Russia’s invasion of Ukraine in February 2022 has tested Europe’s political and economic resolve. But where Vladimir Putin attempted to sow discord, he instead has failed to divide the West.

Now, following last month’s anniversary of the start of the conflict, there has been much commentary on end-game scenarios for the Ukraine war. And any discussion about the end of Russia’s aggression naturally leads to talk about reconstruction. 

Editorial March 2023

The World Bank now estimates that Ukraine’s GDP contracted by 35% in 2022, highlighting the urgency of the economic impact of the war.

Speaking at a recent event at the House of Commons in the UK, Dmytro Natalukha, a member of the Ukrainian Verkhovna Rada (parliament), and chair of the economic affairs committee, stated that private capital will be essential to rebuild the country. 

Ukraine’s government has now secured the assistance of JP Morgan for the creation of a “platform for attracting private capital to rebuild Ukraine”. This was agreed in a video conference last month with senior JP Morgan executives and Ukraine politicians and government officials and follows debt restructuring talks last year.

But the task of attracting capital remains hard for a number of reasons.

The lack of liquid, investable opportunities is a key hurdle. The MSCI Ukraine equity index (which anyway only has two constituents and a $350m market cap) was down almost 64% in 2022; annualised performance since inception has been -21%.

Investment and support for Ukraine is currently through supranational entities and development banks. The EU has announced that €10bn of the proceeds of its latest €80bn bond issuance will be dedicated to Ukraine reconstruction through its Macro-Financial Assistance+ programme.

According to Ukraine’s government, investment will be needed in green energy, IT and agricultural technologies. 

Russian attacks on Ukraine’s energy infrastructure in particular have highlighted the weakness of its power network and the need for the country to diversify energy sources. Ukraine also wants to develop its own IT sector.

The European Bank for Reconstruction and Development (EBRD) already committed €140m to modernise district heating in Kyiv in early 2022 to support greater sustainability and energy efficiency, along with €50m to renew public transport in the capital city.

Ukraine’s current urgent need in the private sector is to replace liquidity financing provisions in the pivotal agricultural sector following the effective withdrawal of mainstream banks.

The EBRD currently invests some €4.6bn in Ukraine and its latest project involves $90m in financing for the agribusiness MHP Sunflower’s edible oil crushing unit.  

If a credible path to peace emerges, blended capital commitments through credible development banks could attract more capital.

But this still looks ambitious given the uncertain trajectory of the war and without any realistic prospect of a peace deal. Sensitivities are high and at the moment it is hard to imagine Russia agreeing to anything that would not see Ukraine effectively giving up swathes of territory – any suggestions in this direction are swiftly rejected by Ukrainians in any case. 

Ukrainian government bonds are currently subject to talks on restructuring and are more the territory of distressed debt hedge funds. 

They might one day look for attractive Western pension funds, but corruption remains a thorn in Ukraine’s heel, and will continue to do so when it comes to attracting institutional capital. Despite making progress in recent years, including during the war, Ukraine languishes near the bottom of indices like Transparency International’s Corruption Perceptions Index.

If this persists it would make it hard for mainstream investors ever to invest in Ukrainian government debt. The Dutch PME pension fund has divested from Nigerian and Pakistan government bonds on governance and corruption grounds, for instance. These countries also rank at the bottom of corruption league tables.

For now, Ukrainian assets remain in deep distress. In a pessimistic scenario, the war will persist, the country will get poorer and will remain uninvestable. But in a more optimistic set of circumstances, there will be a trajectory towards peace. An enlightened, democratic government in Kyiv could marshall Western resources towards recovery. 

Should this scenario come about, opportunities for institutional capital should become more abundant – allowing pension funds to achieve returns aligned with members’ wishes and with measurable impact.

Liam Kennedy, Editor