Priorities, Institutions, and the Private Sector
Though the war remains far from over, the scale and complexity of the Ukraine reconstruction effort require stakeholders to plan now, this commercial diplomat explains.
BY MICHAEL A. LALLY
Russia’s further, unprovoked invasion of Ukraine has upended global geopolitics and European security, and has devastated Europe’s second-largest country by territory. While the war rages in Ukraine’s south and east, another campaign has begun, far from the battlefield. It has existential, long-term consequences for the Ukrainian state, Europe, and democratic governance everywhere: the reconstruction of Ukraine.
Though the war remains far from over, the scale and complexity of the Ukraine reconstruction effort require stakeholders to plan now. While piecemeal efforts continue to provide short-term fixes to critical infrastructure, larger-scale reconstruction should be planned for now but only executed once a lasting peace is assured. Using today’s dollars, the oft-quoted $750 billion price tag to rebuild Ukraine will dwarf the reconstruction budgets of the Marshall Plan, Iraq, and Afghanistan combined.
Although analysts will likely draw parallels with previous reconstruction efforts in the Middle East and South Asia, Ukraine presents a completely different scenario. Ukraine’s geographical proximity to Europe and Eurasia, European Union candidate status, highly skilled work force, and still functioning, export-driven economy all increase the possibility of success, strengthening a key trans-Atlantic ally to counter Russia’s continued aggression in Europe. As President Joe Biden remarked in his March 2022 speech in Warsaw: “Let us resolve to put the strength of democracies into action to thwart the designs of autocracy. Let us remember that the test of this moment is the test of all time.”
Kyiv has sensibly divided its reconstruction effort into three phases: emergency aid to address urgent needs; deeper, broader efforts to rebuild affected infrastructure; and long-term sustainability to integrate Ukraine into European institutions and one day become a member of the European Union. Many critical elements of Ukraine’s reconstruction scheme will be decided later, including governance, assistance coordination, loans vs. grants, monitoring, asset seizure, and a slew of other issues.
While those important and thorny considerations continue to get sorted, the American private sector, working with Ukraine and the international financial institutions, should be deliberating now on approaches to a reconstruction effort that could ultimately top $1 trillion.
Priorities for Reconstruction: The Economy
The July 2022 Ukraine Recovery Conference in Lugano, Switzerland, laid out the broad contours of the reconstruction challenge. The Ukrainian government estimates that 11 airports, more than 300 bridges, and 6,500 kilometers of railways have either been damaged or destroyed. Four major seaports are under occupation. President Volodymyr Zelenskyy’s recent campaign to repair Ukraine’s dilapidated roads was set back several years by Russia’s bombings, with 25,000 kilometers of road now needing repair or a complete rebuild. Damage to infrastructure alone is estimated by the Ukrainian government at $100 billion, with more destruction every day. Business confidence, while resilient, has also suffered. A recent survey of members of the American Chamber of Commerce in Ukraine (AmCham Ukraine) highlighted continued safety and security concerns in the country.
All reconstruction efforts hinge on a durable peace that will allow for a return of migrants, a reconstruction mobilization effort, and workers to fuel the economy. At this writing, both sides are far apart, and any cease-fire or peace agreement seems remote. While the reconstruction task list will be long, five areas should be prioritized both for emergency support and long-term development:
Housing for the population is a “now” goal for Ukraine reconstruction. More than 120,000 residential structures have been destroyed or severely damaged during the war, with almost total destruction in the Luhansk and Donetsk oblasts. Temporary housing for internally displaced persons (including all aspects of social infrastructure such as clinics, schools, and community centers) must be priority number one. Construction of permanent housing will take one to three years, with the opportunity to “build back better” by incorporating modern, energy-efficient materials and technologies, thereby reducing energy consumption.
Ukraine’s archaic infrastructure has been and continues to be badly damaged by the war, including its roads, bridges, airports, railway system, and ports. On Sept. 6, the International Atomic Energy Agency called for the urgent establishment of a demilitarized zone around the Zaporizhzhia Nuclear Power Plant to prevent a nuclear accident. Now occupied by Russian troops, Zaporizhzhia is the largest nuclear power plant in Europe. Before the war it supplied more than a fifth of total electricity generated in Ukraine.
