War on Ukraine: Economic and political reconstruction

Simon Smith

Well, good afternoon, everyone, and welcome to this seminar, Chatham House seminar on Economic and Political Reconstruction in Ukraine. My name is Simon Smith. I’m Chair of the Steering Committee of the Ukraine Forum at Chatham House, and I was the British Ambassador in Ukraine from 2012 ‘til 2015, and it’s my pleasure to welcome you to this event as the Chair. It’s the hottest day of the year, and welcome also to discussion of what remains one of the hottest issues on the international agenda, the future of Ukraine.

As the Russian war against Ukraine continues, there’s been regular discussion and there’ve been regular developments in the ways in which Ukraine’s friends and partners have given support to Ukraine in defending itself against Russian aggression, but it’s important that we’re not wholly concentrating on the immediate next steps. We need to look also at the long-term, and we need to understand clearly what kind of support is going to be best for Ukraine and best for a stable and successful European region in the longer-term future. And that means we can’t wait until the war is over before we start looking at what will need rebuilding in Ukraine, what resources will be needed from within Ukraine, and what will be needed, in terms of resources from Ukraine’s international partners to make reconstruction and recovery a lasting success.

So, I’m here with a panel of excellent experts on this question, and to introduce them in the order in which they will make their first contributions to this discussion, I have Orysia Lutsevych, who is the Director of the Ukraine Forum, the Head of the Ukraine Forum at Chatham House. I have Nataliya Katser-Buchkovska, who is the Co-Founder of the Ukrainian Sustainable Fund, and who was, for five years, until very recently, a Member of the Ukrainian Parliament. And I have John Lough, Associate Fellow of the Russia and Eurasia Programme at Chatham House, and a notable thinker and writer on a wide range of European security and economic issues.

So, we are going to hear from them at the start. We are also going to, after we’ve had a discussion amongst the panel, we will throw the meeting, the discussion open to questions and answers, and if I could ask people who are following online, please use the Q&A function to ask your questions, do not use the chat function. The chat function will be available if you want to exchange remarks with other participants, but if you want to ask the question, put it in the Q&A function and we will, as the discussion goes on, select questions from the audience. My apologies in advance if your question does not get selected, but we’re hopeful that we will cover as much ground as we can.

I need also just to remind you that the event will be on the record, and it will also be recorded. So, that, I think, is all we need to do by way of preparation, by way of shaping the event, and I’d like, without wasting anymore time, to turn to Orysia Lutsevych to begin our discussion. Orysia, over to you.

Orysia Lutsevych

Thank you very much, Simon, and welcome to you as the new Chair. This is your first event, you are joining with us. Sorry for the challenge of the heat, but I’m sure you’ve been to places that were heated in many ways, including during Euromaidan in Kyiv and after the annexation of Crimea, so, you’re not unused to challenges, and thank you again for joining our team.

First, I’d like to say that we are launching also a new series of events, dedicated, like today, looking a bit towards the future of how Ukraine can be renewed, and how can Ukraine use the momentum of this horrific destruction to really reset its governance and its economy. And I’m really pleased that we are able to do it, thanks to some funding coming also from the young generation of Ukrainians, for FCDO and other foundations.

I think the first, I’d like to start, how we see recovery and reconstruction and what it means. For me personally, it means, it’s very much, we are still in the thick of war, and that funding and recovery is needed for the successful outcome of this war. It’s as important, if you want, as the delivery of kit and military equipment that Ukraine is putting so much effort in order to have, you know, an upper hand on the battlefield.

For the West, from what we hear, recovery is in a way to demonstrate that democracy can prevail against autocracy. So, it’s very much also a test case whether the unity of democratic world can come together in an effective way, around this largest war in Europe since the Second World War, and help Ukraine recover and become that country millions of Ukrainians want it to be. And of course, the damage and the task of this is daunting.

We are talking about the bill that Ukrainian Government has declared in its national recovery plan of US$750 billion, that is needed between now and 2032, right? So, this is a long-term objective, but in the immediate term, in the immediate, and this is between now and the end of the year, Ukraine needs roughly US$60 billion in order to rebuild its infrastructure, in order to provide a budgetary support, to sustain salary expansions, in order to repair housing, in order to prepare for winter, in order to support Ukrainian energy sector. So, this is a daunting task, and the good news is that we’ve started thinking how to go about it.

I was in Lugano and it was an impressive meeting of over 1,000 people from various sectors, government officials, civil society, business, and they were all talking, buzzing around how to go about it. Ukrainian Government has prepared this national recovery plan, that has five principles, and these are all very good principles, from grow prosperity in equitable way, everybody wants that, integrate with the European Union, build back better, enable private investment and entrepreneurship.

