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The private sector is playing a decisive role in Ukraine’s economy. During wartime, companies are keeping the economy running by employing Ukrainians, transferring technology and know-how, and financing the government by paying taxes. Ukraine’s allies and partners are also supporting the country by providing military aid, as well as humanitarian and budgetary assistance, thus helping the economy stay afloat.
However, only a small part of this aid is being directly used to help current businesses and attract new investors. So far, the West has committed around $2 billion through the World Bank’s Economic Resilience Action program, which aims to provide financial and advisory support for Ukraine’s private sector. In comparison, government-to-government commitments to Ukraine between January 24, 2022, and January 15, 2023, totaled $154 billion, according to the Kiel Institute for the World Economy.
Ukraine also needs to attract significant foreign direct investment to transform and modernize its economy. Although it is risky to invest in the country due to the war, not all of Ukraine has seen damage or is in active combat; less than 20 percent of Ukraine’s territory is currently illegally occupied. Regions that do not require demining—primarily in the western part of the country—are ripe for business opportunities. Investors and international partners do not have to wait for every part of Ukraine’s territory to be freed from Russian troops to start operating there.
Although it is risky to invest in the country due to the war, not all of Ukraine has seen damage or is in active combat; less than 20 percent of Ukraine’s territory is currently illegally occupied.
Supporting the private sector is an area in which international financial institutions (IFIs) and development finance institutions (DFIs) could do more, even amid the war. Strengthening Ukraine’s private sector in the present will fundamentally shape how recovery efforts proceed during the postwar period. As these institutions approach their operations in Ukraine, they should be more creative, coordinated, and willing to take on risks.
Businesses in Ukraine are facing many obstacles. As the war drags on with no immediate prospect for a political settlement, this situation complicates the outlook for the private sector. There are many financing hurdles, including a lack of affordable credit, a dearth of equity investments, and a disrupted insurance market. Additionally, scant health and life insurance coverage in war zones, requirements for new construction to have bomb shelters, and expensive security details compound the costs that firms confront.
Small and medium-sized enterprises (SMEs) are finding it particularly difficult to attract capital or get credit at reasonable rates. Most of the multilateral funding goes toward larger companies, ones that had been receiving money even before Russia’s full-scale invasion. This, in turn, affects the client pool for the banking sector. Companies are also unable to access medium- to long-term loans. There are some sources of more affordable capital for SMEs, such as the German-funded 5–7–9 interest-subsidy program through the Business Development Fund, yet these programs are still limited.
In addition, there is a major mismatch between the demand and supply of capital in Ukraine. The destruction of manufacturing facilities, logistical lines, and supply chains has forced some companies to rebuild their business models from scratch. While a few were able to adapt to the war, many businesses need new sources of capital.
Companies operating in Ukraine and potential investors also voice unease over political uncertainty and the unavailability of political and war risk insurance mechanisms. Risk-mitigation and risk-sharing instruments are crucial in unleashing the private sector in Ukraine, especially as the war wages.
Risk-mitigation and risk-sharing instruments are crucial in unleashing the private sector in Ukraine, especially as the war wages.
Beyond access to finance, there are other hurdles for the private sector. Even before the war, the conditions for doing business in Ukraine were not optimal. The country attracted little foreign direct investment (FDI) because of its difficult business climate. From 2011 to 2021, the net inflow of FDI in neighboring Poland and Romania averaged $16.9 billion and $5.4 billion per year, respectively. Meanwhile, during the same period, Ukraine saw an average FDI net inflow of $4.3 billion per year.
The World Bank’s Doing Business project ranked Ukraine at 64 out of 190 economies in 2020. Ukraine scored higher on indicators related to starting a business and dealing with construction permits, but electricity access and resolving insolvency weighed down the overall score. Ukraine also has a negative reputation in terms of corruption. For 2023, Ukraine ranked 104 out of 180 countries on Transparency International’s Corruption Perceptions Index with a score of 36 out of 100. Although the score is low, it is Ukraine’s best result since 2012 because of various measures that Kyiv has instituted in the past two years to combat corruption. By gaining three points, Ukraine showed one of the best improvements of any country in 2023 despite the war.
