The 10 Most Pressing Questions for Ukraine’s Economic Reconstruction

Despite the ongoing conflict in Ukraine—currently concentrated in the eastern region of the country—conversations around what reconstruction will look like are already taking place. The reconstruction of a free and independent Ukraine will require a new partnership with the West. Ukraine will survive as a sovereign state, but there are many uncertainties along the way. Now is the time to start identifying the most pressing challenges for Ukraine’s economic reconstruction and how European countries and the United States can support these efforts.

Q1: What does Ukraine’s reconstruction look like?

A1: Although discussions about Ukraine’s reconstruction are happening in European capitals and Washington, D.C., this process should be led by the Ukrainian government and be carried out with Ukraine’s national interest in mind. Importantly, “ownership” by the Ukrainians will mean buy-in from local communities and ensure continued progress and sustainability of these efforts, even after the international community winds down its economic support. However, involvement and assistance from the West is going to be critical in terms of funding, planning, and modernizing’s Ukraine economy.

In April, the London-based Centre for Economic Policy Research (CEPR) released A Blueprint for the Reconstruction of Ukraine, which provides a comprehensive outline for a potential reconstruction plan. Ukrainian president Volodymyr Zelensky also shared his vision for how to fund rebuilding the country at the World Economic Forum annual meeting held in May in Davos. He presented a system, where both countries and companies could pick a specific region in Ukraine to rebuild. Additionally, there have been debates on whether a “Marshall Plan for Ukraine” would be successful, with some experts concerned that Russia’s continued influence would prevent necessary investment and others arguing that the Marshall Plan presents a strong model.

Q2: How much will reconstruction cost and who will pay?

A2: According to the May 25 estimates by the Kyiv School of Economics, which calculates the material damage caused to Ukraine’s physical infrastructure on a weekly basis, the war has resulted in infrastructure losses of $105.5 billion. Although it is hard to predict the exact price tag of reconstruction, efforts could fall between $200 billion and $500 billion. Some estimates even go as high as $1 trillion. This leaves an important question: Who will pay for this significant bill? Yuriy Gorodnichenko, a Ukrainian economist, worries that Ukraine will not “have the capacity to repay loans any time soon,” even if an eventual goal is to have the economy generate sufficient tax revenues for Ukraine's government to fund at least part of the rebuilding. The West will certainly play a role. Last week, the European Union pledged an additional 9 billion euros in the form of loans, adding to the 4.1 billion in economic support and 1.5 billion euros of military assistance provided so far. In the United States, the Senate recently approved an additional $40 billion of grant aid, bringing U.S. total assistance to $54 billion. These funds include military aid and weapons. Despite these significant pledges, they come nowhere close to the estimates of money required for reconstruction.

Q3: Can Russian assets finance part of the reconstruction effort?

A3: Yuriy Gorodnichenko and other economists have turned to the possibility of seizing Russian assets abroad to cover the costs of reconstruction. There is general Western support for finding ways to use Russia’s frozen assets for Ukraine’s reconstruction, but in practice, this will be difficult to implement. In the United States, the U.S. House of Representatives passed a bill on April 27, 2022, urging President Biden to sell Russian luxury assets and use the money to provide aid to Ukraine. Despite being largely symbolic, its 417 to 8 passage shows there is strong bipartisan support for this type of action. Similar efforts have been made in Europe, with 73 members of the European Parliament requesting that $300 billion in frozen Russian assets be used for Ukrainian military and reconstruction assistance. The European Commission, with support from President Ursula von der Leyen, the Baltic states, and Slovakia, has proposed a plan to use frozen Russian assets to pay for Ukrainian reconstruction. This plan still faces a hurdle of legal questions and would eventually have to be implemented by individual states that have custody of the assets. Another option is to condition the return of the $300 billion in frozen Central Bank of Russia reserves on a $200 billion contribution to an international reconstruction fund.

Q4: Can economic reconstruction happen without a comprehensive security framework? What will Ukraine’s security arrangement with the West look like?

A4: It is unlikely that NATO will offer Ukraine a formal security guarantee. Possible security arrangements may look similar to the United States’ current relationship with Israel, where the United States has supported Israel through $125 billion in bilateral assistance since 1948. A large part of U.S. assistance to Israel goes to providing cost sharing on developing some of the most advanced military technologies in the world, such as the Iron Dome system. Although a similar agreement could be brokered, Ukraine will have to spend a portion of its GDP on defense and security going forward. A U.S. commitment to provide Ukraine with state-of-the-art weapons and military equipment to enable Ukraine to deter any future Russian invasion could give Ukraine the security guarantee it needs. As is the case with Israel, this could take the form of a bilateral memorandum of understanding.

