Rebuilding Ukraine: maybe not the Marshall Plan but certainly Marshall Plan money

In recent months most international meetings devoted to Ukraine have focused on the military dimension of the conflict. Keeping the Ukrainians in the fight and preventing Russia from dictating draconian peace terms at the end of the fighting have to be the most urgent objectives of Western policy. So, unsurprisingly, conferences where nations pledge more heavy weapons deliveries and ammunition to Kyiv have grabbed most of the attention and headlines.

Yet, two weeks ago, a very different cast of characters met in Lugano, Switzerland for what was billed as the ‘Ukraine Recovery Conference’. Not the usual defence ministers and military chiefs, but rather foreign and finance ministers from over 40 countries gathered, together with the major international financial institutions, the private sector and civil society. The Swiss hosts had planned the conference before Putin invaded Ukraine earlier this year, but with the purpose of addressing how to fight rampant corruption inside Ukraine. Before the 24 February invasion, corruption – rather than Russian aggression – was the main reason why Ukraine featured on the agendas of Western bankers and finance ministers.

But given the enormity of the destruction that Russia has inflicted on Ukraine’s stock of housing and public buildings, as well as roads, railways, ports, electricity grids, sewage treatment plants and industrial capacity, rebuilding Ukraine will be a long and difficult enterprise and extend across the entire country rather than just the war zones, such as the Donbas, Kharkiv or the Black Sea ports like Mariupol, where the most intense fighting has taken place. Given the reach of Russian airpower and of its long–range artillery, hardly a city or town has been preserved from significant damage thus far. Moreover, the United Nations Environmental Programme (UNEP) reported last week on the impact of land contamination due to the massive use of high explosive artillery shells, as well as the widespread planting of landmines. There have also been indications of Russian troops deliberately burning Ukrainian wheat fields and sabotaging agricultural land.

Given the levels of destruction that Ukraine has suffered in five months of war, it was not totally a surprise that the Ukrainian Prime Minister, Denys Shmyhal, turned up in Lugano asking for a projected $750bn to rebuild his country. The World Bank has assessed the cost of the repair of civilian buildings at $200bn thus far. Coming up with a final calculation of course depends on how long the war goes on, which buildings, infrastructure and supply lines the international community is prepared to repair, and who can be made to pay. Predictably, many are saying that Russia, as the unprovoked aggressor, should foot the bill in the form of war reparations.

Some observers are sceptical that a Ukraine Recovery Conference is appropriate at the present time. After all, the war is far from over. Having lost one–fifth of their territory to the Russians, the Ukrainians can hardly afford to quit the contest now for fear of losing vital industrial and agricultural resources that are key to Ukraine’s survival as a state. Moreover, if they cave in now, they will only send a signal of weakness and Putin may be encouraged to launch further attacks in the not-so-distant future. Putin, for his part, shows no sign of giving up either. This week he ordered his troops in Luhansk to take a brief respite after they had taken control of Severodonetsk and Lysychansk, before advancing on new objectives such as Slovyansk and Kramatorsk. He even told Duma representatives in Moscow this week that the Russian military operations against Ukraine were “just beginning”. He may settle for control of the Donbas or, buoyed by recent successes, go back to his original plan to subjugate all of Ukraine. So, the level of destruction to be repaired may be far higher than today when the war finally stops.

Ongoing financing of heavy weapons and military equipment purchases will be a challenge in itself too. Moreover, Ukraine is currently running a budget deficit of €80bn and has a financing gap on its monthly payments of $5bn, which should be bridged to avoid a government default. If Ukraine does not receive financial bailouts, the government might resort to printing money, which would fuel rampant inflation. So, keeping the Ukrainian state afloat from month to month may take precedence over longer–term reconstruction.

This said, the reconstruction of Ukraine will be a massive undertaking stretching over at least a decade. Getting the approach right so that the money is well spent will be crucial for Ukraine to modernise its economy and thereby meet the standards for EU membership. Of course, as long as the war goes on, Ukraine is moving away from this goal rather than closer to it. Given that Ukraine alone cannot finance its reconstruction any more than it can supply its own weapons, the donor community has a vital interest in creating a system of checks and procedures in advance to ensure that the usual pitfalls of major construction projects are avoided. Such pitfalls include: murky contracts with weak legal enforcement; prestige projects that satisfy the egos of politicians but have little benefit for the general population; the involvement of organised crime using shoddy building materials and creaming off excessive profits; the involvement of middlemen taking a slice of contract values for dubious services adding little or nothing to the overall projects; or projects not integrated into an overall plan, such as residential areas without public transport or schools, or ports without road and rail access or storage facilities.