A Kyiv School of Economics survey conducted earlier this year found that the country’s only major oil refinery, seven power generation facilities, eight civilian airports, 145 factories, and more than 600 educational institutions required significant if not complete reconstruction. These figures represent a conservative estimate and are likely much higher. The knock-on economic effects, including unemployment and energy shortages, are staggering.
Importantly, AmCham Ukraine cited damaged or destroyed transportation and logistical infrastructure as a top issue for rebuilding Ukraine’s economy. Roads, seaports, river transportation hubs, major airports, and high-speed rail between Kyiv, L’viv, Odesa, and Kharkiv should be part of the long-term reconstruction effort. To jump-start the campaign, industrial parks with additional legal protections and basic support infrastructure should be considered, borrowing from Turkey’s successful experience.
Kyiv has sensibly divided its reconstruction effort into three phases: emergency aid to address urgent needs; deeper, broader efforts to rebuild affected infrastructure; and long-term sustainability.
In agriculture, Ukraine’s world famous chernozem (black earth) allows the country to feed 10 times its own population through exports. Agriculture accounted for 11 percent of the country’s prewar GDP and 40 percent of total exports. Ukraine produces more than 30 percent of the world’s sunflower oil and is a leading exporter of wheat, barley, potatoes, and corn. Due to the war, 10 million hectares have been knocked out of production, much covered with mines placed by Russian armed forces. The U.S. Department of Agriculture forecasts that Ukraine’s wheat production alone will fall by two-thirds to 22 million metric tons, and this will be compounded further by port blockages and Russia’s continued terror on the Black Sea.
To rebuild this essential sector, a decade-long, intense effort will require demining agricultural land, replacing agricultural machinery, silos, warehousing, and trucking, and updating road and river connections to seaports for onward export. Further reforms in land property rights and land registration should also be part of the reconstruction effort.
Using its Syrian playbook, the Kremlin has systematically targeted water and wastewater infrastructure to demoralize the population. Only three days after the expansion of hostilities, Russian armed forces bombed a critical dam that blocked water access to Russian-occupied Crimea. That negatively affected water supply in Ukraine’s agriculturally rich Kherson region. Clean water for the population and expanded agricultural irrigation will also be essential for rebuilding Ukraine’s food sector. Pipes, pumping stations, water conservation technology, potable water infrastructure, and wastewater treatment centers will be needed in all affected areas.
More than 600 health care facilities have been intentionally damaged or destroyed, a practice widely used by Russian armed forces in Chechnya and Syria. All of Ukraine’s health care system is by necessity on a war footing, responding to battlefield injuries and limited rehabilitation. This has often displaced the health care needs of the general population, which suffers from high rates of tuberculosis and low rates of immunization for infectious disease, including COVID-19. In the short term, surgical supplies, anesthetics, intensive care unit equipment, and essential medicines will be needed to sustain wartime care. In the longer term, hospitals and clinics, including specialized care for burn treatments, amputees, veterans, and mental health disorders, will be in critical need. Reforms to decentralize health care budget resources and accountability to the regions should also continue.
Rebuilding Strong European-Standard Institutions
Ukraine reconstruction will require not just brick-and-mortar investment, but hard work on rebuilding and strengthening institutions that will once and for all break with the country’s oligarchic Soviet past. Ukraine began intensified economic reforms in 2014, with clear successes in banking, public procurement, and taxation. But more will need to be done to regain the confidence of international donors and investors, including further deregulation, limitation of the state’s role in the economy, reducing the role of oligarchs, and digitalization of public services.
The 2021 report of the European Court of Auditors on corruption in Ukraine noted some progress and considerable remaining challenges. Ukraine’s Anti-Corruption Strategy, adopted in June 2022, properly focuses on customs and taxation; the courts and law enforcement; regulation; and construction and land management— all areas that have been sources of corruption since Ukraine’s modern independence in 1991. Importantly, Kyiv has laid out a plan to manage such risk through the establishment of a separate agency to review reconstruction efforts and provide public oversight to planning, procurement, and implementation.
