Ukraine needs 60–100 billion euros in investment in the next 10 years in order to rebuild its economy and reach the GDP level it had in 2013, according to Gunter Deuber, an analyst at Vienna’s Raiffeisen Bank International. One half will have to come from the European Union and the United States; the other half from private investors.
The numbers look fantastically large, but they’re not. The United States and the EU have provided Afghanistan with about 100 billion euros worth of aid in the last 10 years, while the USA has invested at least 60–70 billion euros in Iraq. Romania has received 20 billion euros from the EU, while Poland has received 80 billion. Although the costs of rebuilding Ukraine are, as Deuber says, “substantial,” the implied economic transformation is “plausible.” The same holds true for the necessary 30–50 billion of private investments, which are “not utopian.” The bottom line is that the EU “has a vital interest in the success of Ukraine’s economic modernization,” as the risk-filled alternative would be “mass emigration and political radicalization.”
The catch, according to Deuber, is that several preconditions be met.
- Ukraine needs to have a “functioning economic model that entails deep reforms and cooperation with the EU and the Eurasian Economic Union” led by Russia.
- Ukraine must fulfill all IMF requirements, as only that will persuade skittish European investors to sink their money into the Ukrainian economy.
- Ukraine must reduce corruption and makes its institutions capable of productively absorbing incoming monies.
- Ukraine needs to adopt a market mentality.
- Ukraine needs to stabilize its security situation and deal with the Donbas.
With respect to point 1, Russian President Vladimir Putin can block, and has blocked, Ukraine’s economic relations with the Eurasian Economic Union, but the EU is not without leverage, especially with regard to Russian energy exports, and could probably work out a deal that promotes everybody’s economic interests. Kyiv seems committed to points 2 and 3. The IMF looks happy with Ukraine’s progress, but the problem is that long-term austerity risks producing social discontent and weakening Kyiv’s resolve. With respect to corruption, so far, so good—sort of. Kyiv is cracking down on some forms of low-to-high-level corruption and has recently appointed a young, and presumably incorruptible, head of an anticorruption bureau. As to point 4, my sense is that most Ukrainians have actually assimilated a market-oriented approach to life, if only because they’ve been forced to do so.
That leaves point 5, where Ukraine appears to be completely hostage to Russia. The conventional wisdom is that the war will continue as long as Putin wants it to continue, and the Donbas will remain a cancer as long as Putin wants it to be one. Technically, that’s true. At the same time, the war will stop, if not formally end, when Ukraine has the military wherewithal to stop any Russian or proxy attack short of an all-out invasion or nuclear assault. In fact, Ukraine is close to achieving that capability and, with every day, comes closer.
Moreover, the West and Ukraine can take the initiative and mold conditions in their favor.
The West can decrease the likelihood of an escalation by making it very clear to Putin that the costs of such a move will be very high: exclusion of Russian from the SWIFT international banking system and the massive provision of lethal weapons to Ukraine. In the meantime, providing non-lethal equipment, intelligence data, and training can only bolster Ukraine without in any way alarming Russia or its apologists in the West.
Kyiv, meanwhile, can hasten the Donbas enclave’s transformation into a “frozen conflict” by renouncing the liberation of the region by military means. Yes, that also means renouncing the Donbas enclave, but, as I have argued before, that can only benefit Ukraine and its reform prospects.
Deuber expresses the same sentiment in the circumspect language of economists:
It is worth considering from the economic point of view whether deep reforms as well as a sustainable reconstruction would not be easier to achieve without the Donbas. This would be especially true if [Ukraine’s] relations with Russia do not improve markedly, Ukraine’s orientation on the West continues, and if a cooperative “economic model” with the EEU is not realized.
If you’re still unpersuaded, ask yourself this: Would you invest in the Donbas enclave? And if you would, might I interest you in the Brooklyn Bridge?
