Foreign ministers, business leaders and Ukraine’s top diplomats have gathered in London at the Ukraine Recovery conference to thrash out a plan to rebuild the country once the fighting ends, and more importantly, on how to fund it.

The rhetoric was rousing and the pledges significant. In the plenary session European Commission President Ursula von der Leyen told delegates that the EU has already committed enough money to cover the fiscal deficit for 2023. In the short term, according to the World Bank's estimate, Ukraine needs $14.1bn for "quick recovery" this year that will deal with the most urgent needs such as accommodation and repairs to the energy system. However, after the terrorist attack on the Kakhovka HPP, these numbers will increase, say experts.

All in all, Ukraine is seeking up to $40bn to fund the first part of a "Green Marshall Plan" to rebuild its economy, including developing a coal-free steel industry, a senior Ukrainian official said ahead of the conference.

A team from Ukraine’s Ministry of Recovery will present 45 projects to delegates and bankers in London during their trip, as well as plans for the unification of procedures, digitisation of processes and greater involvement of private business in recovery processes, the head of the ministry, Oleksandr Kubrakov, said a few days earlier. According to him, the critical recovery is focused on three sectors: energy, housing and export logistics.

Von der Leyen went on to say that another €110bn was needed to shore up the government out to 2027 that was not covered; the EU has promised 45% of this, at total €50bn, to ensure that the government can function and give it space to raise the rest going forward.

In a similar vein Blinken announced that the US was coming up with an additional package of $1.3bn on top of the circa $20bn the US has already committed. And UK Prime Minister Rishi Sunak announced that the UK would spend another $3bn over the next three years.

"As Russia continues to destroy, we are here to help Ukraine rebuild – rebuild lives, rebuild its country, rebuild its future," Blinken told the reconstruction conference in London.

The talk was not just of repairing the damage done by the war, but the speakers and Ukrainian President Volodymyr Zelenskiy himself during his video address to the conference painted a vision of a new Ukraine, a clean, green, democratic and stable country that was rooted in European values. He laid out five topics that were key to making this vision a reality: unity in Europe; bolstering stability in the region; developing energy resources, particularly green energy; bolstering security; and putting democracy at the core of the project.

“Ukraine has succeeded in making the EU as united as it has never been before”, with his country “activating the moral force of Nato” the president said. He highlighted that Ukraine’s example has brought Europe together and demonstrates Ukraine’s proper place is in the EU once EU leaders have the “courage” to make that decision.

“This is truly a unity of values, which is reflected in many political, economic, sanction and humanitarian decisions. Ukraine has activated all that power of solidarity for which this was conceived,” the president said. “And Ukraine is also activating the moral force of Nato. This is important for all of us. What does the world see now? Does it recognise Nato's moral leadership in protecting peace? This is only possible with Ukraine in the Alliance.”

Zelenskiy’s remarks were shot through with references to many of the EU’s most important buzzwords. He mentioned Ukraine’s aspiration to “European values” several times and peppered his comments with allusions to Ukraine’s green energy future, suggesting it could become a green energy powerhouse in Europe.

“Growth is always based on values. Just as strong investments are preceded by trust, so the growth that we are preparing must be preceded by confidence that what has been rebuilt will not fall. And it's not about bricks, but about life in general,” Zelenskiy said, speaking from Kyiv.

Diminishing the risks

Zelenskiy was clearly playing to the audience and the international investors in particular. Many of the speakers, including UK Prime Minister Rishi Sunak, von der Leyen and US Secretary of State Antony Blinken, appealed to the private sector to commit and invest into rebuilding the country.

“Recovery is about money. It must be,” says German Foreign Minister Annalena Baerbock. “This will be a success only if there is a public, private partnership that works together.”

She went on to say in the long-term it's not just about money, but to “build back better”.

“The goal is to rebuild a Ukraine that is fit for (the) EU,” said Baerbock, whose country will host another recovery conference next year.

Blinken said postwar Ukraine will need “the strongest possible economy, the strongest possible democracy” in order to attract the investment it will urgently need.

Baerbock announced that in addition to financial support for Ukraine, the German government will also introduce investment guarantees for private sector companies committing to work in Ukraine and called on other countries to do the same. The UK’s Sunak confirmed a similar scheme where Britain will set up special war insurance to cover investors' exposure to the possibility that Russia resumes its aggression, should there be a ceasefire in the interim.