Q5: How do corruption and governance issues fit into Ukraine’s reconstruction efforts?

A5: Governance reforms are going to be important for successful reconstruction effort. Although Ukraine has made significant progress in transparency, including through the digitalization of city planning and public procurement, and monitoring of public officials assets and lifestyles, corruption remains a challenge. Before the war, Ukraine ranked 122 out of 180 countries in Transparency International’s Corruption Perception Index. Estimates in 2021 showed that Ukraine’s budget was losing $37 billion a year due to corruption and transparency problems. During unprecedented times of conflict in the past three months, Kyiv has returned to relying on oligarchs for government funding of both immediate assistance and future reconstruction, which opens the door for oligarchs to be able to promote their self-interest through the government. For donors and foreign companies to invest in Ukraine, the business environment will need to be strengthened through judiciary reforms, tax enforcement, securing private property rights, and most importantly, enforcing the rule of law. A critical piece to disincentivizing corruption will be the West monitoring whether assistance is reaching its intended target or ending up in the hands of oligarchs.

Q6: What are critical economic sectors for Ukraine’s recovery?

A6: According to Lenna Koszarny, the chair of the American Chamber of Commerce in Ukraine, the future of Ukraine’s economy will be made up of “hands” (manufacturing and infrastructure), “brains” (information and communications technology, or ICT), and “grains” (agriculture). Manufacturing and infrastructure will be integral to the rebuilding process. Russia has destroyed $105.5 billion worth of Ukraine’s physical infrastructure so far, including at least 1,123 secondary and higher education schools, 621 kindergartens, 643 healthcare institutions, 295 bridges, and 2,912 retail facilities, according to a Kyiv School of Economics estimate. All of this will need to be rebuilt. ICT is an area where Ukraine has immense potential and is currently proving its cyber capabilities in the war with Russia. Despite a dramatic increase in hacking attempts by Moscow, the Ukrainian government has managed to protect itself from attacks, including one that would have shut down parts of Ukraine’s energy sector. Infrastructure modernization will be a key part of reconstruction and ICT will play a critical role in this. Another area where Ukraine has proven capabilities is the agricultural sector. Prior to the war, Ukraine was one of the top three exporters of grain in the world and agriculture made up 45 percent of Ukraine’s export sector in 2020. Before the war, Ukraine was also undertaking agricultural land reform through various technological improvements. The reconstruction of Ukraine should focus on not only returning to pre-war levels of agriculture production but include modernization efforts to exceed those levels. Finally, agriculture and infrastructure are inherently interconnected. Russia is currently targeting attacks on the roads, railroads, and bridges needed to export products out of the country, so rebuilding transport infrastructure will be key for the agriculture sector.

Q7: How will the war impact the future of Ukraine’s energy sector?

A7: Ukraine has the capability to produce 65 percent of the coal, natural gas, petroleum, nuclear, and renewables needed domestically, giving it some energy independence. In 2014, Russia’s annexation of Crimea sparked a shift in Ukraine’s energy policies and needs. Russia control of vast portions of the Black Sea coast resulted in Ukraine losing 80 percent of its oil and natural gas reserves. This forced Ukraine to rely on imports for 70 percent of its petroleum and other liquids consumption, including imports from Russia. However, Russia’s annexation of Crimea in 2014 also incentivized Ukraine to pursue energy independence. For example, immediately following the annexation, Ukraine halted natural gas imports from Russia and replaced those with imports from Europe. Given that Ukraine was already relatively energy independent and was moving away from its reliance on Russia, the greater energy disruption will likely be caused in Europe. Currently, Ukraine’s most significant energy interactions with Russia consist of serving as a transit country for oil and natural gas exports from Russia to Europe.

Q8: What happens if Ukraine loses access to the Black Sea?

