Introduction
The Chatham House side event at the Ukraine Recovery Conference focused on imagining the best long-term plan for Ukraine’s recovery and discussed what could be done now to lay the foundations for transformative recovery. This document summarizes the expert discussions and outcomes of three panel events and two deep-dive sessions. For a more detailed record of the discussions, please refer to the video recordings of the events available on the conference page.
Unlocking private sector investments and ensuring that there is meaningful engagement between Ukrainian civil society, the Ukrainian government and international financial institutions (IFI) will be key to making Ukraine’s recovery a success.
Panel 1: Recovery ecosystem: Is it fit for purpose?
Now is a critical moment to assess the extent to which integrity, sustainability and efficiency are part of the vision and plans for Ukraine’s recovery. Recovery discussions are not just about infrastructural reconstruction and economic development, but the European project as a whole.
It is crucial that Ukraine has ownership of the reconstruction process. There have been discussions about outsourcing the management of reconstruction plans to external financial partners, but planning, coordination and stakeholder management must be Ukraine’s responsibility. No one else will have the same level of commitment and drive to succeed. Outsourcing management would deprive Ukraine of an important opportunity to develop its own institutions. The country has already demonstrated success in building institutions from scratch as part of the reform agenda it began in 2014.
The private sector, small and medium-sized enterprises (SMEs) and civil society will be the backbone of Ukraine’s reconstruction. Ukraine’s civil society often complements state functions in multiple ways beyond its conventional ‘watchdog’ role. The imposition of top-down reconstruction plans on Ukrainian society is unlikely to be effective. Therefore, it is crucial to engage local hromady (communities) as part of the reconstruction efforts to build on successful decentralization reforms.
Ukraine’s EU candidate status has activated a new reform agenda. The EU is involved in mapping Ukraine’s needs through the Multi-Agency Donor Coordination Platform (four meetings have been held to date). Such multistakeholder coordination on financial assistance is unprecedented. The EU’s financial support is crucial to ensure both Ukraine’s survival through continued resistance and the technical support to continue Ukraine’s reform agenda.
The European Bank for Reconstruction and Development (EBRD) plays a key role in channelling resources and technical assistance for Ukraine’s reconstruction. EBRD is joining forces with other IFIs to identify gaps in Ukraine’s current implementation capacity. At present this varies across the country, with de-occupied territories lagging. The EBRD assists in streamlining government structures to maximize efficiency and maintains a strong focus on anti-corruption, integrity and transparency. If Kyiv wants to ‘build back better’, regulation must stimulate this process.
Ukraine’s transport system, energy infrastructure and clean water service have demonstrated incredible resilience, responsiveness and efficiency during the war. Ukraine is ready to face the challenge of managing multi-billion-dollar infrastructural projects. There is a new generation of reformers committed to eradicating corruption and they need to be trusted.
Ukraine’s recovery cannot wait for the war to end. The challenge is to identify which are the most urgent tasks. The EU is prioritizing increasing Ukraine’s public administration capacity to make sure reforms and recovery can proceed quickly.
The discussion pointed to the following challenges:
— The need to improve the rapid-response capacity of IFIs.
— Gaps in information-gathering due to the profound impact of the war on society (Ukraine’s economy and population).
— The ability of state institutions to identify local needs (beyond infrastructure).
— The fact that culture and education are missing from current reconstruction programming.
Deep-dive session 1:
Ensuring the integrity of recovery
Ukraine has two goals: to secure sustainable budget support to ensure the continued functioning of Ukrainian state institutions including the payment of salaries; and to build the confidence of foreign investors to encourage the foreign direct investment (FDI) required for reconstruction.
Key challenges discussed:
— Encouraging FDI and private sector inflow. Profitability and risk management are key for external investors. To alleviate concerns over risk, Ukraine must communicate efficiently with investors about various mitigation mechanisms in place to tackle the threat of future war-related risks. War and political risk insurance will be key to this. There is ongoing work by individual states and IFIs (such as the World Bank) to set up insurance products.