As we saw during the COVID-19 pandemic, when governments are in a hurry to deliver things, they tend to throw money indiscriminately at multiple suppliers, real or fake, and waste vast amounts on bad contracts and sub-standard products. In this perspective, holding the Lugano meeting now was not such a bad idea, as it allows the EU and its partners to anticipate the problems and to apply the processes and safeguards from prior experience to make sure the pitfalls are not repeated. Ukraine can also start thinking about how it can present future reconstruction plans to Brussels with the safeguards built in from the start. Advanced planning now can save valuable time later on.

The European Commission, represented in Lugano by its President, Ursula von der Leyen, suggested that it might finance $500bn out of the $750bn requested by Kyiv. Such an amount would mean that the Commission would need to access the financial markets to raise debt, as it did recently to raise the initial $750bn for its post-Covid ‘Next Generation EU’ recovery programme consisting of grants and low-interest loans to EU member states. It would again need the approval of the EU member states to do this. In the meantime, von der Leyen proposed the setting up of a ‘Platform’ into which Ukraine’s partners and friends can pay their donations. Her objective is to quickly get to $100bn as a reserve, which can be topped up once the reconstruction is underway. The European Investment Bank (EIB) has been put in charge of much of the spadework. It will work on a risk assessment and management system, look at ways of ensuring transparency and accountability, devise contracting procedures, and examine the best legal basis and dispute resolution arrangements. The EIB calls this the ‘Pathway’.

Ukraine is keen on Russia being forced to pay the lion’s share of the country’s rebuilding. With a ring of justice to it, the confiscation of Russian assets would be another harsh sanction that the Kremlin would need to endure. Funds within Russia would be hard to expropriate but there is plenty of Russian state and private money parked abroad, including $300bn of the Russian Central Bank. Switzerland, the host of the Lugano conference, itself plays banker to $210bn in Russian private deposits, as the Swiss Bankers Association itself acknowledged before the meeting began. Ultimately, although the US and EU both have task forces looking into the issue of seizing Russian assets and the luxury yachts of several oligarchs have already fallen victim to these investigations, it is easier to freeze funds than to appropriate them. Easier, too, to go after private assets than state assets, particularly those of a national central bank, which could destabilise the international financial system and provoke retaliation. This has not deterred some countries from moving ahead. Two weeks ago, Canada passed legislation giving the government the power to expropriate the assets of individuals or entities. The United Kingdom has been mulling similar legislation. The European Commission is also working on measures that would make it a criminal offence to circumvent sanctions, the first step on the path to confiscating assets. Most probably, other countries will follow with similar legal steps. Together, these initiatives could raise several billions of dollars for Ukraine and they should certainly be vigorously pursued. Yet, realism dictates that we should not put all our hopes behind the ‘aggressor must pay’ principle. Many countries around the world will refuse to move against Russia in this way. The oligarchs will find new safe havens for their money. Legal wranglings could drag on for years. Equally enforcing reparations on Russia will be tough, if not impossible.

The historical precedents are not encouraging here. After the First World War, the British Chancellor of the Exchequer, Eric Geddes, famously proclaimed that Germany should be made to “pay until the pips squeak”. The Treaty of Versailles declared that Germany bore the responsibility for starting the war and on this basis, swingeing reparations commitments and a payments schedule were levied on Berlin. When Germany halted payments during the harsh winter of 1923, France sent its troops into the Ruhr region to seize Germany’s industrial assets and force Berlin to pay up. Ultimately the reparations were never paid and were either reduced or suspended before the outbreak of the Second World War.Yet, instead of inducing the Germans to accept the Versailles treaty as the new basis for European security, they had precisely the opposite effect, poisoning relations between Germany and the allies and stoking resentment and nationalism well before the arrival of Adolf Hitler in the Chancellery. Of course, there will be no Ukraine peace agreement in which Russia accepts to pay reparations for its war damage, particularly as the spectre of war crimes indictments hangs over the heads of the Russian leadership. Moreover, there would be few levers, least of all military, that the west could use to force Moscow to pay up.

The EU and its partners will need to find the money somewhere else. This makes it all the more important for Brussels to engage with Kyiv on serious anti-corruption reforms. Corruption has been the biggest bone of contention in Ukraine’s relations with its Western partners for decades already. Presidents and governments have been elected on promises to secure the independence of the judiciary and to strengthen anti-corruption mechanisms in the public administration. Anti-corruption was the campaign slogan of President Zelensky himself, at the head of his Servant of the People party. Yet, once in office, Zelensky’s delivery proved disappointing. His anti-corruption credentials were undermined by the fact that an oligarch funded his election campaign, and subsequent blockages in the Rada and in-fighting within his government led to the dismissal of the Head of the Independent Anti-Corruption Bureau and the weakening of thebureau’s powers to investigate and hold corrupt officials to account. Today, Transparency International ranks Ukraine 122nd out of the 180 countries that it monitors. This is slightly better than the 142nd ranking that Ukraine held in 2014, and Russia comes in worse at 136th. Yet Bulgaria, the worst placed country in the EU, occupies rank 78.

