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The west must massively upgrade its financial commitments to Ukraine

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This article is an on-site version of Martin Sandbu’s Free Lunch newsletter. Sign up here to get the newsletter sent straight to your inbox every Thursday

This is the last Free Lunch of 2022. We wish all our readers happy and peaceful holidays and look forward to reconnecting in the new year. Thanks for reading and especially to those who have sent their thoughts, comments and feedback — keep it coming!

Russian president Vladimir Putin’s destruction of Ukraine grinds on, but the Ukrainian people’s resilience remains awe-inspiring. Fortunately, the west’s understanding of the material help that is needed, in addition to weapons and political support, is also growing.

At a conference in Berlin earlier this autumn, German chancellor Olaf Scholz and European Commission president Ursula von der Leyen promised a “Marshall Plan” for Ukraine — a meaningful choice of words and a commitment against which Free Lunch and many others will measure them. This week, there is further good news. A follow-up conference in Paris raised funding to help Ukraine through the winter. The G7’s leaders committed to creating a common donor platform for Ukraine with a permanent secretariat as a matter of urgency — which will hopefully fix the lack of co-ordination that has caused a lot of concern in Ukraine. And the EU should clinch €18bn of budget aid for Kyiv next year (only Poland is holding out but it’s unthinkable Warsaw will ultimately block this), which will create a much greater degree of predictability for Ukraine’s finance ministry than has been the case to date.

It may matter less to immediate policymaking, but in the battle of ideas another recent event is worth noting: the Centre for Economic Policy Research, a network of European economists (with many Ukrainian ones on board), published a book on the future reconstruction of Ukraine, building on the fine blueprint the same group produced shortly after Russia’s full-scale invasion. That battle of ideas is still far from being won in a way that ensures the full support required to ensure Ukraine’s future prosperity as a full member of the European democratic family. Despite all the signs of progress above, in particular on short-term funding, there is still a lot of caution, inertia and frankly outright foot-dragging about raising the hundreds of billions that will be needed and organising the best way to deploy such funds.

So in the last newsletter of the year, I want to take inspiration from the CEPR book to refute some of the most common sceptical points made against going all in on funding Ukraine’s reconstruction.

Naysayer objection number 1: You can’t rebuild the country before the fighting has stopped

Separating emergency aid and reconstruction aid is seductive but is a big mistake practically, conceptually and strategically. As the CEPR report puts it, “the best support for the reconstruction would be minimisation of damages”. A lot of the immediate and longer-term needs are the same: providing shelter for those who have lost their homes, strengthening power and utilities supply, improving transport infrastructure. The fact that full-scale reconstruction needs time to prepare is a reason to start today, and to use efforts to raise, allocate and deploy funds today to draw lessons for the future. And as Martin Wolf has pointed out, helping maximally today and giving Ukrainians confidence about the prospect of ambitious reconstruction help as soon as possible will support their ability to fight and improve the chance of a swifter and better resolution to the war — which will make reconstruction less costly.

Naysayer objection number 2: The amounts are unrealistically large

Aid for Ukraine is so far being counted in the tens of billions. Reconstruction will require investments counted in the high hundreds of billions. That has not been fully internalised by many western leaders — one honourable exception is Werner Hoyer, head of the European Investment Bank, who as early as June put the cost at €1tn. But after the Ukrainian government itself calculated a figure of $750bn, the reaction in the west was largely incredulous. A later effort massaged the number down to $350bn — mostly, I think, for political reasons.

But the higher numbers are right. Here are two ways to think about it. The Kyiv School of Economics’ most recent estimate of the cost of only the physical damage from Putin’s attacks was $127bn on September 1 — in other words, before the Russian president’s latest campaign to freeze Ukrainians into submission by bombing their infrastructure. That number will be much higher now, and does not begin to take into account the spending needed to get Ukraine not back to the status quo ante but to a state fit to join the EU.

That requires, as the CEPR writers highlight, “a massive reallocation of resources” to relaunch Ukraine’s arrested transition to a liberal democratic market economy and to secure its economic reorientation westward and away from dependency on Russia.