— Moving away from an overly formalistic approach to business regulation. Panellists suggested that leaner regulations should be combined with effective enforcement. Ukraine’s market is over-regulated and enforcement agencies have overlapping authorities, so these should be streamlined. The paradox of the current situation is that both donors and citizens insist on pushing reconstruction plans quickly, while also imposing meticulous restrictions on Ukraine. IFIs need to be conscious of how their recommendations may impact the regulatory framework and whether they are overburdening the private sector. There is a significant advantage to having one coordinating platform, such as DREAM (Digital Reconstruction Ecosystem for Accountable Management). The DREAM system will help promote transparency, facilitate coordination among international donors and make information widely available. DREAM was tailored to Ukraine’s unique requirements, but Ukraine’s digital solutions are largely adaptable and exportable to other contexts. However, this is not a silver bullet for tackling corruption and must be complemented by other efforts.
— Ensuring transparent tenders and spending. One of the main anticorruption tools is an e-register of the income of government officials. It remains closed during war time and there is no clear prospect of it coming back online, but in conjunction with a strong investigative journalism community, it could serve as a powerful deterrent against corrupt practices.
— Ensuring a fair selection process for all bodies responsible for overseeing reconstruction programming and budgets, which can counter corruption throughout tendering processes. The government of Ukraine must increase awareness among civil society about how recovery will be delivered and the modalities of international financial assistance (e.g. grants, loans, blended finance). Anti-corruption councils at line ministries that would include civil society representatives can be an effective tool in tackling corruption (such as the recent food procurement scandal at the Ministry of Defence). The diaspora can play a key advocacy role in championing civil society inclusion and oversight.
— Addressing corruption in recovery by correctly programming reconstruction plans and improving the business climate. The whole process should be about profound transformation. Ensuring that integrity is at the heart of all reconstruction efforts will be crucial in delivering an irreversible transformation of the country. This transformation is urgent but will inevitably take time. For Ukrainian businesses, reconstruction stretches beyond purely infrastructural repairs.
They need cultural transformation: mainly focusing on strong rule of law and completed reform of courts. Ukraine should hire permanent heads of taxation and customs agencies. Constant re-shuffling fragments guidance and dilutes accountability.
— Addressing the risk of corporate fraud. Focus to date has remained primarily on corruption in state institutions. We must address and reform the blind spot of corporate governance, which as a concept and practice remains weak in Ukraine.
Deep-dive session 2:
Human capital: healing, reintegration, empowering
Ukraine’s recovery should be people-centred, especially considering the impact of the war on people’s living conditions, health, access to education, livelihoods, food security, social status and gender equality, as revealed by the UNDP Human Impact Assessment report. People are Ukraine’s most important resource, yet reconstruction discussions tend to focus on infrastructure rather than human capital. Human capital development should be understood not only in terms of humanitarian assistance, but also as a sector for both public and private investments. Human resources are not only key for ensuring economic development and productivity, but for rebuilding a vibrant Ukraine that has high living standards.
Even before the full-scale invasion, major crises had significantly impacted Ukraine’s human capital, including the 2008 financial crisis, the first phase of Russia’s invasion in 2014 and the COVID-19 pandemic. There remains a lot of uncertainty as to how many people are willing to return to Ukraine; by the end of 2022, between 3.8 million and 4.7 million refugees were abroad and currently, 1.5 million Ukrainians are in Russia. Ukraine has also faced a profound demographic crisis. Prior to the invasion, Ukraine had negative population growth between 2015 and 2021. It is projected that the labour force will decrease from 15 million people in 2022 to 14.5 million people in 2032 due to natural population decline. Ukraine could lose up to $255 billion in GDP due to the negative impact of the war on human capital, primarily through population displacement and decrease in economic productivity. Some Ukrainian refugees may become economic migrants, less likely to return to their native country. However, those who do return with foreign working experience can contribute valuable expertise and technology transfers, making Ukraine more competitive in the future.
Sustainable economic growth in Ukraine over the next decade requires the country’s labour force to grow by 3.1 million to 4.5 million (assuming a 7 per cent annual growth target). In terms of policy priorities, this means:
1. Retaining human capital in Ukraine by creating sufficient in-country opportunities to work and to live and by continuing structural reforms in healthcare, education and SME development.
