Ukraine

More thoughts on reconstruction

I had the pleasure of attending a Ukraine reconstruction conference this past week, organised by @wiltonpark. An excellent event bringing together a range of Ukrainian and Western public and private sector interlocutors focused on the subject of Ukrainian reconstruction and recovery once the war ends. A key focus herein was how to get the private sector to help share the huge costs of Ukraine reconstruction.

This has certainly all helped refine my own views. I have written a lot on this substack page but herein are a few updated thoughts to be viewed in conjunction with the rest of the stack.

First, obviously there is always talk about don’t put the cart before the horse and that first ensure that Ukraine is financed and armed to the extent it can win this war, before talking about reconstruction and recovery. Obviously Ukraine needs to win before we can even get reconstruction and recovery in motion.

That said I am in the optimistic camp, as I am absolutely sure that Ukraine wins this war, and sooner, rather than later. As I have writtten, Russia has no path to victory in Ukraine, and the longer this war goes on the worse it gets for Russia and Putin. Eventually Russians will come to their scences and this could be with or, preferably without, Putin. With Putin, Russia has no chance of re-engagement with the West, and international markets. It’s up to Russians to figure that out like the good cop bad cop routine how this ends. It ends badly with Putin.

Assuming though my scenario of an early Ukraine win - which I sketch as going back to February 23 settings, not necessarily a push to retake Crimea and DPR and LPR - we need to start planning for reconstruction, recovery and actually Ukrainian EU accession now.

Second, and given the first point above, we need to think about the institutional setting around this process, to ensure Ukraine and donors, and the private sector, hit the road running and Ukraine has the best chance of recovery fast, once the war does end.

At the outset I have to restress here that winning the peace in Ukraine is almost as important as winning the war. But this is critical not just for Ukraine, but for our entire system of Western Liberal Market Democracy. Ukraine is the frontline against autocracy, 21st century fascism and actually it is defending Europe and NATO against Russian imperial expansion. We have to think of the Ukraine rebuild, recovery and growth/accession process as a Western national security priority. An economically strong and stable Ukraine will be able to defend itself, and actually will be a front line defence for NATO, for us, against Russia.

I sense here that many Western politicians and actually IFI/MDB folks don’t quite get this, yet. They tend to put this in the context of other global crisis recovery stories, for example earth quake responses.

So from my perspective those shaping the Ukraine recovery and rebuild story must have the defence of Westen Liberal Market Democracy as centre stage here. This has to be a security priority of NATO. And that is why this project is way too important to put in the hands of IFIs and MDBs who have a much broader shareholder set, and very different and divserve priorities, which  more particularly don’t include the survival of Western Liberal Market Democracy.

Think here of the EBRD or the World Bank. The World Bank has shareholders, including Russia, China, India, South Africa, who simply cannot have the same priority focus on Ukraine’s reconstruction. Obviously Russia wants this to fail. Same also really for EBRD, as it’s original mission might have been “transition from plan to market” but it has since branched out to supporting development beyond Emerging Europe, to North Africa and Turkey. It’s shareholders include Russia, but also countries outside the Western alliance. Inevitably the likes of the World Bank and EBRD will be pulled in different directions both because of their diverse shareholder group but because of their more diversified focus. They are compromised in both in terms of their ownership structures and their focus. Both are distractions.

And let’s be realistic here, the bulk of the finance for Ukraine reconstruction will come from Western taxpayers, which should have a razor focus here on ensuring Ukraine’s successful economic development as a national security priority. Why should these funds be administered by entities with just different objectives?

So as I have long argued, Ukraine’s reconstruction effort is so important to the survival of Westen Liberal Market Democracy, and so large in scale that it needs its own development agency/entity, owned by Ukraine with Western governments, and with a very clear cut and focused mission.

I already see here the usual turf wars between the IFIS as to who is going to get the mandate and budget to run the Ukraine reconstruction effort. But I don’t sense these folks really get the national security necessity herein. Indeed I think that Ukraine and Western governments need to make a political decision to create a new agency to lead this process, with a really heavyweight, capable, best of class technocrat or politician to lead the way - and folks this project is too important to do the usual thing of choosing someone whose political face fits either the Yanks or the Europeans, but is not up for the job. Give Ukraine, and our national security, a break here.

So see my earlier piece on my ideas for an Agency for Ukraine Reconstruction and Accession (to the EU), AURA.

