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Will Ukraine’s economic recovery succeed?

By Nicola Stoev

Editor’s note: The opinions expressed here are those of the authors. View more opinion on ScoonTV.

The OECD estimates that the world economy in 2023 will be $2.8 trillion smaller than was expected in December 2021, before Russian troops and tanks invaded Ukraine. It is a cost estimate that is more than ten times the size of Ukraine’s pre-war GDP.

The costs, financial and humanitarian, are no doubt whopping for Ukraine itself. The US military estimates that at least 40,000 Ukrainian civilians have been killed in addition to perhaps 100,000 Ukrainian military casualties. About 6.8 million Ukrainians have left the country, while another 6.6 million are internally displaced.

Andriy and his wife Irina came to Sofia, the capital of Bulgaria, and my home, in March 2022 just days after the Russians besieged their city Mariupol. Now they run a small restaurant for take away in a narrow street near downtown. In the rear behind an ever-opened door, the dishes are prepared. Andriy announces every day at 11 a.m. sharp with a piece of chalk on a blackboard in front of the restaurant window what will be sold that day. And till lunch time usually everything is gone.

They make really excellent dishes. I have never eaten a more delicious spinach pottage than theirs. When you swallow it slowly, you can distinctly feel the taste of its ingredients: the spinach, the butter, the cheese and the eggs, each separately. The dish is neither juicy nor dry. 

While I was thinking that he could be a perfectionist and someone who rapidly gets the knack of both the spirit and the cooking recipes of Bulgarian cuisine, I noticed that there was no picture or a pot with flowers all over around. I held my gaze on him, watching for a second how he was mixing some eggs on the other side of the table.

“Andriy,” I asked. “Do you believe that you, Ukrainians can make a modern society after the war?” “If we can’t this time, we’ll never do it.” He shrugged off and shook the bowl on his legs, but did not cast a look at me. “Yeah,” I replied, “But you know, it’s a matter of economy too and your society is a bit corrupt. It’s not easy then…” He shot back, “Isn’t your society in Bulgaria also a bit corrupt? Bulgaria is among the most corrupt countries in the EU.”

I replied, “That’s right, but we’re not in a hurry. We are already in the EU. Ukraine is not.” “Yes,” He broke in instantly, “We are not in a hurry, either. The war is not over yet. Somebody should be better hearted with the assistance, with the weapons, with artillery, and then we can talk about corruption and building of modern society. You see, the moment is not at hand, not yet.”

He left alone again the silence between us without losing his rhythm in the eggs mixing.

On November 14, a UN General Assembly (UNGA) resolution calling on Moscow to pay reparations received 94 votes in favor. Fourteen states voted against the resolution, and 73 abstained. Is this resolution important after it is not legally binding and it does not correlate directly with any economic recovery mechanism?

The resolution simply signifies that a big group of states supports the necessity for a moral retribution to become a legal mechanism, enforced properly on Russia. Nothing can be done for the Ukrainian economy’s reconstruction without having this kind of support. If it is translated in legal terms (the UNGA resolutions are all a kind of soft law), it means that a big group of countries (practically all the EU and G-7 members) acknowledges the legal interest of Ukraine to claim compensations from Russia for the injuries and damages inflicted by the latter during its aggression.

The resolution said that Russia “must bear the legal consequences of all of its internationally wrongful acts, including making reparation for the injury, including any damage, caused by such acts.” It also recommends that member states, in collaboration with Ukraine, should create an international register to record evidence and claims against Russia. Consequently, the resolution acknowledges that there is a breach of international law by Russia. The entire legal logic of the UN General Assembly resolution calling on Moscow to pay reparations for its aggression is the same one the Soviet Union used to claim compensation from Germany after World War II.

The Russians didn’t see it that way, though. Russian Ambassador to the UN Vassily Nebenzia labeled the current resolution “legally null and void,” and accused the West of “trying to draw out and worsen the conflict.” But the UN General Assembly on March 2 overwhelmingly adopted an emergency resolution condemning Russia’s war. The emergency resolution in practice was again an UN invocation of Russian state responsibility for aggression, as long as such invocations have no established legal forms.

Therefore, the answer to the title question should be something affirmative, because Western post-war aid for Ukraine depends on forcing Russia to pay reparations. Russia, however, will not be forced to pay the reparations on account of a half of its Central Bank reserve kept in Western banks without a broad international co-operation outside of the UN to seize the assets.