2. Creating incentives for Ukrainian refugees returning from abroad.
3. Attracting foreign talent as part of Ukraine’s recovery.
A key challenge facing Ukraine is that there is an entire generation whose educational opportunities have been severely affected by the war. Of the 8 million refugees, half are estimated to be children. It is estimated that 70 per cent of children who are refugees abroad are not formally registered in schools.
Russia’s systematic attack on critical energy infrastructure during the winter in 2022–23 has further impacted access to remote learning for Ukrainian children, including internally displaced children. In addition, it is estimated that 3,200 educational institutions have been destroyed. Rebuilding schools following the principle of inclusivity will be a key priority in recovery plans.
The trauma of the war has created a huge mental health challenge for the Ukrainian population. The education system must reform to provide mental health services, de-stigmatize mental health difficulties and provide mine-risk awareness. Embedding alternative family-based care beyond institutional care for children in need should be embedded in nationwide recovery plan.
Education will be key to the country’s economic productivity and overall quality of life. Ukraine should also gain access to European educational opportunities such as Horizon Europe as part of its European integration process. Twinning programmes between Western and Ukrainian universities are also promising initiatives.
We must advocate not only for fast but also inclusive recovery plans.
Around 10 per cent of Ukraine’s population, approximately four million people, have disabilities. This number will increase over time as more veterans and civilians become victims of war injuries. Recovery plans must prioritize accessible public transport. Increasing the quality of life within Ukraine by ensuring inclusive recovery plans will also encourage more people to return from abroad.
We need to ensure that women are fully included in designing, monitoring and implementing recovery plans. It is crucial to showcase Ukrainian women’s leadership and empowerment during the war and fight the presentation of women as purely victims of the war.
Ukraine will continue to face the incredible challenge of monitoring and returning Ukrainian children that were forcibly transferred to Russia. Investments are needed to support ongoing and future investigations and ensure that those responsible for these crimes are held accountable.
Panel 2: Unblocking FDI and private sector development
All plans for Ukraine’s reconstruction should be aligned with its accession to the EU. A western-oriented outlook for Ukraine in the future is a powerful incentive for foreign investors. The optimal outcome would be for Ukraine to have the technology sector of Silicon Valley, the agricultural potential of Canada and the defence potential of Israel.
Ukraine should aspire to become a regional export hub, first in proximity to and then within the EU market. Kyiv needs to adopt European standards and rethink its transport infrastructure to easily connect to European customers. This means also de-carbonizing its construction industry.
Around 90 per cent of the building materials needed for reconstruction can be found inside Ukraine but adapting to EU standards under the ‘build back better’ principle will remain the key challenge for the sector. Ukraine’s oversight agencies must develop the capacity to enforce new environmental standards.
What can the EU and IFIs do to provide technical assistance to local manufacturers to help them understand and attain EU standards?
We need to build a mechanism that will unblock FDIs. The public sector is a key facilitator here. A more creative approach will be appropriate for a war-ridden context with high inflation; for example, issuing grants keeps interest rates low.
We need to find ways to reduce risk perceptions. Investors who were operating inside Ukraine prior to the 2022 invasion will have a lower risk threshold, but the risk analysis will be different for newcomers. In addition to the war-related risks, investors are uncertain how the government of Ukraine will set about aligning Ukraine’s economy with EU standards.
The perception of corruption is still high, despite progress on reforms. Impunity for corrupt practices must be eliminated by strong judiciary reform. EU accession has provided the answer for many post-Communist countries tackling corruption. We need to change investors perception of the corruption risk through:
— Implementing civil service reform. Corruption risks will remain high until civil servants are properly rewarded and promoted on a meritocratic basis.
— Completing judicial reform (especially courts). This remains the main obstacle to the improvement of the business climate.
— Delivering skills training at the community level. It is crucial to ensure a community-led approach to reconstruction that is owned at a local level. Local government and private sector contractors must be trained to EU standards of project planning and implementation.