This demonstrates how far Ukraine has to go to reach the EU average. It also suggests that the EU, with the support of the US and Kyiv’s other backers, will need to insist on a number of measures before the first euro or dollar is transferred.

Firstly, an international board of auditors should be formed with members appointed by the EU in consultation with all states contributing to the recovery programme. Additionally, a new Anti-Corruption Bureau should be assembled, with a fresh mandate and leadership and whose full independence must be guaranteed by legislation in the Rada. Political interference with the work of this Bureau would immediately engender the suspension of recovery funds. A contract approval board composed equally of Ukrainian and international officials would be required to ensure that contracts for recovery projects have been properly awarded following competitive bidding and transparency regarding the identities of the companies and individuals involved.

Next, the creation of a Ukrainian Recovery Agencyshould assess the viability of projects and their compatibility with Kyiv’s recovery priorities, monitor their implementation and check that projects have been completed to the required standards. This agency would be placed directly under the authority of the President but with a mixed Ukrainian and international board of governors drawn from the government, the private sector and the major financial institutions. To stimulate the local economy and employment, an agreement should be made on the percentage of work to be reserved to Ukrainian construction companies and to international contractors to ensure the donor countries realise some return on their investments. Of course, this does not exclude consortia bringing the two together and it presupposes that Kyiv will create a level playing field for foreign investment. And finally, some pilot projects should be tested before major tranches of recovery funding are handed over.

At the same time, the slogan that the West has used in mapping out its recovery from the pandemic – “build back better” – applies equally to Ukraine. This will be particularly important in renewing energy networks with green technologies. The EU has set a target for 40% of its energy to be generated from non-fossil power by 2030. Before the war, Ukraine only achieved 10% of this target. It has remained largely dependent on oil, gas and coal although it has reduced its dependency on Russia and hooked up to the EU transmission grid. It is also still heavily dependent on nuclear power. If Ukraine is to integrate successfully into the 21st century EU economy, its recovery programme must facilitate its energy transition and all projects will need to meet EU environmental and energy efficiency standards. Using the recovery funds simply to restore the old economic model would be a terribly wasted opportunity.

But first must come not just a ceasefire but a genuine peace which does not oblige Ukraine to live permanently next door to a hostile Russia. To rebuild Ukraine with an ongoing frozen conflict inside its borders and with open warfare threatening to break out again at any moment risks the reversal of all the EU and international reconstruction efforts. In recent years, the EU has paid many times to rebuild infrastructure and administration and media buildings in Gaza destroyed in the frequent Israeli air strikes. With each new round in the conflict, recently rebuilt infrastructure is once again flattened and precious reconstruction funds wasted and duplicated. This brings us inevitably back to the primacy of weapons transfers to Ukraine that was raised at the beginning; a Ukraine that is able to drive Russian forces out of its territory is less likely to see them return in the future. A Ukraine with Russian forces occupying large chunks of its territory will always be in danger. So, one of the most sensitive and difficult decisions for Ukraine’s international partners will be knowing when the country is sufficiently stable to make it worthwhile for investments to go ahead. Kyiv will undoubtedly want to start early, but will the EU agree?

Some have spoken of a Marshall Plan in conjunction with the international efforts to rebuild Ukraine. The analogy does not fit perfectly. The US-initiated European Recovery Programme launched by the Truman administration in 1947 was as much political as economic. It obliged the recipient western European states to lower tariffs, remove protectionist obstacles, improve market mechanisms and work together across borders in order to qualify for funding. The aim was to establish a permanent form of economic integration and joint management of trade. In this way the Marshall Plan was the true founding act of the European project and what we today call the European Union.

In the case of Ukraine, the country already is a candidate for EU membership and has a trade agreement with Brussels. It is moving towards integration into the EU economy even without a future post-conflict recovery programme. So the purpose of the latter is more strictly economic than political. Yet, this said, the Marshall Plan also had an important psychological dimension in giving hopes to millions of Europeans that there was light at the end of the tunnel and a way out of the downward spiral of economic misery and despair that seized the continent at the war’s end. A Marshall Plan for Ukraine now, even years before the first euro or dollar is released, can have the same value in sustaining public morale, social cohesion and the will to resist. Yet the real Marshall Plan was devised when the Second World War had already been over for two years. The destruction, however massive across Europe, had at least come to an end. Tragically, we are still very far from reaching that point in Ukraine and left wondering just how much worse it is still going to get.