President Volodymyr Zelensky demonstrated his willingness to uproot sources of corruption by removing over a dozen officials in the Ministry of Defense in January 2023. Moreover, the government has ramped up criminal proceedings against suspected perpetrators, introducing much-needed judiciary reforms and a competitive selection process for the heads of the main anti-corruption agencies, along with other steps such as improvements in public procurement. As a result of these efforts, the New Europe Center, along with several civil society and media organizations partners in Ukraine—the National Interests Advocacy Network, Anti-Corruption Action Center, Dejure Foundation, European Pravda, Centre of Policy and Legal Reform, Transparency International Ukraine, Ukrainian Center for Independent Political Research, and Detector Media—gave Ukraine an 8.1 out of 10 in its September 2023 joint assessment of Ukraine’s implementation of recommendations for EU candidates. Ukraine scored the highest in media regulation reforms and weakest in constitutional court reform and fighting against money laundering.
The mass exodus of working-age talent also presents a challenge for the private sector. According to the United Nations, there were 6.5 million Ukrainian refugees as of January 2024 and 3.7 million internally displaced as of September 2023; approximately 14.6 million people in the country are projected to require humanitarian assistance in 2024. In addition, many internally displaced Ukrainians do not have the infrastructure and housing that would enable them to thrive professionally.
Personnel shortages are a significant problem for labor-intensive sectors such as construction and metallurgy. A December 2022 survey by Deloitte and the American Chamber of Commerce found major concerns among business managers regarding how to attract, retain, and ensure the safety of talent during wartime. However, this brain drain is not new, since many Ukrainians were already leaving the country before the war. The difference, however, is that the human capital shortage has significantly intensified and is affecting every sector of Ukraine’s economy, including information technology (IT), which has been a catalyst for economic innovation and growth even during the current conflict.
Companies in Ukraine are operating in a difficult war environment. The international community plays a crucial role in supporting these firms with tools adapted to wartime realities. DFIs and multilateral development banks (MDBs) need to be creative and further adapt their operations and capital-deployment mechanisms to support a country at war. How can they go about this task?
First, these institutions can consolidate their currently scattered efforts. For example, although there are multiple war insurance programs (see the appendix for a list), these are isolated and insufficient. Businesses are struggling to know where to look and whom to trust. A consolidation effort could ameliorate the problem, for example, by setting up a user-friendly and transparent portal. If an investor is willing to co-invest or share the risk of an investment with another party, this could have a powerful effect in catalyzing Ukraine’s private sector. As such, it is essential that Ukraine’s DFI and MDB partners coordinate and pool together resources, which will alleviate the risk burden for any one institution and scale both financing and insurance for Ukrainian companies.
Second, as mentioned earlier, many of these institutions are refinancing to reduce their risk exposure but not making new investments. To complicate matters, some institutions do not allow their staff to be on the ground in Ukraine to execute due diligence on local projects. There is a need to attract new investments in Ukraine rather than simply continue using grants to support existing projects, refinance clients, or fund only technical assistance and policy work. Multilateral institutions could establish new vehicles such as investment funds or enterprise funds that would provide targeted technical assistance in combination with their debt products and support for private equity. The impact that new capital can produce in this environment is enormous.
Third, there is a need for financial innovation. These institutions can provide capital to help jump-start creative financial initiatives in Ukraine that the private sector can then replicate at a much larger scale. Risk sharing, including with commercial banks, can be highly beneficial. To unleash this money effectively, these institutions should experiment with various approaches before they “triple down” on those that work best. While ambitious multi-million- and billion-dollar projects are welcome, there is need for small-scale community pilot programs that can bolster Ukraine’s resilience. For example, diversifying Ukraine’s water and energy systems to smaller-scale sources would make its infrastructure less of an easy target for missile attacks. Furthermore, multilateral projects should prioritize businesses that have a rebounding effect: those that strengthen Ukraine’s EU accession and internal absorption capacity, as well as reduce trade turnover bottlenecks such as border controls. There is an ongoing discussion regarding whether to allow multilateral institutions to use hybrid capital products to invest in start-ups but with capped returns in case the country’s recovery happens more quickly than predicted. This could encourage a more level playing field within the business environment and help ensure that equity stays within the country and thus encourages faster recovery. The opposite of this happened in 2015 when Ukraine’s government, to avoid a default, agreed with its creditors to a 20 percent write-down and delayed maturities in exchange for linking the securities to Ukraine’s GDP growth without capping the investment returns (more commonly known as GDP-linked warrants).
In this regard, targeting projects and companies that can create jobs for Ukrainians—and thus attract Ukrainian externally displaced people back home—is paramount.
DFIs and multilateral development banks (MDBs) need to be creative and further adapt their operations and capital-deployment mechanisms to support a country at war.