So, the underlying assumptions and proposition from Ukraine, I think, is quite convincing. The donors are slowly getting behind. Ukrainian civil society is mobilising and is producing, for example, a vision for post-war recovery and post-war Ukraine of over 40 Ukrainian think tanks. They are focussing a lot actually on questions of accountability, but there’s a bit of a bad news, I think. We’re too much, in a way, focusing on the future and this recovery that is needed now, for Ukraine to be able to sustain and build that resilience, is not coming fast enough.

Even if you look at the budget support from the European Union, out of commitments of 12 billion, Ukraine has received only two billion, and budget support is the fastest way to deliver funds at times of war to local communities, so that they can build bomb shelters, repair bridges, stock up supplies for winter, you know, provide water to Mykolaiv, that is completely suffocating and doesn’t have drinking water. And statements about this rapid recovery are, you know, in the range of 300 million, we’ve heard. We’ve heard commitments, but from my conversations with the Mayors, with the local communities, this fund – these funds are not seeping down to Ukraine.

Another challenge is donor co-ordination, and we’ll talk a little bit in the future. We have United 24, which is Zelenskyy’s driven recovery platform. Then we have European Union, that will be setting up its Ukraine recovery platform. What about UK, what about US, what about Canada, how will these countries plug in, into these projects? It is not clear.

And finally, a lot of funding coming in the shape of loans rather than grants, and a lot, I mean, that is for example out of UK’s commitment to over 1.5 billion in multilateral loans, only about 100 million comes in a bilateral support of grants. This is building Ukraine’s debt, which will need to be restructured in a short term, beginning of next year, likely, and is actually – could undermine Ukraine’s macroeconomic stability. So, I’m just putting these issues on the table, and I’m sure we’ll come back to some of those in the discussion. I’ll stop here.

Simon Smith

Thank you very much, Orysia, that was admirably brief and to the point. I’m going to turn now to Nataliya Katser-Buchkovska. We’ve heard from Orysia that a lot of work has been done devising principles for the effort to reconstruct Ukraine, but I’m sure that on a lot of people’s minds will be, “How do those principles translate into practice? How is it actually going to work in Ukraine?,” and I think we’d be very interested in your perspective, Nataliya, on how this is going to work in Ukraine, what are going to be the priorities for the reconstruction effort? What are going to be the obstacles to look out for? So, over to you. If you could just unmute yourself, please, Nataliya, that’d be great.

Nataliya Katser-Buchkovska

Thank you, Simon. Good day, everyone. For sure, Ukraine is very seriously damaged since war started. So, a lot of cities are totally destroyed, economy fall by 40%. We have more than ten millions IDPs, more than six million immigrants, and people are – people losing their income. So, the economy’s falling down and struggling a lot, so, to think about reconstruction is the right, and very timely initiative, first of all. And now we have a chance to design new economy type, but at the same time, as Orysia mentioned, we should not forget about the urgent things and what’s going on, on the ground as Ukraine needs urgent support, and to cover today’s needs, to keep economy running and going through the coming winter.

So, for sure, as first of all, it’s not only Ukrainian who is suffering, because this is new type of war we’re faced. It’s a hybrid warfare against Ukraine and Western world, and now you see that in this interconnected world the impact is huge on neighbouring states, Europe and the rest of the world. So, a food supply chain is broken, energy deficit and price soared, high inflation, immigration issues, political trouble as a result of all these reasons. So, what we are witnessing now is a new type of hybrid war in globalised world, and with cyberattacks, humanitarian crisis, some artificial hunger propaganda, nuclear blackmail, and the consequences would be huge on Ukrainian and the world economy as well.

But at the same time, if you’re thinking about the right model, how to reconstruct Ukraine now, and design the correct economical model, we – Ukraine could be very – has very positive effect and be a part of solution afterwards. First of all, I would point out for a very – a few very important industry like energy, agriculture, as well as technology, which could be implemented into reconstruction plan, so, to make our country successful afterwards.

So, first of all, as you see, as that energy system is on the big stretch and the coming winter is full of uncertainty. But from the other side, Ukraine could be, like, a – has a big potential to be design in a green way, and to be a centre of a green recovery. Because all the problems coming from Russia is based on blackmail of gas supply, nuclear supply, so, if we will get rid of fossil fuel dictatorship, and at the same time to make Ukraine a green hub for hydrogen, for storage, as a infrastructural hub, it would be good investment into, first of all, stable, secure and green and sustainable future of region, Europe and the rest of the world.

So, the same thing with the food supply, and here everyone knows and heard now that as supply chains are broken, and Ukraine feeds more than 400 million people around the globe, so, well, there is a big stretch coming, how we will feed the rest of the world? And in this regards, we should think beforehand and the solution is to increase interconnectivity, and to create additional routes and to redesign the food chain now, and to invest in this now. It is possible to do it through different neighbouring borders, to build additional port infrastructure, as well as not only for food, but also for energy supply, and we also need to work a bit, starting from the day, to now.

