Rebuilding and Modernizing Ukraine’s ICT Infrastructure Will Be Essential to Attract Private Investment

Communication is essential to the Ukrainian war effort and to keep the economy running. Although the information and communication technology (ICT) sector in Ukraine has shown remarkable resilience throughout Russia’s war of aggression, there are huge ICT needs in large swaths of Ukrainian territory that require immediate attention. Ukraine will need significant inflows of foreign direct investment to both restore and modernize its ICT infrastructure. Good ICT infrastructure is a prerequisite for future private investment.

Modernizing Ukraine’s ICT could create positive ripple effects across the economy. By utilizing technology such as the cloud, companies can help reduce sales losses after disruptive events, as shown by businesses using technology to adapt to challenges during Covid-19. As Ukraine begins to regain territory, telecommunications systems will be some of the first categories of infrastructure to be rebuilt, and in turn, will facilitate the digital transformation of different sectors and regions.

The Current State of the ICT Sector in Ukraine

Prior to the war, Ukraine was known for its thriving ICT and digital ecosystem. With over 4,000 local ICT companies, one of the largest 4G networks in Europe, and the fourth-highest number of certified tech professionals globally, Ukraine is highly digital. In 2020 approximately 80 percent of the population had access to the internet. The ICT workforce is dominated by young, driven, business-oriented, and tech-savvy professionals who are keen to develop the sector into the main driver of the Ukrainian economy.

Ukraine does not yet possess 5G network capabilities, but its expansive 4G network provides services to 91.6 percent of the population. In 2021, there were 55.9 million mobile phone subscriptions, with many people on multiple subscriptions. Kyivstar is the largest mobile provider in Ukraine with almost 48 percent of the market. It faces strong competition from Vodafone Ukraine and Lifecell, encompassing 34.8 percent and 16.8 percent of subscribers respectively. These providers are heavily reliant on telecommunications hardware from Chinese-linked companies Huawei and ZTE. Several Ukrainian companies obtain more than 70 percent of their equipment from Chinese suppliers. Ukraine is looking for ways to diversify its supplier base. However, the cost of replacing the Chinese kits could top more than $1 billion.

Within the first six months of the war, all sectors of the Ukrainian economy were targeted, especially ICT infrastructure: as of February 2023, over $2 billion worth of ICT infrastructure has been destroyed and over 64 percent of the ICT workforce has been forced to relocate. Moreover, the ICT sector reported 1,123 cyberattacks. Ukrainian telecommunications providers have been hit particularly hard: more than 4,000 base stations and 60,000 kilometers of fiber-optic lines have been destroyed as a consequence of the war. According to an interim assessment by the International Telecommunication Union (ITU), approximately 12.2 percent of households had lost connection to mobile services and the functioning of these mobile operator base stations was reduced by 11 percent.

In the face of this destruction, the ICT sector has proven to be remarkably resilient. Despite these challenges, it is the only sector of the Ukrainian economy to increase its export volume from 2021 to 2022. The industry has continued to grow despite the war, bringing in over $6 billion in computer services exports in 2022. The Ukrainian government has proactively not drafted IT workers as soldiers and has extended tax breaks to small and medium-sized businesses in the industry. These measures have allowed ICT businesses to stay solvent and continue exporting services. Even though many technology workers have either fled the country or moved to the westernmost parts of Ukraine, the industry has been able to carry on.

Foreign companies have also played a role in ensuring that Ukrainian systems are able to stay connected. The U.S.-based satellite internet provider Starlink, operated by SpaceX, has played a critical role in keeping parts of Ukraine’s military and economy connected to the internet. By allowing the Ukrainian government to use its satellite constellation to provide internet for humanitarian purposes such as broadband internet for grocery stores, banks, hospitals, and families affected by the war, Starlink has become critical to the wartime telecommunications network in Ukraine. However, this is a temporary fix, as concerns over sustainability and reliability of the Starlink system grow alongside long-term ownership costs.

The restoration and modernization of the network requires a more systemic approach, not relying on ad hoc donations. Temporary fixes to the ICT infrastructure will not be sufficient to expand Ukraine’s economy after the war which requires a long-term solution to make the sector more durable and sustainable.