Promoting blended finance and providing capital to Ukrainian SMEs are both key priorities. The latter will attract refugees to return home, contributing towards the human capital required for the country’s future economic development.
Key recommendations:
— Involve new EU member-states like Poland to guide Ukraine in its regulatory adjustments to EU norms, as they have recent experience in completing this transition.
— Provide grant funding to communities highly impacted by the war (Kherson, Kharkiv) that lack capacity to borrow in the short term.
— IFIs should invest in the development of the Ukrainian gas market. Ukraine has huge gas deposits in the east, the Black Sea and Carpathian Mountains range.
— Blend private investment schemes with the funds that will be obtained as Russian war reparations. Legislative decisions around this are still in the making; some countries are cautious of setting a precedent of seizing sovereign assets, citing state immunity clauses. Legal mechanisms must be organized harmoniously to use frozen Russian central bank assets for war reparations across various jurisdictions. Currently two-thirds of these assets are in Belgium. One option is to transfer Russian state assets to the UNoperated fund.
— Create a dedicated fund to unlock the private insurance market.
— Prepare to invest in Ukraine now, by completing the due diligence and building partnerships.
Panel 3: Rebuilding Ukraine from the ground up
DREAM is a digital tool that embeds transparency and accountability into recovery. It was informed by the success of Prozorro, a public digital procurement tool that launched in 2015. Decision-making must be evidencebased. DREAM is primarily a tool for recovery but can also be used to collect and manage data for further regional development.
Digitalization ensures transparency. Ukraine aspires to encourage global entrepreneurs to open businesses inside the country to support local communities. Mentorship schemes can play a vital role in ensuring Ukraine’s long-term economic success. The war is significantly impacting education at all levels, increasing the importance of peer-to-peer business mentorship to help develop Ukraine’s human capital.
Collective ownership of the recovery process and the restoration of community livelihoods should be a key priority. Ukrainian civil society is already involved in different areas of reconstruction at the level of planning and implementation. Local economies must be able to generate revenue.
Detailed assessments of existing productive capabilities should be used to inform recovery planning. Post-war social inequality and economic deprivation could fuel populism and in turn threaten Ukrainian democracy.
Social dialogue between the government and citizens, represented by associations and unions of the most vulnerable groups, will be paramount while planning and implementing local recovery projects. There is no template yet for how Ukraine will go about planning the future. However, Ukrainian social enterprises could play a critical role in boosting the reconstruction effort, especially at the local level.
Key challenges discussed:
1. How young, talented Ukrainians currently living abroad can be incentivized to return. Israel could be useful as a potential case study for this project. Young people will need to be assured that they can participate meaningfully in the country’s political and economic spheres.
2. The cultural factor has so far been overlooked in ongoing discussions on reconstruction. This includes both cultural institutions and creative industries. Local cultural organizations (such as museums, libraries, cultural centres, theatres) are key for quality of life. Civic education should be further strengthened.
3. All restrictions on media introduced due to martial law must be lifted to ensure the free flow of information.
4. How much space is there for testing, assessing, evaluating and re-testing? The culture of entrepreneurship needs to have tolerance for failure, yet the government of Ukraine cannot afford to make fatal mistakes. At present, there is an ambitious vision for recovery, so some mistakes along the way should be expected and SMEs should feel empowered to experiment. The wider culture must encourage reflection and learning from any negative experiences, setting up feedback loops inside government and companies.
Key recommendations:
— Engage young Ukrainians to contribute their ideas to build a fuller picture of the country’s recovery needs.
— Stimulate joint ventures between Ukrainian and US entrepreneurs, especially in the technology sector.
— Develop new business-to-business mentorship schemes that will address Ukraine’s recovery needs.
— Ensure that the rebuilding of and support for cultural initiatives is part of national and community recovery plans.
— Build a centre of excellence to exchange knowledge between international partners and Ukrainian stakeholders and spread recovery knowledge throughout Ukraine, including lessons learnt, case models, assessment strategies and digital solutions.
Source: Chatham House