How to Avoid Past Mistakes in Ukraine

OPINION – The scale of both public and private sector interest towards Ukraine’s economy has been unprecedented in the aftermath of the colossal havoc caused by Russia’s full-scale invasion. Billions of dollars have been pledged by Western financial institutions to rebuild and reconstruct the country. Yet, despite the appetite for pledges, there is a high risk that it will fade away if not backed up by solid commitments.

Ukraine’s total recovery and reconstruction efforts will require $410 billion, according to the World Bank, and those costs are likely to be much higher (back in March 2022, I estimated the costs to be closer to over $1 trillion).

Ukraine experienced a similar trend of interest from the international private sector post 2014, after Russia’s initial invasion of the country. Various international businesses expressed interest in investing in Ukraine, and multiple initiatives sprung which included both SMEs and large-scale players. The appetite was there, as businesspeople across the globe believed that Ukraine might be an investment goldmine as the resource-rich country was moving away from Moscow and heading towards the EU.

It was painful to observe, however, as these businesses chipped away one by one after they concluded that Ukraine did not have the proper investment climate. Though the war was already happening (which directly affected only about 7% of Ukraine’s territory), most international businesses pointed at the rampant corruption infesting the country. Ukraine, therefore, was left with dismal FDI figures, a large chunk of which came in from international offshores belonging to Ukrainian tycoons. There were success stories – mainly within the IT sector – but those tended to be exceptions rather than the rule.

Though the EuroMaidan Revolution succeeded in ousting Russian-backed president Viktor Yanukovych, oligarchs remained in power and had their grip over Ukraine’s government and lawmakers. These oligarchs controlled massive portions of Ukraine’s economy often channeled through the more than 3,000 state-owned enterprises in the country. Some of these kleptocrats had strong connections with the Kremlin and controlled some of Ukraine’s most strategic assets. The less-known example is of Alexander Babakov who established a powerful regional electricity supply network across Ukraine. This dynamic further festered the country with corruption, handsomely serving Russia’s goal – keep Ukraine weak, divided, and unpleasant to the West.

As oligarchs and their lawmaker puppets served Russia as useful idiots, Russia added to Ukraine’s economic weakness by targeting its main business arteries – the 13 remaining sea ports stretched along the Black Sea and Azov Sea coasts (before the 2014 invasion, Ukraine had 18 ports). Russia was notorious for using economic blockades, blackmail, manipulation, and sabotage even before the February 2022 invasion. Its first blockade of trade ships coming from Ukraine’s south was in November 2018 when Russia seized three Ukrainian ships by force and disrupted the flow of trade ships via the Kerch strait. In 2021, Russia declared that it would close the Kerch Strait to Ukrainian official ships for six months. Images of the war in Ukraine diverted potential investors elsewhere, as they would rather not deal with a war-torn country. Therefore, it didn’t take much effort for Russia to do much damage to Ukraine’s economy.

Ukrainians will argue that the West has its fair share of blame to accept as well. Cronies in Ukraine became richer as the stole money from Ukrainians and redirected the cash towards Western countries via a wide web of offshores. These high-level criminals placed their ill-gotten gains in the UK, America, France, Germany, Italy, and elsewhere. Western countries accepted even more such tainted money coming from Russian kleptocrats. As a result, normal Ukrainian citizens directly suffered, including Ukraine’s military. In Ukraine this served as a basis for hopelessness and cynicism – while Ukrainians heard of EU demands for reforms, they saw those same European countries allowing Ukrainian and Russian kleptocrats purchase their most expensive villas and cars; while Western countries demanded change from Ukraine, they observed how Western elite attended oligarch-organized events.

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There is strong appetite for helping Ukraine rebuild as never before in Ukraine’s history. Conversations regarding Ukraine’s reconstruction (despite how dis-attached from reality some of them may be) are frequent. This is a good sign. A large part of it has to do with the realization that it will serve in the present as another means to resist Russia’s ongoing war by showing the West’s commitment to Ukraine. There is one major caveat: once the war is over, much of the interest could fade away if the private sector realizes that the investment climate is not as favorable and if Ukraine’s partners face domestic pressures at home not to aid Ukraine anymore.

There has been an ongoing movement of both Western scholars and Ukrainians pushing for redirecting the more than $300 billion frozen Russian assets to Ukraine. My master’s thesis advisor Robert Zoellick, as well as Lawrence Summers, and Philip Zelikow has been spearheading this idea, arguing that the faster this becomes a reality the more leverage the U.S. and Ukraine will have in negotiating with Russia to end the war. The Ukrainian side should already be forming a transparent institution which will be in charge of these funds as well as a clear process of how these funds will be distributed across all of Ukraine’s oblasts.

