The direct damage inflicted on Ukraine by the Russian invasion in terms of the cost of destroyed and damaged facilities amounts to more than $150 billion, while the total estimate of Ukraine's reconstruction to get it to the stage of advanced EU integration exceeds $1 trillion, according to experts from the Centre for European Policy and Analysis and the Kyiv School of Economics. Such a colossal sum is neither unbelievable nor unprecedented and amounts to 2% of the combined GDP of the EU and G7 countries, which is comparable to European investments made by the US after World War II under the Marshall Plan. Such a project requires the active participation of the private sector, but its involvement will be determined by both the guarantees of Western governments and Ukraine's own progress on the path of reform. According to experts, these are primarily anti-corruption measures, decentralisation of power and improvement of the quality of public administration, liberalisation of the land market and modernisation of the judicial system, as well as development of instruments of civil control. But, as it stands, confidence in Ukraine's ability to implement reforms has been declining both globally and in Ukraine itself. And this is no less bad news than the advance of Russian troops on the line of contact. Ukraine must demonstrate the will to reform and integrate into the Western world from which it expects security guarantees and financial support for its recovery and reconstruction.
The direct damage inflicted on the Ukrainian economy by the Russian invasion (the value of destroyed or damaged material assets and infrastructure) amounted to $155 billion as of September 2023, according to experts from the Centre for European Policy and Analysis (CEPA) and the Kyiv School of Economics (KSE) in a joint study. The most affected sectors were housing (damage is estimated at $58.9 billion), transport ($39.9 billion), trade ($15.7 billion), agriculture and forestry ($13.2 billion), energy ($9 billion) and education ($6.8 billion). In regional terms, the most serious damage was inflicted on territories that were at different times arenas of active military operations or were under Russian occupation: Donetsk Oblast ($37.4 billion), Kharkiv Oblast ($30.2 billion), Luhansk Oblast ($17.1 billion), Zaporizhzhya Oblast ($14.8 billion) and Kherson Oblast ($12.3 billion); Kyiv and Kyiv Oblast ($13.3 billion) also suffered significant damage. The real figures may be even higher, as the scale of destruction in Russian-controlled territories is unknown. At the same time, the total estimate is many times higher than the figures for direct damage, because it should also include losses associated with the interruption of the natural functioning of the economy and economic entities, including lost profits and lack of investment, the authors of the study note.
However, in light of the decision to start the process of Ukraine's integration into the European market and EU structures, the task is not to recreate an inefficient post-Soviet state, but to create in its place a more modern economy with a strong democratic government. In this perspective, the amount of money needed to reconstruct Ukraine substantially increases. For example, the manufacturing sector, according to rough estimates, has suffered direct damage to the value of $29 billion, but at the same time lost ten times more profit (about $250 billion, according to the authors' estimates), and $140 billion will be required for its modernisation, which brings the necessary costs for the restoration of the entire manufacturing sector to $420 billion. In total, the experts estimate the necessary costs for the restoration and reconstruction of Ukraine at $1.14 trillion, which includes $154.9 billion in direct damage and $500 billion in lost or foregone profits, as well as around half a trillion dollars of investment for the creation of a more efficient and modern economy.
These figures may seem incredible, but in reality, they are not, according to the authors of the study. From April 1948 to June 1952, the United States allocated $13.3 billion to the Marshall Plan (this figure is given in the report; there are other estimates in the literature), which at the time was equivalent to 1.6% of US GDP. The $1 trillion needed today for Ukraine's recovery and reconstruction is about 2% of the combined GDP of the EU and G7 countries. To date, Ukraine's allies have agreed to set aside about $375 billion, or 0.15% of their combined GDP, for its reconstruction, including not only EU and IMF guaranteed funds (about $70 billion), but also the frozen reserves of the Russian Central Bank amounting to $300 billion. But this is clearly insufficient.