The UN General Assembly resolution as of November 14, 2022, shows that the necessary multitude of states for this purpose exists. That is why the following three steps should be put into effect for Ukrainian economic reconstruction, which includes the use of the Russian assets:

Step 1. Clarification of the recovery cost

  1. A study of the World Bank and the Ukrainian government in June, 2022 pointed out a figure of US 349 billion;
  2. The London-based Centre for Economic Policy Research (CEPR) offered a blueprint for the reconstruction of Ukraine in April, with an estimated cost of €200 billion to €500 billion, increasing as the war continues; 
  3. The Ukrainian government presented a 10-year, $750 billion plan in July at the Ukraine Recovery Conference in Lugano, Switzerland.

It is obvious that only CEPR and the Ukrainian government proposed complex recovery plans while the other cost valuation refers to compensations of damages incurred by the Ukrainian state up to a given date in the war. If no other figure of recovery costs turns up in the post-war days, it should be assumed that the economic reconstruction of the country (structured in 850 projects within the 10-year plan) may cost about $750 billion. However, Ukraine’s pre-war GDP was roughly only $200 billion, so the repayment seems to be a heavy burden for their economy.

On the other hand, it is a feasible perspective to assume that Russia could be forced to pay at least about 300 billion euro as a lump sum of reparations (for this, see step 2). That is why a repayment of another 300 billion euro as a borrowed debt by the Ukrainian state in the course of 50 or so years appears to be a realistic adjustment to its pre-war GDP.

Consequently, a total sum of about 600 billion euro might be admitted as a plausible valuation of Ukraine’s economic recovery cost (300 billion euro of Russian reparations plus 300 billion euro debt to be taken on by the Ukrainian government). Of course, it goes without saying that a precise recovery cost valuation should be worked out by an in-depth audit.

It is also needed to stipulate how the compensations for the civilian victims and military casualties will be calculated (see p. 28 of CEPR document). But one thing is certain; without any audit and methodologies for compensations, all the opinions shared about trillions of dollars necessary for Ukraine’s economic recovery are groundless. In fact, there are no economic recoveries in human history which have ever cost trillions of dollars, excluding the German unification. It is clear, however, that Ukraine is not Germany, nor is it going to be united with a big brother any time soon.

Besides, Ukraine is a poor country and it does not possess assets valued at trillions of dollars or euros. Therefore, the unpredictable length of the war predictably cannot inflict damages to Ukraine for trillions of dollars. It can inflict similar damages to the global economy.

Step 2. Forcing Russia to pay reparations

Approximately a half of the Russian Central Bank reserve (valued at about 300 billion euro) is immobilized at banks situated in the EU or in countries of G-7. Some other 19 billion euro (cash + assets), which belong to oligarchs and Russian companies, are also frozen with Western banks. The appropriation of the private funds and assets would be more difficult, because in every single case it is necessary to prove personal guilt of the funds/assets’ owner towards Ukraine as per the national legislation of the country in which the money/assets is/are blocked.

The appropriation of the Russian Central Bank immobilized reserve cannot be done right away either. According to international law, assets of this kind can be seized only upon the agreement of the Russian Central Bank. Besides, many commercial banks are not inclined to participate in confiscation of cash and securities treasured with them just for political aims as it may undermine trust in the banks. Analogical precautions are expressed by some American officials too, having concerns about the US dollar role as a global currency.

Further, it is practically impossible to confiscate the Russian Central Bank assets through UN Security Council tribunals after Russia and China can block any UN decisions with their vetoes as permanent Council members.  international Court of Justice (ICJ) cannot enforce any decision on it. Russia also left the Human Rights Court in September, so it’s not under its jurisdiction.

Finally, there has not been any legal practice in international law related to the appropriation of Central Bank reserves. Moreover, there have been only a limited number of cases in the last century for imposing reparation payments based on international legal procedures.

A well-known example of such reparations are the ones paid by Germany as per the Treaty of Versailles at the end of World War I. Germany’s debt linked with those reparations was paid in full in 2010, 92 years after the end of World War I. The Allied powers imposed extensive reparation obligations on Germany after World War II, too.

In the post-war period, however, reparations have featured in only several interstate conflicts. They include Iraq’s invasion of Kuwait, the 1998-2000 Ethiopia-Eritrea war, and Uganda’s intervention in the Democratic Republic of Congo. As a result, the international community’s “memory” for interstate reparations tends to be weak. None of the mechanisms used in the mentioned reparations payments is applicable to the Russian Central Bank reserve appropriation, because of the obstacles described above.  