Well – so, I would say that this industry is quite important, and to sum up my first introduction, I would say that there should be some principle, how we see Ukraine in future. First of all, it should be sustainable, it should be inclusive, so inclusivity should be included into this reconstruction plan. So, all these plans should be decentralised, and the community, the real economy should have access to reconstruction fund, because they know better how to implement it on the place.

We should also think about technological advance. So, Ukraine should create added value, so – and make economy more advanced and technological, so, to create the base for quick economical growth. So, all these principles should be implemented, I am not talking about transparency, it’s a base, and we’ll be talking about this as well today.

Simon Smith

Super, thank you very much, Nataliya, and I think you’ve put your finger on a couple of elements that are of very general significance here, when you talk about the global significance of what is going on in Ukraine now, particularly putting it in the context of what the world is going to look like in 20 or 30 years’ time, in terms of its energy and food consumption.

I’m going to pass rapidly on now to John Lough. John, you have a lot of experience looking at the successes and failures of reconstruction programmes in various parts of the world, and so on, and – but I know you’ve been working very specifically on thinking about what successful reconstruction would look like in Ukraine, so, over to you.

John Lough

Thank you, Simon, and good afternoon, everyone. There is something slightly, I find, surreal, discussing reconstruction when Russia is still inflicting so much destruction on Ukraine. I saw an estimate this morning saying that the cost to rebuild Ukraine after this war could even reach $1 trillion. So, let me make, please, two main points. Firstly, I think we need to be open about the challenge. Reconstruction poses significant challenges in countries with underlying governance problems. How to deliver at speed and ensure integrity?

We have some really good lessons to be learned from different places in the world. The closest to Ukraine would be the Western Balkans. We’ve got some very stark lessons from both Afghanistan and Iraq, in terms of the efficiency of reconstruction spending. There are always huge challenges in these situations, where particularly disaster relief is needed, and we need only think of the whole COVID experience, and how some of the world’s most established democracies, including the UK, were not, let’s say, at their most effective in managing some of these risks.

Ukraine undoubtedly has an underlying governance problem. Corruption is not the cause of the problem, it is merely a symptom, and this is – this governance problem is the direct result of a high concentration of capital in the hands of a small number of politically connected business owners, which has created an environment where institutions are effectively programmed to syphon off public money for the benefit of those who participate in the system. So, the risks are very obvious. If this system were to continue in the phase of reconstruction, it would create very clear challenges.

However, I personally think that when it emerges from the war, Ukraine will have a real chance to break the influence of this system. We’re already seeing the weakening of some of the largest business groups in the country. There will be inevitably the arrival of new faces in both politics and government as a result of the war. This will be at both local, regional and indeed national level. So, all this is going to contribute, I believe, to creating a new operating environment, and the challenge will be to sustain that new environment.

So, my second point would be that we need to keep in mind that Ukraine has significant strengths that can be the building block for this transition to a new model of governance and, I think, the more effective management of reconstruction problems. Firstly and critically, decentralisation has ensured, in recent years, much more efficient delivery of public services, and this really should provide a basis for the empowering of local communities to shape, for example, the rebuilding of cities.

Ukraine has a vibrant, pluralistic political culture and this should make it possible for elected representatives to provide effective oversight of investment projects. Ukraine also, in my view, has an impressive track record of success in – since 2014 in reducing some of the space for corrupt practices in the area of public procurement, and ProZorro backed by Dozorro has – is a real example of what can be achieved.

There are also anti-corruption agencies which, in my view, have the potential to play a much stronger role. They are generally built on quite solid foundations. Equally, Ukraine has a highly capable civil society with specialists working in the anti-corruption area who have both a powerful voice and, I think, are extremely motivated to achieve change. And, moving on, I think the fact that Ukraine has well-developed digital infrastructure that can be adapted to provide the level of data exchange needed for the effective co-ordination and oversight of the reconstruction effort, I think that’s a huge plus.

So, in short, there are some, I think, significant strengths, and I haven’t even mentioned the school of investigative journalism that has really begun to thrive in Ukraine in recent years. These are all important things, but it’s imperative that well-designed anti-corruption efforts accompany Ukraine’s recovery work. Ukraine must not let reconstruction make the corruption problem worse, and it must not allow mismanagement of the reconstruction process to potentially obstruct the path to membership of the European Union. I’ll stop there.