Decentralization will play a crucial role in Ukraine’s successful recovery process as it will create competition at the municipal level and will create a fairer checks-and-balances system between the regional and central governments.

Unfortunately, the capital markets in Ukraine have traditionally been weak and those bonds that have been on the market have traditionally belonged to oligarch-related businesses. This is despite the fact the capital markets act as a major catalyst for economic activity in Western markets. Both the international community and Ukraine started to express more interest in developing a healthy Ukrainian bond market during the past years, and Ukraine’s central bank has been taking steps to create a stronger market both before and after the February invasion. Both Ukraine and its international partners must prioritize the nation’s capital markets as part of Ukraine’s recovery plan.

Ukraine still has a long-lasting problem with its land market. For two decades since 2021 the country had a Soviet-like land moratorium which benefited a few agro-holdings at the expense of smaller players. The country finally lifted the ban, however, the process has been heavily restricted. On one hand, Ukraine’s successful land privatization will bring the economy tens of billions of dollars, on the other hand, a rushed privatization would lead to the same mistake that happened in the early 90s with the privatization of state-owned enterprises which enriched the pockets of a few and created major income gaps. Nevertheless, the successful sale of more farmland should be a priority for Ukraine, if not only for the reason that small-scale Ukrainian farmers can use their land as collateral for taking out loans.

There will surely be cultural tensions between foreign and Ukrainian businesses as there would be in any country. However, the homework should be done now in terms of a) helping Ukraine to adapt to international standards of doing business and b) prepping international businesses to Ukraine’s cultural dynamics. For example, much of Ukraine’s business still extends from a farmland culture where gift-giving has a significant presence. A farmer may decide to show appreciation to a microfinancer who provided an affordable loan by offering the fruit of their harvest. While this seems completely harmless when it has to do with small sums of money, the perception completely changes when the same farmer, who now grew into a multibillion businessperson, is providing much bigger gifts to someone in the Verkhovna Rada. Even though the culture of gift-giving in Ukraine may seem hospitable and even noble, when it comes to doing business, the Ukrainian side will have to adapt to international best practices.

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Despite the frequent daunting projections regarding the return of Ukrainians to their homeland during the post-war period, I am more optimistic for a few reasons:

1. Just recently, Karen Whiting, the Deputy Representative of the UN Refugee Agency in Ukraine, mentioned a figure that got overlooked: 76% of those Ukrainians who left their country due to the full-scale invasion intend to return home. This is a good figure to work with and serves as another example of Ukraine’s resilience.
2. Even before the full-scale invasion, there were those Ukrainians who were planning to leave the country and never come back, and Ukraine was dealing with the problem of brain drain.
3. Those Ukrainians that will return, will be much more involved in rebuilding their country and will contribute to Ukraine’s civic engagement. Furthermore, these Ukrainians, many of whom never traveled to the West, will come with new democratic ideas.
4. The reconstruction and recovery of Ukraine provides an opportunity for the country to attract more immigrants or temporary residents from other countries, including from Africa and the Middle East. This will allow Ukraine to be less homogenous, something it has been criticized for in the past. Ukraine can further increase the number of immigrants if it allows Ukrainians to have dual citizenship, as many from the diaspora will likely either return to Ukraine or be actively involved in its economy.
5. There will certainly be those Ukrainians who will never return to Ukraine because of the full-scale invasion despite them being patriotic. This is not a necessarily negative dynamic since many of these people act as Ukraine’s ambassadors abroad and send finances back to their relatives in Ukraine. In 2021 alone, Ukrainians working abroad sent back to their home country $15 billion, or 7.5% of the country’s GDP that year.

Initiatives funding independent investigative journalists will be a must to keep both public and private sectors accountable with the large flow of money; these journalists will also be able to spot and publicly highlight those individuals who are monopolizing large swaths of sectors and accumulating disproportionate sums of money. Furthermore, agencies responsible for acting as watchdogs and regulators such as the Anti-Monopoly Committee must be strengthened, reformed, properly staffed, and financed.

For all of these points above, it unquestionable that Ukraine will have to heavily expedite its judicial reforms to make sure that the proper implementation of the rule of law is confidently set as a cornerstone to hold accountable both the public and private sectors and to ensure that there is a level playing field for all.

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