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27 June 2023

Ukraine’s reconstruction will depend on security guarantees

Maria Shagina

The Ukraine Recovery Conference will convene in London on 21–22 June 2023, but economic discussions about long-term reconstruction will only produce results if security conditions improve and can be guaranteed in some form by NATO members.

The mass destruction caused by Russia’s brutal war of aggression against Ukraine has created an opportunity to rebuild the country in ways that will make its economy and infrastructure more modern, resilient and sustainable. On 21–22 June, the United Kingdom will host the Ukraine Recovery Conference, which is meant to serve as a matchmaking platform for private-sector investors interested in forming long-term commercial relationships with Ukraine. This model differs from that of the Lugano and Berlin reconstruction conferences, held in July and October 2022, respectively, which focused on attracting immediate investment pledges.

The conference will launch a Business Compact that will ask signatory companies to agree that they will look for opportunities to trade and invest in Ukraine ‘when the time is right’. Indeed, UK Prime Minister Rishi Sunak said in a press release just before the conference’s start that funding Ukraine’s efforts to rebuild and recover is ‘its own form of counteroffensive against Russia’. Ultimately, however, the timing of foreign firms' decisions to invest in the country will be determined by security conditions.

Uncertainty around the duration of the war has discouraged many foreign companies from investing in Ukraine. For private investors, security concerns now far outweigh the country’s long-standing governance and corruption problems. Many are eager to engage, but only when the war is over. For example, BlackRock and JPMorgan Chase have discussed with Kyiv plans to open a reconstruction bank, but it is not expected to be launched fully until the war ends.

During the NATO summit in Vilnius, Lithuania on 11–12 July, the allies will discuss whether to provide Kyiv with a multilateral framework that will formalise current levels of military and financial aid. Short of the blanket security guarantees that would be offered were Ukraine to join the Alliance – expected by no one, at least in the short term – such a framework would provide Ukraine with much-needed long-term security assurances. These assurances, however, would have to be more credible than the Budapest Memorandum of 1994, which ultimately failed to deter Russian aggression.

Given that Russia will remain a hostile neighbour and a threat to Ukraine's territorial integrity and sovereignty for the foreseeable future, it is unlikely that Kyiv will be able to attract a significant inflow of international capital without credible security guarantees. The blueprint of Ukraine’s National Recovery Plan recognises this fact. The plan acknowledges that national security, underpinned by a strong defence sector, is a ‘strategic imperative’ for the country’s economic transformation. Rebuilding and modernising the defence sector will remain the key underlying element of the country’s national security and, by extension, its economic recovery; this means that a successful reconstruction process would have to be comprehensive and multi-faceted and seek to forge inextricable links between a resilient economy, robust institutions and strong military capabilities.

The link between national and economic security will affect several economic policies necessary for the country’s transformation. The revival of the agricultural sector will remain important for economic recovery. The country’s farmland, however, is contaminated with landmines and explosive remnants. Nearly 40% of Ukraine’s total land area has been mined, so de-mining will be the priority for agricultural reconstruction. It is estimated that approximately US$70 billion will be required to clear these territories.

Likewise, Ukraine’s metals industry was severely damaged during the initial months of the war, with a third of total assets destroyed. The Azovstal and MMK Illicha, the country’s second- and third-largest metallurgical plants, respectively, were destroyed. Other plants were partially damaged or closed. Metal production output fell by 70%, exacerbated by the closure of seaports for exports. To remain sustainable, the reconstruction of metallurgical plants would have to be completed in line with the European Union’s Green Deal. More importantly, due to the location of the facilities – close to the battlefield – their reconstruction would depend on the provision of war-risk insurance. The mechanism of war-risk insurance has not yet been widely used in Ukraine. Lloyds of London is the exception, which has offered to cover up to US$50 million in damages to support the Black Sea grain trade. The EU has also tried to persuade banks to offer war-risk insurance to companies willing to store gas in Ukraine's vast underground-storage facilities. But only a few players with a high tolerance for risk are doing so. The Ukraine Recovery Conference in London aims to develop further the framework for underwriting investment and encourage companies to support reconstruction despite security concerns.

These points all illustrate that a coherent strategy for economic development and reconstruction must account for security conditions. Thus, the economic discussions that will take place in London in June will depend, fundamentally, on the outcome of discussions about security guarantees that will occur weeks later in Vilnius. To treat reconstruction and security guarantees as two separate tracks would be to misunderstand the importance of national security to economic security.

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