Despite the setbacks for imposing reparations payment on Russia, if it bears state responsibility for its aggression in Ukraine, international law must be enforced. It could happen, according to professor Philippe Sands, an expert on international law at University College London. He argues “world leaders should set up a one-off tribunal to prosecute the crime of aggression in Ukraine”

This kind of tribunal is not a novelty. In fact, all the tribunals shortly after World War II were of the same type. The Soviet Union was among their initiators. The European Commission worked out a similar proposal on November 30, 2022, as its president had written earlier on Twitter, “Russia must pay for its horrific crimes. We will work with the International Criminal Court (ICC) and help set up a specialized court to try Russia’s crimes. With our partners, we will make sure that Russia pays for the devastation it caused, with the frozen funds of oligarchs and assets of its central bank.” The Commission presented different options to the member states to make sure that Russia would be held accountable for the atrocities committed during the war.

The Commission proposed to create a new structure to manage frozen and immobilized public Russian assets, invest them and use the proceeds for Ukraine. The Commission also declared that, while continuing to support the work of the ICC, it is ready to work with the international community on organizing an ad hoc international tribunal or a specialized “hybrid” tribunal to investigate and prosecute Russia’s crimes. Russia is not a member of the ICC (i.e., it is not under its jurisdiction), the EC proposed concretely two alternative institutional options to ensure that justice is served:

  • A special independent international tribunal based on a multilateral treaty or;
  • A specialized court integrated in a national justice system with international judges – i.e., a hybrid court – to be put in place.

For both options, the strong backing of the United Nations would be essential, at least because the technical preparation and enforcement of the tribunal/court decisions should take place in various UN member countries. The UN General Assembly resolution calling on Moscow to pay reparations certified this kind of backing. The USA (H.R. 6930 (IH)) and Canada (Bill S-217 and Bill C-19) have already been drafting some legal norms paving the way for transfers of Russian assets from their territories to Ukraine, too.

The protection of public health and safety, the regulation of violent crimes, the requirements of national security and military necessity are considered components of a compelling government interest in each UN member state. This interest gives a root to the states’ legal interest in international law enforcement.

Protecting any legal interest within the UN could occur in two ways: either as an explicit interest expression for adhering to international law in the respective field by all the states (such an interest was proclaimed by the 94 governments which voted for the UN resolution) or as forwarding an appeal aimed at some concrete defensive action to be taken (e.g., payment of reparations in a case of state aggression). Ukraine exercised both options. Therefore, its legal interest for observation of international law overlaps with the same interest of the other 93 states which voted for the UN resolution. Under these circumstances, the 94 states in the UN have a legitimate right to protect their legal interest by themselves if the UN’s Security Council is short of options to do it.

Further, UN membership is voluntary. That is why it cannot monopolize national legal interest protection if international law must be enforced for this purpose. Nevertheless, the one-off entity can and should enforce international law to protect the legal interest of Ukraine as per the principles of the UN Charter, the UN General Assembly resolution calling on Moscow to pay reparations, the UN General Assembly resolution 60/147 as of November 16, 2005, and the UN Draft of the Responsibility of States for Internationally Wrongful Acts as of 2001.

The enforcement of international law by the one-off entity needs to not be limited only to the eventual confiscation of assets belonging to Russian oligarchs and the Russian Central Bank. The resourceful pull for reparations payment should include the cash within Western banks from Russia, which it has earned by the export of its fossil fuels.

Step 3. Working out a financial mechanism for Ukraine’s economic recovery

The following milestones extracted from the Blueprint for the Reconstruction of Ukraine, the 10-year, $750 billion plan, and some recommendations of experts can be expected to have a key importance for the setting up and efficient functioning of a useful financial mechanism:

