Ukraine, economics: war damage, reconstruction plans: May 2022

As economic war damage mounts, president’s team sketches a reconstruction plan

(for the EIU)

  • The direct cost of economic war damage is high and mounting, but unevenly spread across Ukraine’s regions. 
  • Amid the large-scale destruction, signs of economic resilience and recovery have started to appear in areas where Russian forces have been pushed back.
  • The president’s team has set out a preliminary plan of priorities for post-war reconstruction.  

1.

Three months into the current, most destructive phase of the Russo-Ukrainian war, the cost of war damage to Ukraine’s infrastructure and physical capital has continued to mount at a rate of US$3bn-4bn per week, according to the Kyiv School of Economics (KSE). As of May 19th, the total accumulated cost of direct economic damage since late February came to just over US$97bn, with the highest losses accruing in the categories of housing, roads and factories. This is high a share of the country’s domestic national wealth (estimated at around 3.5-4.5 times the size of its national income, or about US$500bn-600bn in 2020-21), but is likely to be on the conservative side, as it is based only on verifiable losses. Moreover, the extent of the assessed damage is unevenly spread, so that, with the focus of the war having switched to eastern Ukraine over the past month, it is the Luhansk and Donetsk regions of the once industrialised Donbas—already the worst off economically of Ukraine’s regions, following several years of rule in parts of each by "Russian-backed separatists"—where the infrastructural damage has been highest proportionally. 

2.

Alongside the cumulative destruction, however, reports of sectoral resilience, infrastructural repairs and other signs of the return of economic life have tentatively begun to appear in the local press. So, for example, the earnings of Ukraine’s IT sector are reported to have risen in the first quarter to US$2bn, from US$1.4bn a year earlier, despite the onset of martial law. In April, meanwhile, agricultural exports picked up compared with the previous month, according to the line ministry—probably reflecting the initiation of plans, developed along with the EU, to establish land export routes to partially offset the impact on foreign trade of Russia’s blockade of Ukraine’s Black Sea ports, which has stoked fears of global food shortages. (Although neither IT nor agriculture are very big employers in Ukraine, both usually contribute significantly to its export earnings.) Moreover, according to local sources, some of those earlier displaced by the fighting have started to return home, both from abroad and from within Ukraine, especially to the main cities—first Kyiv, and more recently, Kharkiv—in areas from which Russian forces have been expelled. Here, press reports point also to the resumption of residential construction projects, and the repair of vital transport links. According to the infrastructure ministry, for instance, by May, more than 30 bridges damaged or destroyed in hostilities had already been restored, including a section of railway line connecting Kyiv to Irpin, a satellite suburb north-west of the capital that had been the scene of heavy fighting during Russia's unsuccessful attempt to storm the Ukrainian capital in March.

Nonetheless, and perhaps in response to media stories of Russian troops looting grain in newly occupied areas, such as Kherson, in May the minister of agriculture, Mykola Solskyi, felt obliged to reassure the population that Ukraine retained control of sufficient farm land and food stocks to be able to feed the population; that de-mining of farm land was proceeding in areas retaken from the Russian army; and that there were sufficient fuel stocks to support the upcoming agricultural sowing campaign. That fuel shortages have now become a particular problem in Ukraine’s wartime economy was underscored in mid-May by the promise of neighbouring Poland to deliver 25,000 tonnes of petrol in short order. These shortages, in turn, are no doubt linked to Russia’s targeting of Ukrainian fuel depots, the loss of which the KSE counts at 28 by May 19th, costing an estimated US$227m.

3.

In early May, the team of the president, Volodymyr Zelenskyi, issued a preliminary outline of his government’s reconstruction plans. Of the measures envisaged, some, such deregulation of business activity, and climbing the export value chain—that is, attempting to switch to foreign sales of processed goods rather than raw materials—are familiar from the standard development prescriptions of the past 30 years. Another highlights the long-neglected goal of achieving energy independence through exploitation of Ukraine’s domestic gas reserves and further expansion of the nuclear sector. Ukraine’s gas reserves are the second-highest in Europe, but their development has been hindered by the long-term dysfunction of domestic energy markets. So far, however, it is unclear how this goal might be reconciled with the “green energy” commitments already made by the Zelenskyi administration.

Beside these, another cluster of proposals to boost post-war growth build on war-related developments. The first is a call for the reduction in tariffs on Ukrainian goods, introduced by the EU following the latest Russian invasion, to be adopted by all of the G7 rich industrial economies. A second proposes the strengthening of Ukraine’s commercial transport routes westward, so building on the plans, noted above, to develop auxiliary logistics routes to get around Russia’s blockade of Black Sea merchant shipping, which in the short run will be subject to capacity constraints. A third measure aims at specialisation in military technology, an area in which Ukraine has a strong inheritance from the Soviet era, and which, following reforms of the military-industrial complex from 2014, has delivered some successes in recent hostilities—most notably, perhaps, the wide deployment of the locally-made Stugna-P portable anti-tank missile system. This last may tie in with the aim of boosting manufacturing exports, as well as with the president’s earlier suggestion, that, in the wake of the current war, Ukraine would become a “big Israel”—that is, highly security conscious and more militarised.   

The final element of the reconstruction plan repeats a call for the country to be offered EU candidate status, as a step towards fast-track EU membership. Despite warm words on this from leading EU representatives, such as Ursula von der Leyen, the president of the European Commission, and Charles Michel, the president of the European Council, the issue remains controversial in the EU. In part, this is because of the negative signal it could send to existing EU aspirants were Ukraine to "jump the queue", and in part because of concerns that pervasive, high-level corruption in Ukraine is incompatible with EU institutions. As before the February invasion, then, the reform of Ukraine’s political and economic governance institutions—not mentioned explicitly in the official reconstruction plan—will be essential to Ukraine's reform and recovery plans more broadly. That said, institutional change is likely to be difficult and slow. This is because institutions are ingrained habits of thought and everyday behaviour that people do not find it easy to relinquish. This is why, by offering a range of practical, emulatable, “template” strategies in the areas of bolstering state capacity, the rule of law and liberal democratic practice, for example, achieving EU candidate status would, for Ukraine, be of more than symbolic importance and, in the long run, of greater value than trying to take a short cut to full membership—which, in any case, is unlikely to be offered. An opinion by the European Commission on Ukraine's recently submitted EU membership application is due in June.


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