One of the main hurdles to funding Ukraine’s reconstruction is not only persuading investors to go to a war zone, but overcoming the risks that previously has held back foreign direct investment (FDI). In the period between 2014 and the start of the war Ukraine has received pitifully small amounts of FDI that was almost entirely limited to the renewable energy sector thanks to the generous green tariffs offered by the Poroshenko government.

These worries include poor corporate governance, the lack of transparency, a corrupt judiciary and oligarchs. Zelenskiy specifically highlighted that the entire operation of the government would be put online and made transparent in a digitisation of public services and processes. He also specifically addressed the ongoing judicial reforms designed to root out the bent judges in the system and make Ukraine’s property rights real. And he reminded the audience of his crackdown on the oligarchs “that started even before the war began,” the president said.

There is still much work to be done on this front and the EU’s cash will come with a system of checks and fines for missed targets. Although almost all the speakers repeated “Ukraine’s place is in the EU,” it is not being given a free ticket to membership. According to reports before the event, Ukraine will be assessed on its progress by the EU for about a year after peace arrives to see if it's ready to formally start the EU accession process. However, von der Leyen praised the progress that Kyiv has already made in accelerating these reforms in spite of the war in an “oral assessment” of the country’s progress to date.

Pulling in the private sector

Governments and the international financial institutions (IFIs) will commit enough money to keep the government functioning in the next few years, but the enormous cost of actually putting up new housing and factories will fall to the private sector. During the conference governments announced circa $55bn of new funding but despite these large sums, this remains roughly an order of magnitude less than is needed. The World Bank estimated the cost of the damage done to Ukraine by Russia to be $411bn in April. Other assessments put the number closer to $1 trillion.

"Our goal is to mobilise as much international support as possible and establish mechanisms by which this aid will arrive in a timely and rhythmic manner," Prime Minister Denys Shmyhal said in remarks ahead of the event.

A variety of investment platforms have been set up to mobilise private capital. At the top level is the Multi-agency Coordination Platform that unites Ukraine, the G7, the EU, the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD), the International Monetary Fund (IMF) and the World Bank, which covers the large macroeconomic stability issues and goes down into the strategic and sustainable investments into things like key infrastructure supporting the economy.

At the level of private companies, the UK’s Sunak said that more than 400 companies from 38 different countries with more than $1.6 trillion in market capitalisation had already signed up to the Ukraine Business Compact that has been set up to encourage investment.

Separately, US investment fund giant BlackRock launched a Ukraine Development Fund (UDF) in May together with the Ukrainian government to attract public and private capital to reconstruct Ukraine, the government said on May 8.

President Volodymyr Zelenskiy met with Laurence D. Fink, the head of BlackRock, the world’s largest manager of assets, to discuss how to attract investment in the country’s war-ravaged economy.

With more than $8.5 trillion of assets under management, BlackRock could play a key role in raising investment to rebuild the country after the destruction wrought on Ukraine by Russia’s brutal invasion.

Ukraine will adopt European-style laws and regulations as soon as possible, Zelenskiy said, fully aware of the need to radically overhaul Ukraine’s investment image if it is to have any hope of attracting the massive amounts of capital it needs and fully aware of the poor investment image it had before the war started.

“Investors remember Ukraine as a state of corruption, oligarchs and dishonest courts,” US special representative for Ukraine Kurt Volker said on the eve of the conference.

The German’s offer of an investment guarantee could be significant, as it strikes to the heart of one of the main problems that will stymie inbound investment: mitigating the considerable risks there have always been, in addition to the new war risk, to investing in Ukraine.

“Total predictability, clarity and transparency are needed,” von der Leyen said of attacking investment.

A few investors have already moved in. On the day before the conference the tobacco company Philip Morris International reported that construction of a new $30mn factory in the Lviv region will begin in July to replace the factory that had to be closed in the Kharkiv Oblast. The company expects to start production as early as the first quarter 2024. Beer maker the Carlsberg Group has also invested UAH1.5bn ($40.7mn) in the opening of a new production line in the Kyiv Brewery, which will make it possible to increase can production by 80%. The Carlsberg Group had three breweries, in Zaporizhzhia, Kyiv and Lviv, but suspended operations at all of them at the start of the war.