Third, and I inserted the word “accession” to the EU here because it is now clear that the recent decision to grant Ukraine candidate member status is really so important. Ukraine now has the blueprint for reforms, and laws, and the acquis will be rolled out and adopted. There are no longer any excuses for Ukrainian policitians and oligarchs to stall the acceptance of the EU tool and rule kit. As someone beautifullly put it, Ukraine is now on the elevator to EU accession, and there is no stopping this once the EU bureaucracy has been given the green light, and it has. Their only task is to deliver, and they will. And as we saw in the rest of Emerging Europe who, post the Treaty of

Copenhagen in 1994, got the green light to join the EU, it will be game changing for Ukraine in terms of economic development. And Ukraine has not developed for the past thirty odd years of independence because it lacked that EU accession anchor, but I guess because it was also being dragged back and down by Russian meddling and intervention/invasion. On the latter, hopefully now Ukraine will win a defining victory against Russia to throw off its shackles and be welcomed into the EU.

Fourth, private sector involvement?

Well the prospect of EU accession, finally will help to draw in private sector investment, as will the end of the war, and hopefully finally delivery in the rule of law front (maybe easier said than done).

I think a stand-alone agency for Ukrainian reconstruction (AURA), as above, would send such a powerful signal to the private sector about the West’s commitment to Ukraine, in parallel to EU accession. It would help cement confidence in the private sector that the West is totally invested in this project, it is not just a side bar for an IFI like the WB or the EBRD. It signals that the West is in this for the long haul.

The foreign private sector will get involved, eventually, but it will take time, and as the business environment improves, the allure of low base rebound, and the huge potential and profit upside will bring business in. And I am mega positive about Ukraine’s ability now to deliver given the bravery and innovation shown during this war. This is Ukraine’s State of Israel moment both from a defence but also an economic perspective - innovation, IT, motivation, young, dynamic well educated population with a clear vision of where they are going will push development and investment.

But in the near term financing will be a problem.

The debt standstill which was agreed last August, lasting 24 months, and then further concerns around debt sustainability depending on when the war ends will surely keep capital markets closed until either a) Ukraine starts servicing its debt again or, if the debt ratio is so onerous at the end of the war, seeks some further debt treatment.

So innovative solutions should be found. I have suggested a Brady bond type solution, using frozen Russian assets - I even suggested this back as early as July, before the debt standstill agreement was reached. This could have avoided a default. But hey ho, we are wher we are.

I still think that frozen Russian assets should and will be used, and perhaps the West can pledge these as collateral for Brady bond style solutions for Ukraine - perhaps insurance can be used to offset risks to Western states making the pledge in cash legal hurdles prove insurmountable.

An easier, more timely solution, mindful of the huge reconstruction needs and limited space for funding from Western taxpayers might be to utilise unallocated IMF SDRs, some of the $650bn distributed in response to the Covid crisis. Actually the bulk of these SDR allocations were to G7 nations who simply have little need for this free money. In recognition of this, the G20 in 2021 agreed to pledge 20% of their SDR allocations to lower and middle income countries. Unfortunately, as of writing, only just short of $60bn of the $100bn pledged by G7 has been committed to the two IMF programmes earmarked to utilise these funds. As much as $40bn is stuck in legal/political red tape. A large weight of this consists of the US pledge, of $22bn, and a large chunk from the UK. I would argue that these funds should be allocated as collateral for either a programme of debt relief to Ukraine, as per the Brady example from the 1980s, which could also be used to engineer new money solutions from the private sector. The re-allocation of SDRs to Ukraine would bring multiple benefits, providing opportunities for debt relief, new money, early market access and lower borrowing costs. It’s a no brainer. I just hope the bean counters in our own governments don’t adopt a “the computer says no” approach. They also need to get on the programme that ensuring Ukraine’s succession reconstruction and development is the most important project for the West since the collapse of Communism in 1989/1991.

The above solution could also be extended beyond Ukraine, but also to LICs, in a broader programme of debt relief linked to KPIs around SDG goals. The beauty of this for the US, in particular, is that SDR reallocations to Ukraine would reduce the tab for the US taxpayer, but US generosity in providing debt relief to LICs would also help build back bridges to the Global South, and therein increase geopolitical support for the West in its battle with Russia and autocracies globally.