  • Ukraine should introduce a currency board thus fixing the exchange rate of the hryvnia to the euro. It will curb the post-war inflation at more acceptable levels. Interest rates will not soar and the FX risk for the reconstruction projects will be diminished. Alternatively, Ukraine may pay the deliveries and the carried out works directly in euro;
  • The EU should keep its markets for Ukrainian imports on custom-free regime;
  • The EU should open at least one pre-accession program in Ukraine, aiming to enhance the administrative capacity of its public institutions and support an anti-corruption legislation drafting; 
  • Ukraine should have an anti-corruption legislation in force prior to the financial mechanism launching; 
  • A centralized international body-CIB (preferably under USA, EU and G-7 administration) should be created for coordinating and managing all the external funding related to Ukraine’s economic recovery (including the resources raised by international bonds issues). CIB will be entitled to withhold or delay payments and together with the Ukrainian government it shall define funding priorities;
  • The principal funding sources should be the Russian reparations, Ukrainian government bonds issues, and IMF back up lending. Technical assistance may be sought from the World Bank, EIB, and EBRD;
  • The tenders for works and deliveries assignment on the reconstruction projects have to be contracted only with fixed sums. CIB experts could prepare the tender dossiers or leave that to the Ukrainian beneficiaries, but the dossiers should consist of documentary templates approved by the CIB staff. CIB experts/external consultants should always verify the dossiers and the data submitted with the offers;
  • The tenders should prioritize bidders from Ukraine, the USA and the EU in order to be attained an export and investment leverage for the economies with highest war involvement;
  • All the tenders will be a potential subject of international independent audit;
  • The initial payments on the projects should start with funds raised by bonds issues. The Russian reparations will guarantee the correct repayment schedule of the bonds;
  • When the bonds risen resources will be fully allocated to payments then the tender assignors will be reimbursed with funds from the reparations;
  • All the leased/pledged movables/mortgages should be insured in favor of a lessor or the CIB;
  • The IMF should provide a back-up loan to the Ukrainian government for a grace period on the bonds’ repayment schedule (perhaps for at least 5 years);
  • It is recommendable for the two largest Ukrainian banks, which are state owned, to be privatized in the first 1-2 years of the recovery plan implementation, possibly by their sales to reputed foreign banks; 
  • The legal disputes related to resource spending should be resolved in EU courts (on preliminary contracted terms) or in a specialized Ukrainian court dealing only with disputes concerning the country’s reconstruction projects as senior judges at this court should be hired from the USA and the EU at least in the initial 5-6 years of the court work. The Ukrainian specialized court has to function under EU jurisdiction. The EU prosecutors’ office must have access to investigate everything linked with the distribution of funds through the financial mechanism.  

Structural components of the financial plan

The 10-year plan is structured into two phases, 2023-2025 and 2026-2032. It encompasses 850 wide-ranging projects requiring funding totaling an estimated $750 billion.

The two biggest components of the plan are the reconstruction and modernization of housing and infrastructure ($150 billion to $250 billion; 103 projects and activities) and expanding logistical and transportation facilities (airports, railroads, roads, ports) and integrating them with the EU ($120 billion to $160 billion; 145 projects and activities). Other high-cost items include achieving energy independence and developing green energy ($130 billion; 21 projects and activities), ensuring access to funding through insurance, loan guarantees, and other programs ($75 billion; 21 projects and activities), and supporting high-tech and other potentially fast-growing economic sectors ($50 billion; 34 projects and activities).

Undoubtedly, the largest recovery cost (for only physical recovery of assets) that should be paid through the financial mechanism is for residential buildings reconstruction – $50.5 billion as of September 2022. Then come the expenses for the transport infrastructure repair sized at $35.3 billion.

According to a study of Mr. Simeon Diankov, policy director at London School of Economics and Political Science (he is also a former Minister of Finance in Bulgaria) and Mr. Oleksiy Blinov, head of research at Alfa Bank, Ukraine, the direct losses from damages to the physical infrastructure in Ukraine were $113 billion as of September 2022. These figures are much lower than the estimated reconstruction cost of the physical infrastructure listed in the 10-year, $750 billion plan of the Ukrainian government, which is $300 billion.

But we should not be excessively skeptical about the Ukrainian government’s forecast. First of all, there are new quantitative additions in the cost figures up to the end of 2022 versus September. Secondly, the government expectations cover an unspecified length of time. The latter matches well the fact that no one knows when the war would be over. Besides, the government plan is not purely a restoration scheme, it is mostly a plan for modernization and development of the Ukrainian economy. It contains substantial expenses ($400 billion) aimed at the transformation of the economy as per the priorities for its EU integration (e.g., it is envisaged, that the Ukrainian economy should grow with > 7% per annum after 2032 as a consequence of the targeted structural changes in it). It is also obvious that if the immobilized Russian Central Bank funds and assets (valued at about $300 billion) will be used effectively, it will bring an enormous benefit for the recovery of Ukraine’s physical infrastructure (evaluated similarly at $300 billion or even less).