What Will Ukraine Need to Rebuild ICT Infrastructure?

Rebuilding Ukraine’s ICT infrastructure involves a twofold approach: first, restoring the existing infrastructure, and second, modernizing the infrastructure so that it can withstand shocks in the future. By adopting this approach, Ukraine can lay the foundation for a stronger and more resilient digital landscape.

Restoring the existing infrastructure should be a top priority. It entails focusing on destroyed telecommunication networks, electrical hubs, and digital support infrastructure. The ITU estimates that Ukraine needs almost $1.8 billion to recover from the damage to the telecommunication sector sustained during the first six months of the war alone.

Work is already underway in the Ukrainian Cabinet of Ministers and the Ministry of Digital Transformation with active projects building communication networks from scratch in destroyed areas. The World Bank has drafted a National Broadband Strategy of Ukraine (NBS), which provides recommendations for the Ministry of Digital Transformation of Ukraine, and outlines the current broadband capabilities as well as goals for a mass broadband rollout of 5G.

However, the Ukrainian economy will be unable to generate this funding on its own and the private sector is essential in the process. The ICT sector is widely viewed as a fertile environment for private investments. Before the war, a poll by the American Chamber of Commerce Ukraine and Citibank showed that ICT was Ukraine’s second-most attractive sector in the country to invest in. The potential is still there.

Public-private partnerships (PPPs) will be key to mobilizing the needed funds and the ICT sector is particularly well suited for PPPs. For example, in February 2023, the U.S. Federal Communications Commission announced it signed a memorandum of understanding with Ukraine’s regulator to partner on a project to strengthen the resilience of Ukraine’s telecommunications infrastructure, build out the use of 5G networks in Ukraine, and work to protect against additional security threats posed by Russia. As mentioned previously, the partnership between U.S. Agency for International Development and SpaceX to deliver 5,000 Starlink terminals to the Ukrainian government, which provided critical internet connectivity for both public and private uses during the invasion, is also an example of successful private public collaboration. In June 2023, as part of the London Ukraine Recovery Conference, an investment pledge of $600 million to the Ukrainian mobile servicer, Kyivstar, was made by Veon, a Dutch-based telecommunications company.

Competition in the sector continues to be strong with many companies still present in Ukraine—yet another good sign for investors. If certain safety and resilience standards can be met, it would become financially feasible for private companies to bring in large amounts of funding to the sector. Some sectors of the ICT industry will be relatively untouched by the war and are ready for private investment now, while others have been severely damaged. It is within these latter areas that the return on investment for private companies could be too low without the presence of government subsidies or donor involvement.

In order to attract large-scale private investments, certain measures must be implemented to ensure that that ICT systems can withstand disruptions and the investment process will be transparent. This includes creating alternative energy sources and backup systems, implementing strong cybersecurity measures, and establishing a regulatory framework that promotes resilient technologies.

Investors will also require better risk coverage through guarantees and political risk insurance. Working with international institutions, development banks, private insurance firms, bilateral donors, and specialized guarantee providers can help Ukraine encourage the increased investment and collaboration necessary for reconstruction efforts.

Conclusion

Ukraine’s ICT sector has shown remarkable resilience throughout the war and the country has the potential to be on the cutting edge of technological innovation. However, with billions of dollars’ worth of telecommunications and digital infrastructure destroyed and over half of the workforce relocated, the needs are sizable and private sector engagement is essential. ICT infrastructure will require sizeable investments to truly remake Ukraine into a modern European nation.

A modern ICT infrastructure will be foundational for economic growth and to attract further investments in other sectors. If the digital sector and telecommunications infrastructure receives adequate financing and investments through the reconstruction process, Ukraine has the potential to be a front-runner in technological innovation, enabling a more prosperous future.

Romina Bandura is a senior fellow with the Project on Prosperity and Development and the Project on U.S. Leadership in Development at Center for Strategic and International Studies (CSIS) in Washington, D.C. Janina Staguhn is a former associate fellow with the Project on Prosperity and Development at CSIS. Madeleine McLean is a program coordinator and research assistant with the Project on Prosperity and Development at CSIS.