What would Ukraine need to rebuild after the war?

Devil was deadly wrong

24 February 2022 putin started his full-scale war against Ukraine allegedly to de-nazify, de-militarize the country, and not to allow NATO to extend. As a consequence, NATO expanded on Baltic Sea just on the borders with ruzzia. After more than 540 days of ruzzian terror onto Ukrainian civilian objects the entire world realized that putin’s aim to attack Ukraine was to destroy our country completely. Mathematically the task was simple: bigger territory, larger economy, vast advantage on number of weapons and headcount to be mobilized. However, he was wrong having not thought of the level of resistance and courage of the Ukrainians who are prepared to die for their freedom and about the civilized world that joined effort in support for democracy fighting against tyranny.

As per sociological Group "Rating" 74% of Ukrainians believe that Ukraine will keep its territories within the borders of 1991. 97% of surveyed residents of Ukraine believe in the victory in the war, which was unleashed by the ruzzian federation; hence everybody’s plans are in support for the army now and in post-war building of a new economy.

We will definitely win the war, what about the economy?

Funding in post-war devastated economy cannot look similar as “business-as-usual” circumstances, hence there is a degree of ingenuity that needs to be applied. During the war, life accelerates multiple times, so should be the funding speed after Ukraine’s and its partner counties’ victory against the evil.

Winning in the economic war is as important as the win on the battlefield. When ruzzian army is defeated but the Ukrainian economy would not be properly supported and the country is deserted, then putin could still consider himself as a winner. That would be looking like an invitation to ruzzia to return again and thus endanger security of the Eastern European countries.

During the war success could be achieved provided there is concerted effort on every front and weaponry types; same approach would need to be taken in rebuilding of the wounded economy. The major rule that would need to be applied – all partners need to shoot with their menu of instruments in close coordination, because lacking elements in financing structuring would just impede the success story.

Since annexation of Crimea and certain parts of Donetsk and Luhansk oblasts in 2014-2015 the country received significant international support in funding from the International Financial Institutions (IFIs), however Ukrainian banks were not able to use it properly given FX risk and weak corporate sector that lost its capital base. It took a while to convince the IFIs that their FX debt channeled to Ukrainian financial institutions is not helpful to the Ukrainian corporate sector because debt without capital support is not sufficient for the private sector to recover.

Lessons have been learned and now it is time to reconsider those lessons and get set for comprehensive launch of tools necessary to help the Ukrainian economy it its reconstruction.

International Financial Institutions

Key ideology of all major IFIs is “Transition Impact” and “Crisis Response”, so they should respond multiple times heavier with their most powerful and basic tool – Trade Support to Ukrainian banks in order to provide a quick fresh blood to Ukraine-EU cooperation. Foreign commercial banks would join the suite for their country-specific agreements.

It is not a secret that the private corporate sector would be extremely weak after sustaining substantial damages during the war to bear the burden of funding. To avoid the concentration of all business in the hands of state-owned companies, IFIs should also get a possibility to partially compensate principal for such funding (funds from “Marshall Plan” or restitution from ruzzia would be most likely usual suspect in this respect. Potentially, unless ruzzia agrees to compensate the losses to Ukraine, a special type solidarity tax should be introduced on import of any goods from ruzzia to the EU with the funds to be channeled into Ukraine via IFIs).

This mechanism proved to be very successful in energy efficiency/energy saving programs of Ukrainian banks that ultimately resulted in substantial reduction of dependence from imported gas. Similar mechanisms are also pretty successful with e.g. various KfW programmes in Germany or BGK funding in Poland.

To accelerate the approval processes many rules of IFIs should be relaxed. One should provide them more leeway in acting as development institution, and not as another layer as commercial banks.

National development funds (NDF) of foreign countries

Without financial assistance, financially devastated Ukrainian enterprises would not be able to rebuild quickly, therefore international cooperation is paramount. NDFs should initiate establishment of Private Equity Funds, topped with IFIs to establish political risk umbrella so that ultimately a collective “Wall Street” would be incentivized to join the success story. In addition to financing, the NDFs should bring the governance and transparency mechanisms in the private corporate sector.  That would enable establishment of JVs with Ukrainian corporates with bankable shape, commercial banks would get high-quality client base that could engage in trade support, project finance, export/pre-export finance.

Export Credit Agencies (ECAs)

Good trend started in some ECAs which introduced military guarantees for investors whereby those who invest into Ukraine now are covered against the risk of military destruction. That is a very powerful instrument and signal that Ukraine will definitely win and efforts in its reconstruction should start now, now waiting until the war is officially over.

Polish angle of its banks’ involvement

Support of Ukrainian corporate sector, e.g., agri in broad sense (silos, machinery with Polish passport, food processing technologies) renewables, municipal infrastructure, export support and incentives. On the other hand, lacking knowledge of Ukrainian corporates in their new export channels and lack of trust in new untested export partners could be coped with by means of Polish partners (as recommended by Polish Financial Institutions (PFI)) that could offer trade finance instruments from investment-grade bank. In this way, Poland could extend its role as a gateway of Ukrainian exports to the EU (a role that Poland has already took over by supporting a lot of companies that relocated their business to Eastern Poland).

Ukraine’s fiscal decentralization that started in 2015 significantly increased budgetary appropriations of Ukraine’s municipalities (average increase – 3 times) which allowed municipalities to start thinking about modernization of their infrastructure (roads, transport, district heating, water, waste management). Having limited experience in these areas Ukrainian banks lack the competence to offer these clients attractive products.

One should not exclude growth of Ukrainian medium-size businesses willing to go public, and Warsaw Stock Exchange proved to be the most comfortable venue to reach that objective. Some PFIs are great names to support them in this process.

Another format could be an approval of joint Polish-Ukrainian industrial strategies that as a way to strengthen Polish and Ukrainian enterprises (e.g. in mining, renewable energy, etc), including vertical integration, cross shareholding, etc.

Glory to Ukraine and its supporters, together we will definitely win on all fronts!