A proposal to turn a cost info an opportunity for development

Vision Think Tank¹ - January 2023

What is the cost of repairing what the Russians destroyed in one year of “special operations”? To have an idea of the chasm that Ukraine will have – sooner or later - to overcome, it is useful to look at the pictures of some of the cities that were unfortunately close to the long war border (1.300 kilometers).

These pictures were taken by satellites flying over Bakhmut (where the most violent fighting is currently happening) or Kherson (which was taken back by Ukrainians some months ago). These cities disappeared. Buildings are not only gutted, as those far from the trench: apparently, bombs have torn away their foundations from the ground. In some areas, bombs have drilled land so densely to erase its colors. The land that used to be one of the first producers of wheat and apples, once green and yellow, is now of an indistinct grey. The first problem will be removing the enormous amount of rubble.

What satellite pictures show with so much harshness is the issue of rebuilding a country that might soon become the largest of the European Union, and this poses three problems: the first one is to quantify the necessary figures of reconstruction, deciding whether the goal is just to rebuild the previous situation or to address some vulnerabilities that Ukraine had even before the war.

The second problem will be that of understanding who pays the highest price of this war and how the aggressor could be held accountable for the damage.

The third question will be defining which mechanisms will guarantee certain results for the international community and who is willing to invest.

The damages provoked by the conflict are both direct and indirect. In June 2022, the World Bank estimated that the cost of reconstruction would be of 349 billion dollars (more than 1.5 times the GDP of 2021). As far as the direct losses are concerned, the Kiev School of Economics calculated that the cost of rebuilding infrastructure – bridges, dams, high voltage masts and roads – destroyed by the attacks might be of 127 billion dollars.
Furthermore, the destruction of agricultural crops, infrastructure and production facilities caused a reduction of the production of goods and services, with rising costs for businesses.

Regarding the indirect damages, the major ones result from the collapse of private investment and exports, for a total pairs to $350 billion.

And yet, the drop of the Gross Domestic Product alone (which, according to the European Bank for Reconstruction and Development, was of 30% in 2022) amounts to 60 billion euros. However, these figures would obviously grow even more (of almost two billion dollars a day) if the war was to continue, whereas things would change with a different purpose for reconstruction. The public deficit was 25.6% of GDP in 2022. This, together with the losses, brought to a significant increase of the debt to GDP ratio: 71% in the third quarter in 2022. It is an huge value for an emerging country, considering that at the end of 2021 the debt was 48.9%.

In fact, even before the invasion, Ukraine suffered from a longstanding disease causing its instability. In 1991, when Ukraine became independent from the USSR, it had a population of 52 million inhabitants – which had become 43 million by the time Putin ordered his tanks to cross the border. In the past 30 years, Ukraine’s population has been decreasing consistently every year. This happens on the one hand because working-age individuals migrated to Europe (among them, many caregivers and builders); on the other hand, because the life expectancy of those who stayed became shorter: in 2019, it was of 66 years, 12 years lower than the European average (also because of smoking abuse among the unemployed). In the months following the invasion, another 8 million refugees left the country, leading it on the brink of a demographic catastrophe – perhaps, even worse than the catastrophe of war. 

DEMOGRAPHICS OF UKRAINE (MILLION, 1960-2022)

SOURCE: VISION ON WB DATA

And yet, something changed in the past months: since September, 1 million refugees have come back to Ukraine and, among those who already lived in Europe, the percentage of those who are willing to move back has grown from 48 to 72%. In this tragedy, Ukrainians might have found the pride of fighting a war that also affects those who were hosting them. Thus, reconstruction should aspire not only to rebuild what was destroyed, but also to enhance the possibility of an economic recovery, aiming both at replacing destroyed roads and at building new opportunities. This could paradoxically lower the cost of reconstruction, if we could make many young graduates move back to Kyiv.

Secondly, it is necessary to establish who pays and how to make the Russians accountable for their responsibilities. In this regard, there is actually a precedent: that of the fund for compensating damages caused by Iraq’s invasion of Kuwait in 1990. This fund, established by the United Nations, distributed almost 50 billion dollars of compensation using the revenues of Iraq’s oil trade for twelve years - until Saddam Hussein’s destitution.

In this case, the proposal is to finance Ukraine’s reconstruction not only with the oligarchs’ funds, currently frozen in Western banks (and in tax havens) – which, according to the New Lines Institute, potentially amount to two trillion dollars. Instead, reconstruction would also have to be supported by any country that is interested in a stronger Ukraine – firstly and mostly, by the Union of which Ukraine will be part. Moreover, it should be supported with instruments that can maximize private investments, especially if the objective is not only that of rebuilding but also reviving a great country.

One last question – related to the first two – is that of who will manage this reconstruction. Ukrainian democracy, quite fragile even before the war, might have gained new credibility from this tragedy. And yet, European Union should more vigorously invest in this historic bet, have to rely more on the design of financial instruments.

The trading relations between the European Union and Ukraine were rather intensive before the war broke out: total trade between them reached almost €52.4 billion in 2021. The EU is Ukraine's largest trading partner (39.5% of its trade) and Ukraine was the EU's 15th biggest trading partner (1.2% of the EU's total trade). Europe is putting much effort into rebuilding one of its main commercial partner. From the beginning of the war, the EU have considerably stepped up their support for Ukraine². More than 18 billion of euro are allocated for the Ukraine’s economic, social and financial resilience. In January 2023 the Commission dispensed a first instalment of €3 billion of the up to €18 billion Macro-financial Assistance+ (MFA+) package for Ukraine, The MFA+ will help Ukraine to keep on paying pensions, pensions, and to maintain essential public services.

The war in the heart of Europe seems to have led us in a time beyond time – a trench war as those from a century ago, fought with twenty first century weapons. Rebuilding does not only mean to pay and to make others pay. It also means remembering that solidarity and economic efficiency can coincide.  

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^1: The co-authors of this paper are Giorgia Caianiello and Francesco Grillo from Vision Think Tank

^2: Reconstruction of Ukraine, EU solidarity with Ukraine, from the European Commission website https://eu-solidarity-ukraine.ec.europa.eu/eu-assistance-ukraine/reconstruction-ukraine_en