the reconstructing and rejuvenating of the market economy in Ukraine. Public funds were likely to come from donor countries, such as the US, European Union and others that have provided billions of funding to Ukraine in security assistance and economic aid. Financial analysts observed that attracting private investors remained a significant challenge while the war continued, primarily due to the absence of comprehensive insurance.

2023 – international global level / largest global businesses

During the first half of 2023, notable bilateral discussions took place between the governments of Ukraine and some European countries, large DFIs and IFIs on the scope and requirements of future reconstruction of Ukraine. In June 2023 BlackRock and JPMorgan Chase formally announced their plan to assist the Ukrainian government in establishing a reconstruction bank to direct public seed capital in rebuilding projects that aim to attract hundreds of billions of US$ in private investments[5][6].

The international event that brought Ukraine back into focus was the ‘Ukraine Recovery Conference’ in London on 21-22 June that brought together over 1,000 public and private sector decision makers, representing 59 countries, 33 international organisations and over 400 businesses[7]. This acted as a catalyst for businesses to start more dynamic interactions and organize the coalition for rebuilding Ukraine. 

Another significant international event, the ‘ReBuild Ukraine conference’, was held in Warsaw on 14-15 November focusing on energy and infrastructure sectors. This event aimed to raise awareness among international businesses and investors about the current state of economy in Ukraine and provide a space for collaboration and open dialogue. Participants from Forvis Mazars offices in Ukraine, Poland, the UK, Germany, France represented a wide range of capabilities, including the global Infrastructure Team and Asset Management Audit function. The most relevant, powerful part of the conference was ‘FIT: Forum on Investments & Transformation for Ukraine’ that brought together government officials (from Norway, Italy, France, Ukraine, the UK), DFIs (DFC, EBRD, IFC), and IFIs (Blackrock).

The key narratives mentioned by the keynote speakers were:

• The sense of urgency – the reconstruction, innovation and transformation of the Ukrainian economy can and should start before the end of the war. Certain case studies are already available based on some available success stories from Ukrainian large businesses, such as Astarta Agro-Industrial Holding securing climate finance from EBRD and the Clean Technology Fund.[8]
• Priority sectors to invest in– infrastructure, energy, IT & technology, agriculture, transportation, logistics. Commercial and residential real estate will become an area of focus to rebuild the capacity to replace the wide range of destroyed sites in the major cities and settlements.
• Resilience of the Ukrainian economy – the banking and financial system remained stable, wide range of local businesses have reallocated internally from the east of Ukraine to the west which remains relatively safe to continue resume operations.

The keynote speakers did not ignore the risks present and they highlighted the lack of de-risking mechanisms, risk of malpractice and corruption, as well as the capacity building due to a significantly depleted pool of human resources. These form part of our assessment of the risks and challenges that will be faced by those responsible for rebuilding Ukraine, along with other significant challenges.

Challenges in rebuilding Ukraine

The biggest challenge that faces the rebuilding of Ukraine is the scale of the damage done and the vast sums of money required rectify the damage. The Kyiv School of Economics estimated in 2023 25,400 kilometres of roads, 19 airports, 1,203 healthcare institutions, 3,800 educational establishments and 344 bridges have been damaged or destroyed.[9] The World Bank estimates that the total sum of money required to rebuild Ukraine will be $486bn over the next decade and this figure may be conservative.[10] The recent decimation of power supply infrastructure in some regions will also require complete reconstruction of power generation and supply facilities in some cases. However, the challenge does not end with the financing of the projects.

The cost of security

If the reconstruction begins before hostilities cease, as recommended at the Forum on investments and transformation for Ukraine, then everything must be considered through a lens of security, which adds complexity and cost. Even after the war, Russia will still adjoin Ukraine and it is likely that the reconstruction efforts will be undermined by its neighbour. Ukraine must be able to defend herself and to do so must have a well-supplied army, as well as the explicit support of NATO and the European Union, eventually leading to Ukraine joining both alliances. Beyond the financial challenge, this will require political unity from members of both organisations.

Political uncertainty

Underlying both the financial and military commitments that are required to rebuild Ukraine, there must be sustained commitment from other countries. An unwillingness to provide the financial support, sympathy for the Russian cause, or a combination of the two could create divide among member states of NATO or the European Union and stymie the flow of necessary funds or Ukraine’s ascension to either group. Donald Trump has been characteristically explicit in his unwillingness to fund Ukraine’s war effort, which would likely be extended to the costs required to rebuild Ukraine. Within the European Union, Hungary’s Victor Orban is well-known for his sympathy for Russia and his close ties to Russia’s leader. The recent elections in Slovakia were won by a politician who is opposed to European support for Ukraine. Anything short of complete certainty about Western support for Ukraine’s redevelopment after the war may hinder progress, not least because private capital that is needed to partially fund the large sums involved will not be committed if Ukraine’s security, and with it the invested capital, is not guaranteed.