A8: Ukraine’s access to the Black Sea was already dramatically reduced following Russia’s annexation of Crimea, which had housed 75 percent of Ukraine’s naval force. Prior to the 2022 war, Odesa (a port city on the Black Sea) was responsible for 65 percent of the country's trade and has since been a target for Russian attacks. If both Odesa and the rest of Ukraine’s Black Sea coastline were to be seized by Russia, it would have grave consequences for both the Ukrainian economy and global food supply chains. In fact, export routes through Ukraine’s Black Sea ports accounted for 90 percent of the country’s grain trade and Russia’s current blocking of the ports could result in $6 billion of grain revenue losses if no transportation alternative is found. Cereal made up 18 percent of all of Ukraine’s exports in 2021 and that Ukraine provided 12 percent of the world’s wheat. During the 2020/2021 growing season, Ukraine was the world’s fourth-largest grain exporter and currently has 20 million tons of wheat and corn it will be unable to export.

Alternative routes for trade out of Ukraine are extremely limited. There are a few routes via road, rail, and the Danube River, but the infrastructure does not exist to support prewar level exports. In the short term, Romania has made its Constanta port available for Ukrainian exports, however, the wait time for Ukrainian grain to cross the border is 16 to 30 days, making this an unsustainable alternative. In the long term, additional transportation infrastructure, especially railways, should be built to create new export corridors and be a key part of reconstruction. However, this will take several years to achieve.

Q9: Will Ukrainian refugees return home and under what circumstances?

A9: Since the start of the war, over 14 million Ukrainians have left their homes, with 6 million leaving the country entirely and 8 million internally displaced. Of the 6 million that emigrated, 2.1 million have returned to Ukraine for various reasons. Many refugees, especially women with young children, have struggled to find a source of employment or an affordable place to live abroad and want to reunite with their families. Some Ukrainians who were allowed to leave have decided to return to fight. And many people who have decided to return are attached to Ukraine as their home. However, this still leaves 4 million Ukrainians abroad: the longer they stay, the higher the chances are that they rebuild lives outside their homeland and thus, less likely to return. More tailored initiatives will be needed to encourage young Ukrainians to come back home to help with the reconstruction efforts. This includes new housing, hospitals, schools, and economic incentives such as new sources of capital for business start-ups.  

Even before the war, Ukraine was suffering from a severe population decline and shrinking labor force due to low birth rates and the emigration of young and educated Ukrainians. In a survey conducted in 2019, 55 percent of the respondents considered emigration to be the greatest threat to the country. Tech executives in Ukraine are especially concerned, with about 16 percent of the workforce seeking refuge abroad. Europe has a high demand for employees from this sector and companies are able to offer higher wages which may incentivize Ukrainians to remain outside of Ukraine. The exodus of university students and academics is also causing concerns for a possible departure of talent. Universities in Ukraine have called for adaptations to the Erasmus+ program, which offers higher education opportunities throughout the European Union, to include measures that support students in their transition back to their Ukrainian alma mater once conditions allow.

Q10: Should reconstruction be tied to EU accession?

A10: Attitudes have already shifted within Ukraine, with support for joining the European Union rising from 60 percent in the past three years to a record high of 91 percent in March 2022, according to a recent Rating Agency poll. The initial steps for Ukraine’s accession to the European Union have begun at an unprecedented rate. In fact, Von der Leyen visited Ukraine on April 8, 2022, and reiterated her commitment to Ukraine’s accession. This paves the way for EU leaders to grant Ukraine candidacy during the upcoming EU summit, taking place on June 23–24.

Despite the speed at which these initial steps have been taken, the road to EU membership will be long. Ukraine will have to implement several regulatory and legal reforms to meet the following three conditions: a stable democracy, a functioning economy, and implementation of the European Union’s legislative corpus. Additionally, the European Commission is also going to have to negotiate a framework for accession which will need unanimous approval from all member states. This process may take a decade or longer. Regulatory and judicial requirements for EU membership offer a strong outline and promising goals for Ukraine to meet during its process of reconstruction. However, reconstruction should not be intrinsically tied to EU accession. In particular, rebuilding Ukraine’s social infrastructure, including new housing, schools, and hospitals, will have to be done fairly quickly and cannot wait for the European Commission to grant Ukraine EU membership.

Daniel F. Runde is senior vice president, director of the Project on Prosperity and Development, and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Janina Staguhn is a research assistant for the Project on Prosperity and Development at CSIS.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Daniel F. Runde
Senior Vice President; William A. Schreyer Chair; Director, Project on Prosperity and Development
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Janina Staguhn
Research Associate and Program Manager, Project on Prosperity and Development
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Romina Bandura
Senior Fellow, Project on Prosperity and Development, Project on U.S. Leadership in Development