Simon Smith

Thank you very much, John, and I’d like actually to, sort of, pick up your last point, and perhaps pass it along to Nataliya, and just to say, you know, John is talking about anti-corruption, he’s talking about the danger of allowing, kind of, mismanagement to haul the reconstruction effort off-track. And I wonder if I can ask you, what is your assessment, as someone who has, kind of, seen many of the workings of the Ukraine from the inside, as a Member of Parliament, who’s worked on a lot of very big-ticket energy issues, for example.

From your perspective, is it, in particular – we talk about the importance of Ukrainian ownership of the reconstruction programme, but how reasonable is it to expect that that is going to work, will there be competing owners for the reconstruction programme in Ukraine? We already have seen a National Recovery Council set up in Ukraine. What does that need to do to be credible? Is it credible at the moment, or what needs to be done? What is going to be the role of local government and entities outside central government, how crucial are they going to be to the success?

So, a lot of questions, I think, are going to be on the minds of the participants in any reconstruction, the supporters of any reconstruction programme in Ukraine, but what’s your assessment of how ready Ukraine will be to ensure that that programme is managed and implemented with success?

Nataliya Katser-Buchkovska

Thank you, Simon, for this important question. As you mentioned, my previous experience, our first point would be, like, not to – trying to eliminate something but to change the systems. For instance, a good example is gas market, so, before 2014, we did – we had one supplier, one offtaker and not normal price, it was twice as high as in European market.

We changed system, or we enacted gas market law, implementing EU directives, and it – as a result, we had fully function market with gas stock exchange, with numerous traders, Ukrainian, international, and there was no manipulation with the price. So, it was before war, we would say that this reform was completed, and we have – we had fully function, transparent gas market, it was a fact, recognised. So, first point would be changing system.

You also mentioned the digital capacity of Ukraine. Ukraine has a huge human capital who work in IT sector, as very well-known. So, I suppose digitalisation and implementing some – well, eliminating a physical presence and making decision, I mean, to make all these processes as much as autonomous, would be also helpful. So, I suppose digitalisation could be also good tool.

But when we are talking in general, as a general system, how it should work, my view is that all these funds should be decentralised, first of all, and they should be implemented industry-by-industry. There should be a responsible industry, a lot of real economy and business participation, as well as decentralised to different regions and, you know, local communities should also take part into the process and ask and saying, what do they really need, and which industry would be working.

I would also say that also important to implement private/public partnership. We haven’t had any successful case of public/private partnership yet. The law was just implemented, and that it, but this tool is working in inward, and the private capital always more efficient than the state one. In Ukraine case, it’s 100%, so, this particular instrument should be implemented.

The another point is, for instance, to use special economical growth tools like industrial parts. It does work in different economies, and widely implemented, while – during the reconstruction of particular countries. So, our Parliament just enacted a law on industrial products, and I suppose this could be turning point towards economical growth in Ukraine, if we – if properly used.

I would also work with financial market as well, and create additional financial tools, and implement them into Ukrainian financial system, meaning that we can also issue some new type of bonds, green bonds, which is not in the place in Ukraine, to design some special insurance, and here international community and governments should be helpful, because to invest in Ukraine, any foreign investor needs some kind of insurance at the moment. So, working on special financial tools would be a very big work for those who are working on a reconstruction plan.

So, all these together will allow for economy functioning well, and the reconstruction fund placed in the right places. I’m completely against of – against centralised management, and the state to decide where to invest and what to do. And maybe on top of this, first of all, there should be, like, bench of thinkers to design new economy type. World is changing, there now – there is a lot of new challenges, and Ukraine should be a very good role model, and place for so-called experiment – sorry, but – to create something really model, new and to be a part of solution in future.

Simon Smith

Thanks very much, Nataliya. I’m going to go – pass onto Orysia now, and just to say, to pick up a little bit on the outline of the concept of recovery that you were talking to us about. Of course, that concept will need to have a very powerful narrative behind it. We’ve got already a question come in, which I think, from – this one from John Kavulich, which I think actually sums up what a lot of sceptical outsiders are going to be asking, and when I say outsiders, countries outside Ukraine. He asks, “Look, it wasn’t the oligarchs who invaded Ukraine, so, why are we so focused on sanctioning Government officials?” But he also asks, “Why should taxpayers in any other country than those residing in the Russian Federation be responsible for the reconstruction of Ukraine?”

There’s going to be a lot of questions that says, “Why are we doing this, what’s in it for us?” What needs to be the narrative that grabs taxpayers, consumers, electorates around the world, that convinces them that we really need to weigh in behind rebuilding a successful Ukraine?

