Ukraine’s forthcoming counter-offensive owes much to Britain. “The UK is a leader when it comes to expanding our capabilities on the ground and in the air,” President Volodymr Zelensky said last month, when the UK became the first country to send long-range missiles to Ukraine. In 2022, the UK provided £2.3bn of military support, more than any other country bar the US, has committed the same for 2023, and has trained 15,000 Ukrainian soldiers. Alongside the US and Poland, the UK is widely recognised within Ukraine as its key war time ally and has accrued a huge amount of goodwill in the process.
Tomorrow and on Thursday, the UK jointly with Ukraine will host the international Ukraine Recovery Conference (URC 2023) in London, and the question for Britain is whether it will step up to play a similarly critical role in helping Ukraine win the peace? Without question, the reconstruction effort will be immense. A March 2023 joint assessment by the Ukrainian Government, the World Bank, the European Commission and the UN estimated the cost at US$ 411 billion – assuming the war had ended then and excluding the cost of rebuilding the occupied territories for which there is no reliable data. The cost is expected to stretch over a 10-year period and will need both public and private capital.
To date, committed financing has been thin on the ground. While natural justice demands Russia pay for what it has destroyed, the history of reparations as a source of reconstruction funding is not promising. There is an increasing view among the Western allies that frozen Russian state and Russian oligarch assets could be used for the refinancing. Significant sums could in theory be available. Around £300bn of Russian Central Bank foreign reserve funds have been frozen. More than €24bn of assets attributed to sanctioned Russian individuals and companies have been frozen to date in the EU.
Last month saw the US for the first time transferred to Ukraine assets seized from a sanctions-hit Russian oligarch, Konstantin Malofeyev, following his alleged violation of sanctions imposed on Russia over its 2014 annexation of Crimea. “While this represents the United States’ first transfer of forfeited Russian funds for the rebuilding of Ukraine, it will not be the last,” Merrick Garland, the US Attorney General, promised. But the legality of these transfers is not entirely clear cut or consistent among Ukraine’s allies and even were all such assets and funds to be transferred, they would not be sufficient to cover the reconstruction effort. Public and private capital will also need to step in.
While it is a challenge, the reconstruction work is also an immense opportunity for investors looking for growth. Ukrainian society has shown the world not just resilience and fortitude, but also immense skills at improvisation, leadership and business performance under the most extreme conditions. The post gets delivered and the trains run on time. Post-war Ukraine will be a growth market; it is on a pathway to EU accession, it has a rapidly growing IT sector (exports in 2022 rose $400M to $7bn), the opportunity finally to replace the Soviet legacy infrastructure, substantial hydrocarbon reserves and renewable energy potential, and a galvanised civic society whose determination and calibre to bury forever the malign Soviet legacy has catapulted the country on to the world stage.
Despite the enormous goodwill in Kyiv towards its Western allies, Ukraine needs committed financing plans in place in short order. If Britain and the West sit on the sidelines waiting for the war to end, others will step forward.
Alice Darwall is a lawyer specialising in corporate financing and restructuring.In a report published last month for the Henry Jackson Society, “Winning the Peace”, Dr Ivanov and Marc Sidwell warn of the risks of China filling the vacuum. China is already Ukraine’s number one trading partner. There are undoubted downsides for Ukraine and for its allies in Ukraine becoming more economically dependent on China. In essence, this war is about Ukraine exercising its sovereign right to free itself from Russia’s orbit to join the West, but it may not have the luxury of foregoing Chinese capital unless it has capital commitments from the West.
Foreign, Commonwealth and Development Office (FCDO) ministers should focus on how they can best assist and encourage British investors and businesses to invest in the reconstruction and start to make the committed investment plans that Ukraine needs now.
Investors will have two concerns upper most in their minds, both of which can be addressed. The first is the political risk of committing now without an end in sight to the war or the risk of another Russian attack after a ceasefire. The Ukrainian Government is working on making political risk insurance available for overseas investors; Ukraine and the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, established a pilot scheme last year to provide political risk coverage for foreign direct investments.
