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Congress should dole out funds for a postwar Ukraine investment trust fund

Washington cannot help Kyiv win the war, but lose the peace

A retail warehouse was damaged by a recent Russian missile attack in Odesa, Ukraine.
A retail warehouse was damaged by a recent Russian missile attack in Odesa, Ukraine. (Nina Liashonok/Ukrinform/Future Publishing via Getty Images)

The British government will host a Ukraine recovery conference this week that will focus on mobilizing international private sector support for Ukraine’s economic recovery. While the Ukraine war is not yet over, it is not too early to think about what comes next. The United States cannot afford to help Ukraine win the war only to lose the peace. Washington needs to back investor insurance for Ukraine.

The challenge that lies ahead is not simply the reconstruction of a war-torn Ukraine and a recovery to its prewar level of economic activity. Prior to the war, Ukraine was a relatively poor country. Its 2021 per capita income was 13 percent of the European Union average. Its hopes for EU membership, integration into the broader world economy, and a stable democracy will not be possible if Ukraine remains so impoverished. 

Ukraine’s long-term economic recovery will require sustained economic growth, far above the 2 percent annual growth averaged in the six years prior to Russia’s full-scale invasion. That can only be achieved through a sharp increase in productivity, fueled by investment. 

Ukraine has a strong track record of attracting foreign direct investment (FDI) thanks to its proximity to the European market, a relatively well-trained workforce and low wage costs that are comparable to China’s. The average annual inflow of FDI between 2016 and 2021 represented 3.3 percent of Ukrainian GDP, roughly equivalent to that enjoyed by its EU neighbor Poland (3.5 percent).

But much more investment will be needed because recovery costs will be enormous. Ukraine may need $180 billion in FDI and $350 billion in additional domestic private investment over the next 15 years, according to unofficial European estimates.

Around four-fifths of this investment will require some degree of investment insurance before it can proceed because private investors are wary of committing funds to new plants and equipment if there is any chance they might be blown up. Unfortunately, private insurance and reinsurance companies, which normally backstop business investment, have no appetite for assuming such war risk.

If Ukraine is going to receive the private investment it will desperately need, governments are going to have to shoulder the burden initially. Once time and experience lower the risk assessment of private investors and their insurers, public sector risk guarantees can be reduced and phased out. 

Existing public sector institutions are not up to the task of sharing the Ukraine investment risk with the private sector. The World Bank’s Multilateral Investment Guarantee Agency (MIGA) hopes to create a $300 million fund for Ukraine, but that will be woefully insufficient. Ukraine’s annual FDI insurance coverage needs could amount to more than all of MIGA’s  investment guarantees issued for the entire world in 2022. The European Bank for Reconstruction and Development, where the U.S. is the largest shareholder, is barred from doing investment insurance. Nor can the European Investment Bank. 

To provide the necessary insurance guarantees, the G-7-sponsored Multi-agency Donor Coordination Platform for Ukraine should create an Investment Trust Fund for Ukraine open to all donors. Such a multilateral fund will minimize each nation’s budgetary commitment and potential risk exposure, making their efforts more politically palatable at home, while providing private investors in Ukraine the reassurance they need. 

Initially, the Fund can be relatively modest. The World Bank estimates that just $1.5 billion is needed in 2023 to support financing mechanisms to sustain and de-risk private investment. The need for guarantees will grow but compared with the tens of billions of dollars in direct financial support that donor countries provided Kyiv in 2022, this immediate de-risking price tag pales in comparison.

Trust fund support should be provided to international and domestic investors, especially small and medium-sized Ukrainian enterprises. Such inclusion ensures that domestic investors are not disadvantaged in the rebuilding process, thereby preventing a possible backlash against privileged international investors. And insured projects should be in line with recovery priorities that Ukraine defines for itself.

There will be hundreds of billions of dollars of potential business deals on the table as Ukraine recovers. American companies should get their fair share. To that end, the trust fund should operate on an explicit pay-to-play principle. Private investors from nations that have failed to aid Ukraine during the war should not be eligible for trust fund support. Allowing Chinese or Indian or other such investors to reap the benefits of postwar reconstruction insurance would understandably undermine American taxpayer backing for Ukraine aid.

At the same time, Ukraine should not be denied needed investment. Any limits on who benefits from public sector risk-sharing must be contingent on sustained donor willingness to bear the cost. 

This fall, Congress likely will be asked for additional funds by the Biden administration for Ukraine. The U.S. already has been very generous, providing billions of dollars in humanitarian, financial and military aid. That will continue to be an immediate need. 

But any appropriation should also include support for an investment trust fund for Ukraine. A successful postwar reconstruction of war-torn Ukraine is the best guarantor of long-term stability in the region. 

Bruce Stokes is a visiting senior fellow at the German Marshall Fund and co-author of its new report Toward a Marshall Plan for Ukraine. 

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