Orysia Lutsevych

It’s a fantastic question. I can take a stab of it but, like, I’d like to hear others. I think, when we look at recovery of Ukraine, we must understand that if Ukraine emerges as a stronger economy, well integrated with the global space, it will be a recovery of global economy. It will be a recovery of Europe, because we – what we see right now is the destruction as the result of Russian aggression, of this imperial war, that Ukraine is in the immediate frontline of that, with horrific, genocidal-type war, but Europe, by proxy – and this is what Nataliya was talking about, is also a target, in a perhaps more subtle way, grey-zone operations, cyber activity, energy blackmail. So, I think we should see this as a part of the trend where Ukraine is an immediate victim of Russian aggression, but once we find a solution to this aggression, we’ll all be better off, and in the end, actually we’ll see a different Russia that will be able to integrate in the European security architecture.

So, there is a big card at stake here, and I think, you know, maybe to connect also a little bit concretely to what Nataliya was suggesting, I already see, for example, Liz Truss after Lugano, she suggested setting up a Ukraine/UK private finance partnership. And this is where roles of European Union, UK will be to facilitate the specific mechanisms that would bring onboard private sector with innovation technology, but also funds, exactly right.

In Ukraine, when you ask people what it means to win over Russia, it means that Russia pays for reparations and recovery funds, and EU and UK should set up a legal instrument to enable frozen assets to be actually mobilised for Ukraine recovery. Canada has done it, they’ve already passed a law in the Parliament to enable – use some of the Russian frozen assets, to direct them to Ukraine, and I think once we have funds framework which is EU candidate status, and also the conditionality and reform and FDI, I think we’ll sort the puzzle of Ukraine’s recovery. The question is sequencing, political will and a clear story.

Simon Smith

Thank you, Orysia. I’d like to pass onto John Lough now. John, we were talking a bit earlier about the international mechanisms that might be mobilised, the experience we’ve had of how those have worked in the past. I would suggest that at the moment, in terms of international support for Ukraine, notwithstanding the vote in the UN General Assembly, which now seems many months ago, which overwhelmingly condemned the Russian aggression, it seems that we are not – that we are some way short of a, sort of, broad international consensus on weighing in, in support of successful reconstruction in Ukraine.

How much of a problem is that, if that means that this looks like a very, kind of, Euro-Atlantic initiative, a Euro-Atlantic concern? Is that something that we need urgently to be doing more work on, or is it more practical for us to work forward, assuming that this is perhaps is not going to be a global effort in a big sense, that it requires several more narrowly-focused coalitions of the willing to pull off successfully, and what does that mean for our expectations about the extent to which international institutions, multilateral institutions, can weigh in, in support of reconstruction in Ukraine?

John Lough

Thank you, Simon. This is an excellent question. I mean, it seems to me that we are going to live with the fact that this is Russia’s war, not just against Ukraine, but Russia’s war of the West, and there are, as we saw in the United Nations, there are many countries in the South, for example, that are not aligned with the Western view, in some ways have been more sympathetic to the way Russia has presented its narrative. I simply don’t think we’re going to get round that, and there are very good reasons to believe, of course, that it would be much better to have some of those countries, if you like, onside.

It would be wonderful, for example, if India were not prepared to buy crude oil from Russia, even at a discounted price, and if China were to play a more constructive role. But I simply don’t see that’s going to happen any time soon, so, we therefore live with the fact that some international institutions are probably just going to bowl the ball, you know, back to the European Union, and maybe to the United States to provide, you know, bilateral support to Ukraine for this reconstruction effort.

But I don’t see, in some ways, why that shouldn’t be sufficient, because many Western countries, I think, will accept the narrative that we need to rebuild Ukraine because it is an investment in our defence. And not just that, I think Orysia put her finger on it, longer-term, we are going to see change in Russia, whether it’s simply generational change initially, but I believe that history teaches us that Russia goes through these periods of closing it off – itself off to the world, becoming more aggressive, and then, if you like, reassesses its place in the world, and then returns to a reform track.

So, we have to hope that will happen in Russia, and if we make the right investment in Ukraine, I believe that we can make that process in Russia in fact go much more smoothly, and in fact provide Russia with an example of how a country that was previously regarded as being culturally very similar to Russia, and I say, regarded by Russians as being culturally very similar to Russia, in general terms, how in fact it could make this qualitative leap, and in fact modernise itself? Because Russia, over the last two decades, has been undergoing a very rapid process of de-modernisation. So, in that sense, making the case for Ukraine, I don’t think, should be regarded as so ambitious.

Simon Smith

Thanks very much, John. We’re going to try now to run through a lot of very good questions that we’ve had coming in on the Q&A. I’d like to maybe bunch a few of them together, because not surprisingly, a lot of the questions are coming in focusing on similar blocs of issues. One thing that, not surprisingly, comes up repeatedly in the questions is concern about corruption. I know all three of you have spoken about corruption, but Madeleine Moon, Janet Gunn has – they have all – they’ve put in questions, thank you for those, making the very obvious point, but the very good point, that those taxpayers and consumers who are actually going to be funding the recovery effort in Ukraine, they are going to need a lot of very powerful reassurance that their money is going to good places and doing good things.