Of course, expecting such sums to be allocated from the budgets of Ukraine's allies is not reasonable. The international business community can and should play a decisive role in the reconstruction process. Around 600 companies from 42 countries with a combined market capitalisation of more than $5.2 trillion have signed a declaration of readiness to invest in Ukraine's reconstruction within the framework of the Ukraine Business Compact platform. But this mechanism will not work on its own in the conditions of war. As we have previously written, it requires an investment boost in the form of guarantees or subsidies from the governments of developed countries (→ Re: Russia: The Great Reconstruction). However, the third necessary component is the will of Ukraine itself towards a new level of integration. In 2022, its heroic resistance to Russian aggression made a huge impression on the world. Today, this effect has largely faded, and Putin's narrative of Ukraine's state inadequacy has gained influential support in the form of Donald Trump, according to knowledgeable sources. Although the war has become protracted, Ukraine must send a new signal to the world of its commitment to democracy and European integration.
Any aid disbursement to Ukraine should be conditional on continued anti-corruption reform, an expanded role for civil society, and decentralisation of power, the German Marshall Fund (GMF) has written in a policy report on this topic published ahead of the London conference on Ukraine's reconstruction. Although Kyiv has fulfilled over two-thirds of the seven preliminary conditions for starting negotiations on EU accession, successful completion of reforms is necessary for the success of the country's reconstruction programmes, the CEPA and KSE experts write. For example, against the backdrop of a full-scale Russian invasion, the urgent need to modernise public administration and the Ukrainian state as a whole has become apparent: the experts suggest decentralising power by creating effective bodies for local self-governance, as well as improving the transparency and quality of public administration. Ukraine should complete its land reform by allowing all legal entities, including foreigners, to purchase agricultural land, the authors of the report believe. The agricultural sector plays a crucial role in Ukraine's economy and even in 2022 accounted for 53% of its export revenues and about 20% of GDP. As part of the reform of the judicial system, analysts advise harmonising legislation, partially introducing case law, and increasing public control over the judiciary.
Even more important for potential donors is the promotion of a deoligarchisation campaign as well as the fight against corruption. The deoligarchisation law adopted in 2021, which provides for the inclusion of oligarchs in a special register, was criticised by the Council of Europe's Venice Commission, noting that its 'personalist' approach to the problem essentially replaces the necessary measures for implementing a 'systemic' approach. The lack of attention to systemic measures and personalisation of problems exacerbates risks in times of military conflict when standard instruments of civilian control, such as elections, are unavailable.
As part of the campaign to combat corruption, the CEPA and KSE analysts suggest that the Ukrainian authorities should address staffing problems in anti-corruption agencies, expand the use of electronic procurement and other digital financial transparency tools, further develop legislation related to money laundering, and increase funding for civil society projects and journalistic initiatives aimed at disclosing corruption and monitoring public spending. If the system of civilian control is not developed, the erosion of power in the context of war and lack of elections will become almost inevitable. In a recent survey of Ukrainian residents, the problem of corruption topped the list of threats to Ukrainian statehood (mentioned by 51% of those surveyed), surpassing even 'military aggression' (46%). The growing concern about this problem goes hand in hand with the declining authority of state power and its representatives, as shown by the survey data.
The effective promotion of Ukrainian reforms is necessary not only for Kyiv, but also for Brussels, the CEPA and KSE experts believe. Unlike the US, Europe has no choice: the integration process is underway and essentially represents both the only chance for Ukraine and an existential challenge for the EU. Its failure would result in a sharp decline in the trust in EU structures of its citizens and would destabilise its eastern flank. As noted in a RAND report on Ukraine's reconstruction, the success stories of post-war reconstruction were based on the initial capital and security guarantees provided by the US, while the main funding, reform design and 'image of the future' were provided by Europe. However, much depends on Kyiv's own commitment to such a project — Ukraine must demonstrate the will to undertake structural reforms. Moreover, as investors and donors invest more money in Ukraine, their demands for progress in anti-corruption reforms will increase, as will resistance to these reforms in Ukraine itself, according to GMF.