The E.U.’s cumulative body of community law can also provide important leverage to ensure Kyiv takes the right, painful steps to enforce the rule of law and root out corruption. As E.U. President Ursula von der Leyen said earlier this year, “Reconstruction should combine investment with reforms. In time it will help Ukraine on its European path.” The detailed legislative and implementation road map presented by the Ukrainian government at the Lugano conference shows seriousness of intent, but the proof will be in the pudding. Private investment will form a large part of the capital pool in Ukraine reconstruction, but only if the business environment improves significantly.
The U.S., Ukraine, and their partners and allies have a key weapon in their arsenals: the resources and ingenuity of their private sector. Within weeks of the war’s expansion, thousands of American, European, and other firms closed their operations permanently in Russia, reacting to strong public opinion against doing business there. Per Yale’s Chief Executive Leadership Institute, more than 250,000 Russians lost their jobs from this Western corporate exodus. For the first time since the Cold War, the U.S., E.U., and nearly 40 partners have put in place export controls on critical technologies to Russia, working closely with the private sector.
Sanctions implemented by private financial institutions have crippled the Russian economy; its GDP is expected to drop by 5–10 percent this year alone. American, Ukrainian, and international firms in Ukraine continue to contribute directly and indirectly to the war effort, through support of the Territorial Defense Forces; provision of key IT, logistics, and transportation products and services; and provision of jobs to Ukrainians. And the private sector in Ukraine remains resilient: 60 percent of AmCham Ukraine members noted they plan to continue to operate despite the war, and 96 percent plan to do so in 2023. In any reconstruction effort, it will be the private sector that will bear the brunt of implementation, from initial planning to “last mile” completion.
The Critical Role of the Private Sector
American companies and international partners can play a critical role by bringing global expertise to Ukraine reconstruction, but will need significant clarity and advance consultation. First, strong partnerships should be established with the many qualified Ukrainian firms. While many of these local firms might not have the scale and financial capacity for larger projects, the deep talent pool of qualified engineers, IT professionals, agricultural specialists, and logisticians should be fully deployed.
Second, prequalification of bidders for primary and subcontracts will need to be carefully thought through to ensure transparency, competition, and public confidence in the process. Third, the debate on sole source and open competition procurement strategies will have supporters and detractors. However, especially in the emergency phase of the rebuild, a firm’s capability, experience, and speed to mobilize should be strongly considered to ensure quick wins early in the process. Ukraine’s globally recognized ProZorro procurement system should be leveraged to ensure Ukrainian companies can access tenders and provide transparency for all stakeholders.
Finally, private sector entities should ensure that the spending stays in Ukraine as much as feasible, with incentives for local sourcing (which is often cheaper, faster, and even better than many offshore options). Key financial institutions such as the Development Finance Corporation, the Export-Import Bank of the U.S., and their international counterparts should consider Ukraine-dedicated funds and programming with authorities that allow creativity and fewer restrictions that govern traditional portfolio. Our embassy in Kyiv should retain and, when possible, surge resources to assist private sector–led reconstruction efforts.
Ukraine is fighting not just for herself, but for Europe, trans-Atlantic values, and the ideals of democratic governance. “Reconstruction of Ukraine is not a local task of a single nation,” President Zelenskyy noted. “It is a common task of the whole democratic world.” Unfortunately, no one can accurately predict when the war in Ukraine will end. The daily carnage from Russian bombardment of Ukraine can often make a reconstruction effort hard to ponder. But we know now that a well-coordinated, long-term, international effort—done in partnership with the vast resources of the private sector—will be essential for success. The same decisiveness, cohesion, and determination of U.S., E.U., and NATO efforts to respond to Kremlin perfidy will be required for Ukraine reconstruction over the long haul. The world has much at stake in Ukraine’s ultimate victory.