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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

Ukraine rebuilding would be small wager for Europe

Ukrainian national flag flies near buildings destroyed by Russian military strike in Borodianka, in Kyiv region. — Reuters
Ukrainian national flag flies near buildings destroyed by Russian military strike in Borodianka, in Kyiv region. — Reuters
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In 1991, the year Ukraine became independent after years as a Soviet republic, its GDP per capita was 21% higher than that of Poland, which had just broken free from the defunct communist bloc. Thirty years later, Poland’s output per capita was 2.7 times that of its southern neighbour. When the war-torn country starts rebuilding, it will have the opportunity to make up for lost ground. Europe has both the financial capacity and the political interest to play the leading part in the rebirth of its wounded ally.


Russia’s invasion of its neighbour in February last year interrupted a slow reform drive in Ukraine. The irony is that effort had started when Russian President Vladimir Putin annexed Crimea in 2014, thus ensuring that Ukraine would firmly aspire to belong to Europe.


The war inflicted severe damage on Ukraine, with GDP down 30% last year according to the International Monetary Fund. Despite this, the economy held together. Reforms, however, were far from completed, and as Kyiv’s allies discuss what is needed to rebuild the country, they will have to pay to heal both pre-war and post-war economic wounds.


Rebuilding Ukraine will require help, expertise and guidance – and a lot of time and money. Yet the costs are within what Ukraine’s allies and multilateral organisations can afford.


The divergence between Poland and Ukraine since the end of communism in Europe has a lot to do with the former joining the European Union in 2004. The latter, on the other hand, took the corrupt path of an oligarch-financed economy, along the lines of the Russian model. Ukraine’s Deputy Economy Minister Oleksandr Gryban, in a recent interview in Kyiv with Breakingviews, referred to those years as his country’s “three lost decades.”


Ukraine now has a team of reform-minded ministers and in the last few years has embarked on a serious overhaul of its once-shady banking system. That helps explain its surprising performance since the war began - even with an unemployment rate at 20%, inflation running at 21% this year and the central bank’s key interest rate set at 25%. Private savings have doubled, in absolute terms and amounted to 36.5% of GDP last year, according to the IMF.


In another sign of confidence in the government of President Volodymyr Zelenskiy, the unofficial level of the national currency, the hryvnia, has remained within 5% of the official rate. And foreign currency reserves, now at $36 billion, are at their highest level in a year.


International aid was key to holding the Ukrainian economy together. Nataliia Shapoval, chair of the Kyiv School of Economics Institute, notes that foreign money is helping finance roughly half the government’s budget deficit, expected to balloon to 28% of GDP this year from 4% in 2021, according to the IMF. Ukraine’s allies contributed some $31 billion last year. According to the World Bank, the government still needs about $3 billion a month in outside help to keep paying soldiers, teachers, and rising social transfers.


In the first four months of 2023, the European Union overtook the US as top donor to Ukraine, according to finance ministry numbers, injecting some $6.5 billion into the government budget. Were the aid to continue at that rate, it would total $19.5 billion for the whole of 2023. That’s just 0.1% of the EU’s GDP – a small tax to pay to keep Putin at bay.


Funding the country’s reconstruction once the war is finally over will cost more. In their most recent report, the World Bank and other international organisations estimated Ukraine’s future rebuild will require at least some $410 billion over 10 years - or 2.6 times its 2022 GDP.


The number sounds impressive. Look closer, though, and it is largely affordable for Ukraine’s allies, even if Europe had to shoulder the whole burden. Even under extreme and unlikely assumptions that public money would fund half of the $410 billion needed through non-repayable grants, and that non-Europeans would suddenly stop all aid to Ukraine, the EU could fund the entire reconstruction by spending $20.5 billion a year for a decade — in line with its current 0.1%-of-GDP contribution to Ukraine’s budget.


In practice, the EU’s outlay would be lower because most of the reconstruction money could come from private investors, and much of the public funding would be extended through loans or credit guarantees. And the United States, Japan and multilateral organisations such as the IMF will continue to flank Europe in its efforts to rebuild Ukraine.


Nevertheless, it is in Europe’s interest to play a major part in Ukraine’s reconstruction before the country is accepted as a formal candidate member of the EU. The bloc’s governments might want to consider that spending 0.1% of GDP to bring a former Soviet republic into the fold would be a small and shrewd investment to help Ukraine embark at last on a Polish-style growth path. — Reuters


Pierre Briançon is a Breakingviews columnist, writing on European business and economics.


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