I know you’ve spoken about corruption, but I think it’s worth our dwelling on this, and can I ask any of you on the panel, what would your number one priority be in getting through this message, in actually establishing this principle, and establishing a principle that could offer assurance to concerned taxpayers in other countries, that the expectation that a recovery programme will be vulnerable to corruption is not something that people need to have deep anxieties about? What is the signal of reassurance that could be given at this stage to those who are going to be funding the recovery programme in Ukraine? Orysia, do you want to take that on?

Orysia Lutsevych

I’ll just say briefly, I think Ukraine will be able to build trust, because this is the key, right, why is everybody concerned there’s no trust? We know that there is a tendency, like John said, to accumulate large contracts in politically affiliated companies, who then funnel funds to a pol – to politics in order to sustain a certain kind of decision-making, let’s put it this way, in favour of certain individuals. We want to put a stop on it, where we have, as in Ukraine national recovery plan, a key goal of inclusive prosperity and Ukrainian resilience.

For that, I would suggest simply having a transparent bidding process that is competitive, that is not monopolised, and to stop impunity for corruption by actually having prosecutions of those who violate exactly those bidding procedures and engage in corrupt practices, so that they can go to jail. I think this would increase trust in investors and donors.

Simon Smith

Thanks very much, Orysia. An associated question has come in from Trisha de Borchgrave, who points to the recent sacking of the Prosecutor-General and Head of the Security Service in Ukraine, and I think the question that’s behind this is, if we’re going to see continual, sort of, disruption in Ukraine, we’re going to see people removed from key posts and replaced and so on, is that going to be a concern, in terms of the commitment of Ukraine’s supporters in recovery? And I wonder if I could ask Nataliya, how concerned are you, not – I mean, I’m not asking you specifically about the recent sackings, but how concerned are you about continuity in Ukraine’s institutions, and whether that will be something that flashes an amber light, that suggests to potential supporters and donors in a reconstruction programme that actually, everything is going to be chaos and unpredictable and unstable in Ukraine, so the reconstruction programme is not a very good investment?

Nataliya Katser-Buchkovska

First of all, the war is going on and it’s a very active phase of war, so, you should – everyone should be aware of the decision, if they need to make, they should be effective and, well, if it’s may – need to be done, it should be done. And the second issue is, for sure, that as the political process is going on and reshuffle in government and changing different position, it’s normal for any country, and it’s a part of the governance process. So, if there would be changes, and we expect that some more coming – come in autumn, it should be accepted like normal political process, first of all.

Secondly, my dream is, for sure, that when we win, to have a fair election, to come back to normal life, not – do not live in war condition, and then, for sure, first of all, coming back to normal democracy would be the first, like, key issue, and here the institutions, civil society plays a very important role.

So, I would suggest, yes, it’s vitally important to preserve institutions, and even now, during the war, but the efficiency is also important. So, we need to keep this very thin balance between efficiency and winning war, and afterwards to also, apart from economy, have a clear model of what the democracy should be, and how it should function, and it shouldn’t be worse than it was before, it should be better.

Simon Smith

Thanks very much, Nataliya, and we’ve got a question in also from James Nixey on precisely the issue that you’ve just touched on there, which is that there is a potential, sort of, conflict, in a way, between the urge to support Ukraine in the short-term while the war is still going on, but also look at the very common-sense argument that says, “We must be thinking about what happens after the war. We must be thinking about the success of reconstruction before the war is finished.” And James asks, “Are these two – so, how do we balance between assisting Ukraine to win the war and assisting Ukraine to win its future post-war, and are the two things necessarily completely segregated from each other, or is there some sort of overlap in some fashion?” John, do you want to have a go at that?

John Lough

Goodness, and that’s a tough one. I mean, I think, to win this war the Ukrainians have to believe that there is a future, and it’s quite clear to me that they do believe there is a much brighter future for Ukraine, and that that is one that is motivating the country right now. So, we, I think, have to share, as far as we can, that vision with our Ukrainian friends, and buy into it, and imagine a Ukraine that does operate differently, on a different basis, that becomes – has more mature democratic institutions. And I think the absolutely critical factor that Ukraine needs to fix in the coming years is the problem of the judiciary, and it needs to establish a judiciary that’s not just operationally more efficient, because that’s, in fact, the easy thing to do.

It has to build this culture of respect for the rule of law, and respect for the independence of the judiciary, and these are very subtle things that generally take quite a long time in democratic countries to develop, and Ukraine needs to do this at much greater speed. But I tend to think that this – maybe the, sort of, catalytic effect of war and the renewal of the elites in Ukraine is going to create a very different situation, and potentially a country that is governed much better than in the past, and we have to be, I think, focused on that possibility.