Take Poland as a benchmark. In 1990, the two countries were of similar prosperity. Just before the war, Poland was more than three times richer. If a good long-term goal for Ukraine’s EU-oriented reconstruction is to achieve Poland’s current level of prosperity (by which time Poland will be richer still, of course), then Ukraine will need to build up something like Poland’s current capital stock. That’s in the order of $1.2tn, against Ukraine’s $500bn or so on the eve of Putin’s full-scale invasion. Count in the destruction and we get near the trillion-dollar mark of needed investments.

So the discussion needs to move on from quibbling about the scale of investment needed to the form in which they come. Most may well be private money, and even some of the official money can take the form of contingent debt (to be paid back only when Ukraine has had enough economic growth). But western governments — and that means above all the rest of Europe — must put significant money in the pot, including in the forms of insurance and guarantees, to lure private investments in.

Naysayer objection number 3: EU membership is too far off — don’t let the best be the enemy of the good

This gets things precisely the wrong way round. The west is in danger of letting the good (or really the mediocre) be the enemy of the best. The CEPR emphasises that the war and its conclusion will present “unique opportunities to accelerate the transition from the post-Soviet legacy to a modern democracy”. A permanent victory of the European project is within sight, and should be met with the same urgency the 1989 generation of European leaders employed when it came to the previous Soviet satellites in central Europe.

The book contains analysis of that experience and Ukraine’s post-2014 efforts at integrating with Europe. These are instructive about what is possible. It took 15 years from the fall of the Berlin Wall for central Europe to enter the EU, and merely a decade or so from when the commitment to include them was made in earnest. In the case of Slovakia, a case of arrested integration in the mid-1990s meant that accession eventually was undertaken in barely more than five years.

What about corruption?

This question, while legitimate, often comes from people with an outdated view of Ukraine and how much the country has changed since the 2014 Revolution of Dignity which overthrew the grotesquely corrupt Viktor Yanukovych. The CEPR report’s chapter on corruption, in addition to setting out sound advice on how to keep reducing it, also describes the progress that has been made. The banking system has undergone a clean-up. ProZorro, Ukraine’s digitised open-contracting system for public procurement and the sale and lease of public sector assets, provides more transparency than many western countries.

Above all, the process of EU integration provides the best tool for continuing to squeeze out corruption, in a context of overwhelming public support for upgrading the country’s governance. The CEPR book’s authors are clear that, both politically and institutionally, reconstruction should be used precisely to force through the necessary anti-corruption reforms, implementation and enforcement. But for this to work, worries about corruption cannot be allowed to slow down reconstruction and reforms themselves. Rather than preapproving every project, donors need to commit to a “trust and verify” model under which Ukraine is given the go-ahead to choose and fund projects subject to strict ex-post audits.

Ukraine’s integration into the EU as a modern green economy is an enormous prize dangling within reach of EU leaders’ hands, if they only dare to see it. There is everything to gain and no time to lose.

Other readables

  • The indictment against FTX founder Sam Bankman-Fried is quite something. What better time to sign up for our cryptofinance newsletter?

  • Can a four-day week really work?

  • With the best reporting I have read in a long time, my colleague Helen Warrell meets the top female spies of MI6.

  • Last week I included here new research showing that global profits booked in international tax havens have kept increasing. But on another measure, tax havens are in retreat. IMF data on foreign direct investment — which can often be a mere conduit for balance sheet manoeuvres to reduce tax — shows that the international offshore centres’ share of the global FDI stock “has gradually declined since 2017, while that of the largest economies such as the United States and China has increased”. Longtime readers may recall earlier iterations of this research showing the importance of “phantom FDI” in global capital flows.

  • A particularly good edition of our sister newsletter Energy Source is well worth your time — it includes the breakthrough in fusion energy and an interview with the top White House energy adviser.

  • And did you hear there was a breakthrough in green hydrogen technology too?

  • Russia is learning how to live without imports — or how to smuggle them into the country in defiance of sanctions.

Numbers news

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