Finally, Ukraine’s partners could also do more to improve governance and support the country’s fight against corruption, including through technical assistance and training programs. This is an area in which the international community can play a critical role, providing both advice and pressure for reforms. Ukrainian civil society and independent journalists are important allies in this fight.
Ultimately, for DFIs and IFIs to be effective, they need to be more innovative and collaborative, willing to take more risk and to understand what specifically works in the Ukrainian market. By demonstrating a willingness to experiment and set up collaborative frameworks, they can catalyze the flow of more private capital into Ukraine. Much of this will require more effective coordination and pooling of resources among institutions, allowing them to co-invest in projects without repeating or overlapping efforts. Moreover, these institutions need to create concrete plans for execution and set specific performance indicators for measuring results and holding themselves accountable.
In parallel, Ukraine needs to make more significant governance and economic reforms to reduce barriers to doing business. Kyiv is working with partners on legislation and initiatives that will improve the business climate. For example, the European Bank for Reconstruction and Development (EBRD) is assisting the National Bank of Ukraine in aligning its regulations, policies, and practices with those of the European Union regarding bank and capital market supervision. Moreover, Ukraine is working on public-private partnership (PPP) legislation that should provide more flexibility and speed for these types of ventures. Having the appropriate PPP legislation can play a significant part in Ukraine’s recovery, as international investors will be able to contribute a wide range of assets. Whatever the law is on paper, it will have to ensure that in practice there is a robust, transparent, fair, and open PPP framework that encourages privatization in key sectors such as energy and transportation. As part of a reform initiative that started in 2023, Kyiv is in the process of removing and updating hundreds of documents to boost Ukraine’s business climate.
Ukraine is also developing an Export Credit Agency (ECA) that will help insure investments into the country. In April 2023, Kyiv announced it will provide state guarantees such as war insurance for domestic exporters via this agency. In addition, the Ukrainian parliament passed draft law No. 9015 at the end of November 2023 to provide war insurance for investments of both international companies and Ukrainian companies. Currently, the Ukrainian government is communicating with the World Bank’s Multilateral Investment Guarantee Agency (MIGA), the U.S. International Development Finance Corporation (DFC), the EBRD, and other donors regarding the need for $100 million to reinsure its ECA.
The war has obviously disrupted Ukraine’s financial attractiveness, so Kyiv is offering special investment agreements, according to the Ukraine Investment Promotion Office (UkraineInvest). These include
In addition to these mechanisms, there are untapped resources that could be used to buttress the private sector. There are currently more than $300 billion in Russian central bank assets in Group of Seven (G7) countries that have been frozen since the full-scale invasion. Ukraine has suggested using these assets to back the issuance of reconstruction bonds and as loss-absorbing, risk-curtailing capital. Kyiv has also demonstrated that the seizure of Russian assets is possible, as it relocated at least 28.3 billion hryvnias ($784 million) to its state coffers between February 2022 and November 2023. These assets could also be used to set up new finance vehicles, such as investment funds through which donors could provide a first-loss tranche to attract other investors.
There are legal, economic, and reputational arguments for seizing these assets, and leading experts have analyzed these issues and proposed solutions to move forward. Moreover, some countries have taken initial steps to make use of these assets:
Ukraine and its international partners need to find practical solutions to sustain Ukraine’s economy, especially to support the private sector. Creativity will be at the core of finding such a multilayered approach. By working with Ukrainian stakeholders and private actors, development and finance institutions can explore innovative tools and avenues to support current businesses in the short run and attract new investments in the medium run.
There is huge business potential in Ukraine, where investors can make significant returns. However, some investors are more skeptical and believe the country is currently more of a charity case. Regardless, the opportunity is there—especially within the context of Ukraine’s path toward EU accession, availability of raw materials, large consumer base, and high-quality and relatively inexpensive labor.
Romina Bandura is a senior fellow with the Project on Prosperity and Development and Project on Leadership and Development at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Ilya Timtchenko is a program manager and research associate with the CSIS Project on Prosperity and Development. Austin Hardman is a research assistant with the CSIS Project on Prosperity and Development.
This report was made possible by the generous support of the Japan International Cooperation Agency. The report greatly benefited from a private CSIS roundtable discussion with experts on innovative finance for Ukraine on November 30, 2023.
I - Risk Mitigation Tools
II - Equity and Impact Investing
III - Other Investment Vehicles
