The reconstruction of Ukraine and its EU accession have become a hotly-debated topic. There are many questions. How much damage has Russia caused Ukraine? How can that possibly be financed? How should the financing be managed? How can Ukraine’s EU accession be facilitated?
In the short term, Western donors want to provide Ukraine with ample military and humanitarian assistance as fast as possible. In parallel, they attempt to reduce Russia’s economic and military strength through severe sanctions. The military and humanitarian assistance must come as fast as possible. Since speed is crucial, all nations and organizations should offer support without much coordination, which may slow these vital actions.
In the longer term, when the imminent crisis of the war has passed, a very different long-term policy is needed. It should focus on three goals: Ukraine’s reconstruction, reform, and EU accession.
This requires substantial financing and a solid governance framework. The best publication I have seen on this topic is “A Blueprint for the Reconstruction of Ukraine”, which the Centre for Economic Policy Research published in April.
All kinds of numbers are thrown around about the damage Russia has caused and the costs of reconstruction. Laudably, the Kyiv School of Economics has established an ambitious data base with all the damaged property and assessments of their value. It has reached $100 billion, and the total is likely to double. To this should be added the reduction of Ukraine’s GDP because of the war this year.
The reduction of electricity consumption is a good proxy for the short-term development of the GDP, since they tend to move in parallel. Last year, Ukraine’s GDP was $200 billion. Electricity consumption is down by 35 percent, so if GDP has fallen correspondingly that is a loss of $70 billion.
In addition, compensation should be due to the families of the tens of thousands of Ukrainians who have been killed by the Russians. Such compensation varies greatly, but $100 billion would be a reasonable amount. The total compensation claims would then be about $400 billion. To this should come Western support for Ukraine’s reforms and EU accession.
The Ukrainian government has presented a much larger sum of war damages, about $550 billion, but it seems exaggerated. It includes a large sum of nearly $50 billion for absent foreign direct investment (FDI), but Ukraine hardly had any FDI in 2020 or 2021 because of its poor business environment.
In his grand work Capital, Thomas Piketty has established that the total capital of a country, including everything, such as land and minerals, is historically usually four times GDP, that is, $800 billion for Ukraine, and much of this capital persists.
The next question is how can this possibly be financed.
Ideally, it should be financed by Russia as war reparations.
Needless to say, the Kremlin is not likely to accept that voluntarily, but the beauty of the current situation is that Russia might not have a voice. Western countries have frozen a total of $316 billion of the Russian central bank’s reserves. Germany holds $96 billion, France $61 billion, Japan $57 billion, the US $39 billion, the United Kingdom $31 billion, Canada $17 billion, and Austria $15 billion.
These highly liquid funds should be confiscated and allocated to Ukraine’s reconstruction. The legal situation in each country varies, but presumably this will require new legislation in each of these countries.
A second source that should be available for Ukraine’s reconstruction are assets of sanctioned Russian oligarchs that have been frozen abroad. Total Russian private financial assets abroad are assessed at $1 trillion.
Almost all of this money is hidden in layers of often 20-30 anonymous shell companies. A fair assumption is that the assets that should be frozen amount to around $400 billion, but so far only about $50 billion has been frozen and much of it in jurisdictions that are not likely to be helpful, such as Switzerland, Cayman Islands and Jersey.
Again, each country would need to adopt a special law for the confiscation of such assets and their transfer to Ukrainian reconstruction.
The third source would be bilateral funding, primarily from the EU and the United States. The EU has already committed $100 billion to Ukraine and the U.S. have committed $54 billion this year.
Considering the nature of Russia’s war damage, the vast majority of the funding should be grants rather than loans.
Moreover, if Ukraine is given large loans, it will be forced to restructure its debt under difficult circumstances, which makes no sense. Therefore, bilateral donors that primarily offer grants are likely to play an uncommonly large role, while international financial institutions (IFIs) – the IMF, the World Bank, the EBRD and the EIB – that provide more loans than grants will probably play a less important role than usual.
A major conundrum will be how to handle such large amounts of money with good governance. A suitable model for governance would be the Organization for European Economic Cooperation, which was founded in 1948 to manage the Marshall Plan.
Ideally, a new Ukrainian Development Authority should be set up for this purpose.
The two dominant external powers should be the EU and the US, and the next two the UK and Canada, while all other donors should be invited to participate. It is vital that an early agreement is concluded between these four parties and the Ukrainian government so that an international institution will exist to which funds can be provided.
Otherwise, the confiscation of Russian funds and their transfer is not likely to proceed. A proliferation of Ukrainian and external trust funds that claim the same funds in competition must be avoided. Such rivalry would arouse suspicion among donors, resulting in them holding back their support.
Both the inflow of funds and the expenditures incurred must be meticulously transparent.
If any inappropriate usage of the funds is suspected, Western governments may stop the financial flows to the support of Ukraine. Conversely, the procurement must maintain the standards of ProZorro, Ukraine’s excellent electronic procurement system.
The next topic is what the Ukrainian Development Authority should do.
Anders Åslund is a senior fellow at the Stockholm Free World Forum and author of “Russia’s Crony Capitalism.”
The views expressed in this article are the author’s and not necessarily those of the Kyiv Post.