The US International Finance Development Corporation may provide political risk insurance for private sector projects in Ukraine, even for non-US capital. Germany is to provide investment guarantees and political risk protection to encourage German businesses to invest in Ukraine, and France and Poland are working on risk protection schemes as well. Governments can also stimulate investment in other ways; Denmark, for example, has launched a US$133m special investment fund for Ukraine to finance projects using Danish technology, which will both provide direct financing through loans as well as providing financial guarantees. The UK can and should step up here too, providing insurance for reconstruction loans from UK investors.
Ultimately, Western governments – not investors – are best able to manage war risk. The best reassurance they can give investors is to make clear that Ukraine’s future is as a full member of NATO, something recently advocated by Henry Kissinger in an interview to celebrate his 100th birthday.
A second oft-cited concern is institutional capacity and transparency – in ordinary parlance, corruption. Here, general perception is not keeping abreast with the reality on the ground. Ukraine has been working to overcome post-Soviet graft since 2014. Ukraine knows that its future depends on not just combatting corruption, but being seen to do so by the outside world if it is to join the EU and attract the financial support it so desperately needs. Corruption is a cancer Ukrainians want to cut out and consign to the past.
The impressive digitalisation of Ukrainian society, not least through its DIIA app, has increased transparency, which is fatal to corruption. Ukraine has launched new anti-corruption institutions – SAPO, the specialised anti-corruption office, NABU, the National Anti-Corruption Bureau, NACP, the National Agency on Corruption Prevention, and the Higher Anti-Corruption Court. In a move hailed by anti-corruption campaigner Daria Koleniuk as “a breakthrough in the war against corruption,” in January President Zelensky fired five regional governors and more than a dozen senior officials in his government following allegations of corruption.
Last month, the FT reported the arrest of Vsevolod Kniaziev, president of the Ukrainian Supreme Court, for allegedly taking bribes from an oligarch. These developments should be seen as a huge positive by investors – evidence of Ukraine’s determination to stamp out corruption. And while corruption still exists in Ukraine and will continue to do so – albeit with diminishing effect, it is not unknown within EU member states. The very next day the FT reported that former French President Sarkozy had lost his appeal against his conviction for participating in a scheme to bribe a judge.
Should the UK Government be doing more to support British investment? In general, UK business and capital is more than able to fend for itself. However in this case, Government support is obviously needed – as other allied Governments are recognising and acting on. If UK business wants to explore investment, whom at Whitehall does it call to ask what support there will be through financing and political risk insurance? Who in Whitehall is going to help it secure the agreements and commitments it will need from Kyiv? Has any designated resource – human and financial – been allocated to help British investment to identify and secure investment opportunities in Ukraine? Is the Government monitoring what others are doing and ensuring that UK business will also get the right support to operate on a level playing field?
Infrastructure is likely to be the most promising early-stage investment avenue for investors, where Ukraine can guarantee offtake over 10-30 year agreements and credit enhancement from the World Bank and EBRD should be available. Utilities are both a prime focus for Ukraine and an opportunity for investors to showcase green energy solutions alongside other emerging technologies. The Government could support UK investors with priority access to Ukrainian decision makers on energy, telecoms, green technology and other key infrastructure projects – ideally showcasing UK tech and engineering prowess. It could establish a development finance institution for Ukraine with a similar mandate to British International Investment, to encourage the rich vein of smaller Ukraine businesses and entrepreneurs to re-ignite the economy from the ground up.
All too often, the Government machine gets a bad press. But we know from the past that when the stakes are sufficiently high and given a strong lead from No.10, it can deliver. We saw that with preparations for the 2021 Glasgow climate conference, which benefited from having its own full time cabinet minister, Sir Alok Sharma. The success of Dame Kate Bingham’s vaccine taskforce reflected her leadership and not being part of the Whitehall machine but having a short reporting line to the prime minister.
With Ukraine, a hybrid approach is required. A UK-Ukraine investment taskforce needs to face two ways. It needs to maintain high level access to President Zelensky and his government to provide discreet advice to Kyiv on how to improve institutional capacity and transparency, and it needs to be private sector facing to British capital and businesses. Having acted quickly and decisively to support Ukraine win the war, the Government needs similar decisiveness to help win the peace.
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