Lessons from Bosnia and Herzegovina and Japan

The three-year war in Bosnia and Herzegovina ended through international mediation, but the cost of rebuilding was immense, estimated at 15-20 times the country’s GDP. This challenge was met with substantial funds from the EU, spread across multiple aid programs. However, the lack of a cohesive economic development strategy and the involvement of various aid programs led to coordination issues and duplication of efforts. For Ukraine, having a single body to coordinate redevelopment efforts with the shared goal of joining the European Union can reduce wasted efforts and ensure a more streamlined approach. This central coordination can help align the various contributions from multiple bodies, fostering a more efficient and effective reconstruction process.

Post-World War II, Japan faced enormous challenges with 2.2 million buildings destroyed in aerial bombing campaigns. The economic hardship was compounded by the need to self-fund reconstruction, leading to hyperinflation that topped 500% in 1946. This underscores the importance of foreign capital to avoid massive devaluation of Ukraine’s currency and the associated economic pain. Additionally, Japan’s industry was dominated by oligarchs, which had to be dismantled to create a competitive, free market. Similarly, Ukraine must address the concentration of wealth in the hands of a few individuals to foster greater economic growth and stability. A more democratic model of asset ownership will benefit the wider population and create a more stable political environment, aligning with the free institutions expected of a country aspiring to join the European Union.

If Ukraine can avoid the mistakes made in other countries in the past it will increase the likelihood of a faster, stronger recovery.

2024 – current outlook and concluding remarks

Further discussions on the future of the Ukraine Reconstruction fund were discussed at the World Economic Forum in Davos in January 2024. The fund that is likely to be registered in Luxembourg and represent one of the biggest ever public-private collaborations, similar to Germany’s development bank set up after WW2. It will be created by the government of Ukraine with support from BlackRock and JPMorgan Chase, and the current committed capital comprises at least US $500mln and the expected to be launched in H2 2024 of the year. From the total pool of 280 investment projects, around 25-30 have been pre-cleared by BlackRock and JPMorgan following their due diligence. The currently identified priority sectors for the fund are agriculture, manufacturing, infrastructure, and energy.

As we continue to monitor closely events in Ukraine, we will be vigilant about the risks and observe how pledged funds are converted into investment. The EBRD has already deployed, albeit limited, funds in 2022 & 2023 and there was a significant development at the Ukraine Recovery conference in Berlin in June 2024 where it was announced that Ukraine would receive a further €600 million in new funding commitments and de-risking tools. These funds aimed at emergency support for energy sector, greenfield biofuel / renewable energy projects and financing for local SMEs.[11] The remainder of 2024 will be a turning point as the Ukraine reconstruction fund finds its way to the projects that have been earmarked for investment.

We will be revisiting this subject in future articles as we update on progress made, reporting not only on which investments have happened, but also in which sectors and regions they are taking place. Over time we aim to build up a picture of these investments which will inform decision makers to help allocate funds to projects that are both profitable and meaningful. Forvis Mazars currently is in the process of creating a suite of services that will be available to investors. These would include access to local expertise and due diligence capabilities, facilitation of international cross border investments, access to global DFIs and their products, assurance services on the funds deployed, supply chain and human capital advice.

If you would like to learn more details on the opportunities and the available support from Forvis Mazars in Ukraine or in other key locations, such as the UK, US, Germany, France and Poland, you can reach out to our Global head of Infrastructure Finance team Bob Green or our Audit Director Pavlo Cherednychenko.  

[1] Report for Selected Countries and Subjects (imf.org)

[2] 2023 Corruption Perceptions Index: Explore the… – Transparency.org

[3] Ukraine war: Kyiv makes gains in another fight – against corruption (bbc.com)

[4] It is on Ukrainian land that the new center of economic growth in Europe will be – President’s speech at the meeting with the heads of big businesses in the framework of the opening of the New York Stock Exchange — Official website of the President of Ukraine

[5] BlackRock and JPMorgan help set up Ukraine reconstruction bank (ft.com)

[6] Ukraine reconstruction bank eyes near $1 bln in committed capital – Ukraine official | Reuters

[7] Ukraine Recovery Conference 2023: Ukraine and UK co-chairs’ statement – GOV.UK (www.gov.uk)

[8] US$ 30 million loan for Ukraine agri holding Astarta

[9] Direct damage caused to Ukraine’s infrastructure during the war has already reached almost $63 billion. Global economic losses are about $543–600 billion – Kyiv School of Economics (kse.ua)

[10] Dentons – A good week for Ukraine: Berlin hosts a key milestone in Ukraine’s recovery efforts

[11] Ukraine war: Kyiv makes gains in another fight – against corruption – BBC News