Diankov and Blinov’s study asserts that only 7.5% of the assets in the productive sector of Ukraine as of September were destroyed or heavily damaged and thus made non-functional. It explains the estimated shrinking of the Ukrainian GDP with 30-50% in 2022 mainly with the impact of factors such as broken logistic chains, lack of energy resources, cut off commercial placement opportunities, work force displacement and migration, stopped production processes in the enterprises, males’ military mobilization, business uncertainty, high inflation, and more. 

The physical recovery of non-functional assets is estimated at about $16 billion according to the study. This valuation also includes around 20% of the grain crop in the agricultural sector, which has been lost for Ukraine in the Russian occupied zones. If all that is true, then restarting the engine of the Ukrainian pre-war economy will not be the costliest affair prior to undertaking its modernization. Perhaps, 2-3 years will be enough for that, too. 

The relatives’ indemnification of war victims is a problem possessing quite a volatile character. There are no explicit rules or tariffs about its tackling. Every single victim’s compensation might cost several hundred thousand USD, but there were historic cases when the indemnifications reached a few million USD.

However, for a huge number of war victims and military casualties, it seems that the Ukrainian state should take a minimalistic approach when having to pay indemnifications. If we assume (there is no reliable official data) that the number of Ukrainian victims and military casualties in the end of 2022 will be about 150,000 people (100,000 soldiers and 50,000 civilians), and as per the minimalistic approach accrue $200 000 to each individual compensation, then the total indemnification cost will reach $30 billion.  

Shall the recovery of Ukraine’s economy be successful?

The reconstruction will begin from slightly above the lowest levels of the economy and it will affect it as an overhaul. It would be a monumental chance for Ukraine to make a breakthrough, stemming from the blood, pain and resilience of its people, instead of waiting for a social evolution to unfold gradually beyond the endemic corruption in the county. The prospective peace will show whether a similar outcome can be sustainable. 

Analyzing the investment priorities and the figures related to the overhaul, it should be concluded that any cost estimation within the range of 600 billion – 700 billion euro will suffice for Ukraine’s economy recovery and modernization, even if the modernization will include new urban architectural designs, introduction of energy saving measures and technologies, construction of speedy railroads, rearming of military outfits with up-to-date weapons, re-adjusting of the economy to the framework of the EU Green Deal, investments in IT projects, and digitalization of the public administration.

Ukraine, if it should do all that, will have to repay about 300 – 320 billion euro, which will eventually be paid back in 50-60 years. It will probably be able to rely on a big grant of about 300 billion euro (the Russian reparations), too. Hopefully the EU may not also repeat its mistakes with the funding programs in Bulgaria and Hungary, and this time would choose to put a more direct grip on the resource allocation through CIB. Under these circumstances, it is difficult to think Ukraine’s economic recovery will fail.

Some experts, however, stress the necessity for using as much as possible institutional grants instead of turning to private investors for ensuring the bulk of the attracted resources (about 300-320 billion euro). It does not seem a feasible option when hundreds of billions of euros are needed. It will not be easy to attract considerable cash by bonds in a time of growing interest rates either. But it could be a more realistic objective if the issues are pegged to some guarantee commitments or they are undertaken as EU bonds.

Of course, the most important factor concerning Ukraine’s economic recovery is how long the war with Russia will continue. And then, will the end war peace be a rumbling new war or not? I asked Andriy whether he believed that the weapons might stop in 2023. 

“Well,” he said. “I’ll also ask you something. The USA and the EU have economies 20 times bigger than Russia combined. Why then do they complain that NATO nearly exhausted its weapons for Ukraine in September? Russia does not moan that it lacks anything even if it lacks almost everything.” “I don’t know,” I replied, “The Westerners don’t like to suffer for somebody outside their doorsteps. Perhaps, they also fear Putin or his nuclear potential, who knows. They are a bit spoiled.” I grinned.

“Right,” said Andriy. “We can suffer because we’re corrupted unspoiled Slavs and we don’t fear Putin. If he were a smart guy indeed, he would never have marched into Ukraine.”

“Are you offended?”

He got up and calmly paced into the cooking premise solemnly carrying the bowl with the beaten eggs on both his hands.

Nicola Stoev

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