The writer is an FT contributing editor and global chief economist at Kroll
The full economic impact of Russia’s war on Ukraine is impossible to determine in the fog of war. What is clear is Ukraine will need a lot of financial help when the fighting stops. Now is the time for major donors to put plans and procedures in place to provide it. The potential geopolitical cost of failure is high.
G7 leaders have suggested Ukraine needs an initiative comparable to the Marshall Plan. But rebuilding Ukraine will be more complex than the US-financed project for Europe’s reconstruction after the second world war. The Marshall Plan involved one donor for 16 recipients. Postwar Ukraine will be the other way round, with one recipient and at least 16 donors, including individual countries, development institutions, international organisations, private sector actors and, possibly, seized Russian assets and reparations.
This brings with it a host of co-ordination issues, and so far progress on addressing them has been lacklustre. It may seem premature to discuss rebuilding Ukraine while war rages and the risk of a frozen conflict for years is high. But now is exactly the time to establish the infrastructure for a comprehensive reconstruction, so work can begin as soon as the shooting stops.
There is broad agreement among economists that Ukraine must own any recovery plan if it is to have lasting success. The Ukrainian government must devise the proposal in consultation with local and civil society organisations, and have it approved by the large and diverse donor community. Ukraine has already started this process. The government presented a national recovery plan at a donor’s conference in Lugano in July, and a Berlin G7 event hosted by the German presidency in October.
In Lugano, however, donors were reportedly unprepared, and the US and others did not send their highest-level officials. Few concrete proposals emerged from the Berlin meeting. The US, Ukraine’s largest donor, was hardly represented and western leaders were relatively disorganised. G7 leaders agreed last week to set up a donor platform for Ukraine but offered no details.
Europe should spearhead a recovery programme. In June the EU agreed to accept Ukraine as a candidate country. European leadership could ensure the country develops institutions and standards in line with EU requirements.
The EU shouldn’t, however, take the lead on collecting and disbursing funding. Most economists agree Ukraine needs debt restructuring and grants instead of loans if it is to emerge with sustainable debt. Loans eventually need to be repaid, and would increase the risk of a debt crisis. But the EU’s consensus-based decision-making means loans are easier to approve than grants (though Hungary has shown even this isn’t always easy). Nearly all funding from EU institutions has come as loans, while most US funding has taken the form of grants.
Final disbursal of loans has been a problem for the EU as well. By late November, the US had delivered around 60 per cent of the funding it pledged, while the EU had distributed only around 27 per cent. The urgency to deliver may fade after the existential threat abates and rebuilding begins.
Instead, the EU should play a leadership role in a new independent agency set up to match funding with projects in Ukraine and monitor those projects’ implementation. It would be similar to the Economic Co-operation Administration that was established to administer the Marshall Plan. The agency should be based in Brussels, with a strong presence in Kyiv to ensure local ownership of the programme and a management team comprised of non-Europeans so all donor interests are represented.
As outlined in a Centre for Economic Policy Research proposal, the new agency should establish a multi-donor trust fund, a vehicle often used by the World Bank to pool diverse sources of funding. To mobilise capital immediately, the agency should set up a facility that can issue bonds up front against long-term commitments of donors.
There is never a guarantee of success with reconstruction programmes, as evidenced by Afghanistan and Iraq. The cost of failure in this instance, however, could be enormous for Ukraine, Europe and the world.
A failed state in Europe, bordering Russia, would be a security nightmare. It would ensure a refugee crisis as millions of displaced Ukrainians would have no reason to return home. And it would reinforce scepticism about the west’s values and intentions among countries that have refused to take sides in the war. The fighting continues, but the time to plan for peace is now.