FMCG (fast moving consumer goods) companies tend to be the fastest moving and bravest of the international investors, as gaining as much market share as soon as possible is paramount to their business models, but much more work to attract the slower moving, more conservative companies still needs to be done.

Russia’s frozen $300bn

The delegates were adamant that Russia must be made to pay for the destruction it has wrought on Ukraine.

“Russia is causing Ukraine’s destruction. Russia will eventually bear the cost of its reconstruction,” said Blinken to a round of enthusiastic applause.

Von der Leyen said that over the next few years public money would be sourced from three sources: grants and soft loans from places like the EU; money raised in the form of bonds on the international capital markets; and the “eventual mobilisation of Russian assets” in a phase echoing Blinken’s comments. Sunak also called for the Russian central bank’s frozen assets to be pressed into play in a “legal” way.

These qualifiers testify to the legal problems surrounding the use of Russia’s money, which has been legally frozen by Western authorities but, as bne IntelliNews columnist Gunther Deuber explained in a recent opinion piece, cannot easily be seized legally.

A big debate is currently underway over the issue of seizing the CBR’s money. The issue at hand is that EU law doesn’t allow for the seizure of another government’s property unless war has been declared on that country – something the Nato members have made explicit they won’t do. Currently the plan seems to be to take the profits the $300bn is generating from its investments and channel those to Ukraine, which will amount to several billion dollars a year – and even that is legally problematic, according to the EC legal team. Volker suggested an alternative would be to use the frozen $300bn of reserves as a guarantee fund for investors in Ukraine.

The CBR’s money would go a long way towards providing funds to rebuild Ukraine, but without it the whole programme becomes much more heavily dependent on the trillions of dollars available to the private sector. As the conference stressed the private sector investment so heavily, and spent so little time on the CBR’s frozen assets, this probably represents a shift in thinking and a growing uncertainty that the CBR money can ever be used to fund Ukraine’s reconstruction.

Anti-corruption drive

With an expanded role for the private sector in Ukraine’s reconstruction, Ukraine’s anti-corruption efforts will come into much sharper focus. As Zelenskiy mentioned in his remarks, the process was well under way before the war started, but most of the work still lies ahead.

Zelenskiy has slowly been ramping up his campaign to contain the power and influence of the oligarchs at the insistence of the International Monetary Fund (IMF) for three years.

The first major step was the passage of the so-called Anti-Kolomoisky banking law in May 2020, which banned the former owners of nationalised banks from ever regaining control of them.

The Ukrainian government nationalised PrivatBank in December 2016 following a bne IntelliNews exposé “Privat Investigations” that detailed fake loans scams that were syphoning billions of dollars out of the bank. A subsequent audit found $5.5bn had gone missing from the bank’s accounts. The Anti-Kolomoisky bank law was specifically designed to prevent the uber-oligarch from using his influence to re-take control of the bank.

The IMF has been pushing the government to crack down on the oligarchs, which it sees as a major problem in the country. Zelenskiy broadened his campaign following his oligarch speech in March 2021 that led to the oligarch law in September the same year, which defined oligarchs and introduced legal curbs on their actions.

Undoing the power of the oligarchs will be very hard, as they have had an extra two decades to establish themselves than the Russian oligarchs which Putin ousted soon after taking office in 2000.

The now state-owned PrivatBank has launched legal cases against Kolomoisky in the UK and Cyprus in 2017 to try to recover some of the $5.5bn that the oligarch allegedly stole while the bank, Ukraine’s largest, was under his control. In the preliminary hearing, the UK judge ruled there was clear evidence of fraud “on an epic scale” and froze $2bn of the oligarch’s assets. In the latest development, Kolomoisky refused to testify in the trial in May, which is expected to wind up in the next few years.

The campaign has continued to gather momentum. Kolomoisky has now been sanctioned by the US and Zelenskiy stripped his former friend of his Ukrainian citizenship in July last year, and in February this year police raided his home looking for evidence of embezzling oil products worth UAH40bn ($1.08bn) and evading customs payments, according to reports.

The crackdown on oligarchs is welcome but the much larger issue is the nine-year effort to reform the notoriously corrupt judiciary that is going much more slowly. A new High Qualification Commission to vet and approve the appointment of judges has been set up after years of delays, but the whole system is still waiting for a purge and comprehensive reforms.