Simon Smith

Thanks very much, John. Orysia, yes.

Orysia Lutsevych

Hang on, do you mind if I just jump in?

Simon Smith

Please.

Orysia Lutsevych

I really like James’ question. I would like to say, would this assistance help win Ukraine the future? Because that also includes winning the war and winning the peace, and then, I think, I don’t see much of a contradiction there, other than to say that if an underlining principle of the future, and we hear it from all places, is resilient systems; after COVID everybody’s talking, “How do we build resilient healthcare?” I mean, in Ukraine of course the bombs are falling, it’s a different level of challenge, but you see economy functioning, railway running, small companies working.

It means that even at times of war, if we embed these principles of resilience to deliver recovery, Ukraine will both win peace and the future, and Ukraine has very good preconditions for that, because it has experience to – of devolved power, of quite vibrant small and medium enterprises, and an ambition, and here I say ambition to connect to what John said about the hope of the future. You know, Ukrainians were always dissatisfied with the way things are going in Ukraine, right? 70% would say they are not happy, right? Now 70% say things are going in the right direction. How do you explain that?

I am saying that Ukrainians finally see that they could seize the chance of – that this – based on this destruction, they could build this new system, and they will answer the key question: in whose favour regulation is working, in whose favour, and who is keeping a check on unaccountable power? And I think they’re already asking these questions, and this is why I’m hopeful that this recovery will stimulate the right answers to these questions.

Simon Smith

Thank you very much, Orysia. I want to get on, before we finish, to some of the questions a little bit more specifically about the mechanisms for delivery of a recovery programme. But I want, before that, just to come to an interesting question, because we have – we’ve talked about the strength of institutions in Ukraine and, I think, made a very important point that this is not just about rebuilding infrastructure, it’s not just about rebuilding physical damage, it’s about rebuilding and ensuring that there are resilient and successful institutions.

But Sarah Farnsworth fires in a question about actually looking even more broadly in this, and reminding us that it’s critical to invest in people as well as a strong and – having a strong and broad psychosocial trauma programme, working on the health of people, as well as their physical health. “So, what plans are there to invest in people in Ukraine, what can be done to ensure the health of the people who are rebuilding their country?” Nataliya, do you want to come in on that?

Nataliya Katser-Buchkovska

Yes, so, a very important question, because of social capital is a key to recovery, because if there are no people, there will be no reconstruction at all, so – and we now face a huge migration issue, and all – or big numbers are abroad, and from one side, they are looking for shelter for them and for families. From the other side, they also will keep some new skills, will have new skills and come back with new ideas when they come back to Ukraine.

But from the other policymaking side, we should think about how to create incentives for those people to come back, and here are the special tools, as I mentioned. So, first of all, we should create infrastructure for them, and some incentives and what I – I love to say that Ukrainians don’t need any subsidies, they need jobs, and all these people are looking for a good place to work and to live.

So, I think such instruments like industrial products, some special economical zones and were, well, arounded by different social infrastructure could be very good, effective point for those people to come, and to rebuild the economy and to take part in some economical activity. So, the first thing, they need to have a place to live, to work and then to – for their – infrastructure for their families. So, I suppose the key element of this reconstruction fund should be also focused on social activity, and how to create this special cluster for those people to come back. But even without these people want to come back, more than 80% of refugees, according to polls, even now during the active phase of war, miss homes and they want to come back as soon as possible. So, it would be just to do something to support them and give them this hope and place where they can work.

About health issue and, well, you mentioned about – yes, there is different funds now who are working to help people to recover, but it’s not enough. So, we’ll have a huge number of injured and wounded people without – with different physical and mental issues. I suppose it’s a huge another topic, and here international donors, specialised organisations should take a very active part, ‘cause it’s a generational issue now.

Simon Smith

Thank you very much, Nataliya. I wonder if I could keep you on, if that’s okay, because I’ve got a couple of questions on the Q&A, one specifically for you, saying, “Do you think that tax breaks for foreign investors willing to invest in the Ukraine once the war is ended, can help make recovery faster?” And there is an associated question, which is, in a sense, part of your, kind of, energy specialism. “Do you think Ukraine will continue on the green path in its energy security, particularly in terms of revitalising its nuclear energy capacity, and is this a part of Ukraine’s rebuilding plan?”

Nataliya Katser-Buchkovska

Well, you know, in Parliament I was a big advocate of green transition and renewables. So, we created a special system to support renewables, and it shows us – we have as a result that the portion of renewables increased from zero to 14% now. So, I’m very devoted because of, like, I believe in renewable energy and its future. But now – but there was also bigger criticism because its cost, because its imbal– there is a lot of imbalances created by renewables, but now, we see the clear picture. So, Ukraine has any other chance to be – not to be green, first of all, because of so-called fossil fuel dictatorship. We have the state, which blackmails and the special tools of this war is the fossil fuels, gas and other nuclear fuel as well, which is supplied to Ukraine and other states, so, first of all, we need to get rid of this.

Secondly, we have also coal, we have generation and I suppose there is no way here this reconstruction, France come back and to invest in coal generation in Ukraine, which is destroyed. So, it could be substituted by biogas, biomass, biofuels, and this is clean and affordable and cheap.

When we are talking about nuclear, someone love to say that it’s cheap. No, it’s not cheap if we are calculate from the beginning all costs, so, all the nuclear cycle, starting from design, to use the nuclear fuel, so, it’s much more expensive than to build some renewables facility. And addition to that, in Ukraine nuclear is dangerous, because we have violent neighbour who can kept and misuse a nuclear station, and, you know, we face this recently and even now. So, therefore we should even, or diversify to create some small reactors, if it’s applicable, or just to get rid of nuclear as well, because it’s dangerous, and it would be dangerous in our territory.

So, we can also think about – in addition to that we can think the about hydrogen economy. Ukraine has a huge potential to be a hydrogen hub, and to create some storage facility for electricity trade, as well as for gas. We have huge natural storages in Ukraine, and it could be the security base for our region. So, meaning that the Ukraine should totally redesign its energy system, and it’s in favour of sustainability goals, transition, etc., etc. So, here is a huge chance to make everything much more efficient.

And very short about tax, taxes, I think the most important is – for investor would be guarantees, security guarantees of their investment, and here, it’s a room for international – for states, for big states to think how to provide the security guarantee for investments from – coming from their countries.

Secondly, about tax, it should create additional incentives. For instance, I mentioned green products, industrial products, which – who already has these tax incentives to invest in specific areas, and we hope it would works, for sure, because the cost of capital would be higher for Ukraine because of risk rather than other destination. But I suggest that the recurrence would be also much higher than you invest in just normal jurisdiction.

Simon Smith

Thank you very much, Nataliya. I want to go on, as I suggested we would, to looking a little bit more closely at the funding and financial mechanisms for recovery, and I’ve got a question in from Kieran O’Meara, who says, “Could funds be raised on behalf of Ukraine through mechanisms of sovereign debt by Western states, i.e., a particular bond is issued, like green bonds, where the yield is directly raised for reconstruction?”

And, associated with that, there’s a question, which asks, “What role has cryptocurrency had in raising funds for Ukraine, and does the panel see any role of crypto in the recovery?” John, can I bowl that one at you? If you could unmute yourself, please, John.

John Lough

Apologies. You’re really bowling a googly at me there, Simon, which I’m not sure that I can play with any particular competence. The – I mean, it seems to be around sovereign debt, there are going to be probably all sorts of creative ideas emerging for how we fund the reconstruction of the Ukraine, because it’s going to be a matter of such great urgency. I’m not qualified to comment on crypto, others may be able to, but I’m really not informed on that issue.

Simon Smith

Okay, unless anyone is putting their hand up to address the crypto issue, I think we will move on from it. Orysia.

Orysia Lutsevych

I’ll just say briefly, if you look at the national recovery plan, they are hoping still to get most of it in grants and in debt. And there will be that debt pressure that will be growing on Ukraine, and there’s also the question of, you know, how that could be managed, because it’s not very sustainable at the time when Ukraine’s export economy is collapsing. There’s no foreign exchange coming at this point, because of the Black Sea blockade, but also, the internal tax revenue collection collapsed 30%. So, we have to be very cautious how we tread this line of structuring basket of finance with the proper combination of grants, debt and investment, and perhaps we’ll have, in September, another conversation on it.

Simon Smith

Great, thank you very much, Orysia. I regret to announce that we are now pretty much at the end of our allotted time, so, my – first thing I need to say is, my apologies to those questioners who put questions in the Q&A, whose questions we didn’t get time to answer. But just to say, all of those questions, including the unanswered ones, are extraordinarily valuable to feed into the thinking as to where we go next. So, even if your question was not answered, thank you for your active participation in this discussion. I’m sure it’s a theme to which we will be returning, as we continue to participate in a collective effort, to refine the shape and nature and the mechanisms of a recovery programme for Ukraine.

So, once again, thank you all out there online who have participated in today’s session, and a special thank you to all our speakers, to you, Orysia, to you, John, to you, Nataliya, thank you so much for joining us today.

Nataliya Katser-Buchkovska

Thank you.

Orysia Lutsevych

Thank you very much, Simon, thank you.

John Lough

Thank you.

Nataliya Katser-Buchkovska

Thank you.

Orysia Lutsevych

Bye.