More money or promises? What to expect from the London conference on the recovery of Ukraine
And why the Ukraine Recovery Conference won't prompt a rapid influx of investments into the country
On 21–22 June, Ukraine will present another plan for the country's restoration at the Ukraine Recovery Conference in London. This is essentially a logical continuation and, to some extent, a reinterpretation of the so-called "Marshall Plan" for Ukraine, which was presented a year ago in Lugano, Switzerland.
Ukrainian authorities are counting on the fact that they will be able to revive the international community's interest in Ukraine's problems and attract investments into our economy as soon as today.
"This (the conference in London) is a continuation of the great recovery movement we started a year ago in Lugano. Our goal is to mobilise as much international support as possible and establish mechanisms through which this aid will come timely and rhythmically", Prime Minister Denys Shmygal said about his expectations for the Ukraine Recovery Conference.
Mind found out what proposals Ukraine is taking to London and what results this event can bring.
What proposals did Ukraine bring to London? The Ukraine Recovery Conference is already in its sixth year. The event was first organised in 2017 and was intended as a Conference on the issues of Ukraine's reforms and transformation. But in 2022, due to the outbreak of a military conflict, the event changed its format. Its main focus became mobilising international support for the economic and social stabilisation of Ukraine and its post-war reconstruction.
Unfortunately, at the time of publication, the presentation of the updated plan for the restoration of Ukraine has not been released. However, Denys Shmygal talked about what key aspects will be dedicated to the conference.
- Rapid recovery. First and foremost, this concerns energy, critical and social infrastructure, and housing restoration. The Cabinet of Ministers hopes to mobilise the necessary resources for this recovery. For this purpose, a meeting of the so-called "financial Ramstein" will be held, which will help to find these resources.
- Attracting private investment. The Ukrainian delegation plans to present the most promising directions for investment and promises to take important steps for investors regarding the insurance of military-political risks.
- Regional development. This is about activating connections between Ukrainian communities and international partners to implement joint projects. As the Prime Minister reported, over 200 projects have already been launched. There is a need for many more to start.
"As a result of the conference in London, we expect to sign a series of important agreements, memoranda, and declarations that will accelerate our recovery and development," Shmygal stated.
Thus, if in Lugano Ukraine presented a long-term and comprehensive strategy for post-war recovery, which was scheduled for 10 years, in London, it is evidently about urgent measures that need to be taken right now, without waiting for the end of hostilities.
No one is fundamentally refusing from the previous plan. However, since the war is dragging on and its devastating consequences for the Ukrainian economy are becoming increasingly large-scale, it is entirely logical that the Cabinet of Ministers intends to promote the voiced ideas among international partners who can help not only with words but also with actual financial support.
How does the Ukrainian government intend to motivate investors? The government is trying to convince potential investors that things are not so bad in the Ukrainian economy. Therefore, investing money here is both possible and necessary. This is the signal that will be transmitted to the participants of the Ukraine Recovery Conference in London.
In particular, the Ministry of Economy came up with several encouraging theses before the conference. The Ministry reminded that in the first quarter, Ukraine's GDP grew by 2.4%, and announced that the government intends to upgrade the GDP growth forecast for 2023 to 3.2%.
The Ministry also set a target of $1 trillion in real GDP. Although it did not specify the time frame within which such an indicator will be achieved. But this clearly refers to last year's plan, outlined up to and including 2032. That is, the task is – $1 trillion in 10 years.
In these same 10 years, Ukraine wants to increase the generation of "green" energy tenfold – up to 100 GW, and at the same time feed about 600 million people all over the planet, which implies growth and scaling of the agro-sector.
Moreover, Ukrainian business is literally a model of resilience. Entrepreneurs and companies, despite military threats (unending shelling, military operations in some regions, etc.), adapt to such realities and continue to operate. For example, the Business Activity Expectations Index (BAEI), calculated by the National Bank, was 50.5 points in May. This is above the neutral level of 50 points and indicates expectations of an increase in production, trade and service volumes.
What's wrong with the macro indicators and the Cabinet's forecasts. In principle, such references do indeed allow investors to paint a picture of economic realities in Ukraine. But the problem is that the government's forecasts and expectations appear somewhat inflated and embellished.
The Ministry of Economy already downgraded expectations for GDP growth in 2023 from 3.2% to 1% in March. And suddenly – a return to the previous figure of 3.2%. International donors are even more conservative and cautious.
According to estimates by the World Bank and the European Bank for Reconstruction and Development, Ukraine's GDP will grow by a maximum of 0.5-1% in 2023. And the International Monetary Fund (IMF) gives a corridor from a fall of 3% to a growth of 1%. Moreover, all these forecasts do not take into account the consequences of the destruction of the Kakhovka Dam, which, according to various estimates, can "eat up" up to 0.3 percentage points of GDP growth.
Even the actual GDP figure for the first quarter of 2023 at 2.4% is given compared to the fourth quarter of 2022. But if we take the year-over-year value, i.e., to the first quarter of 2022, it will not be growth, but a decline of more than 10%.
And the figure of $1 trillion GDP looks, of course, beautiful (especially for a presentation on a big screen), but it's also disconnected from reality. To verify this, one simply needs to open the memorandum between Ukraine and the IMF. It has a detailed macro forecast until 2032. So, the fund calculated that in 2032, Ukraine's nominal GDP will be around 16.4 trillion hryvnias.
Even if we hypothetically assume that the official exchange rate will remain at 37 UAH/$ by that time, the nominal GDP will be around $440 million. That is, half as much as the Cabinet promises. And this is despite the fact that the real growth of the Ukrainian economy, according to IMF estimates, will reach 4-6% per year from 2025. Therefore, in order to fit into the "trillion" expectations of the government, GDP has to grow almost twice as fast for 7 years.
What could be the result of the Ukraine Recovery Conference – 2023? As a result of last year's conference in Lugano, Ukraine was able to secure funding of $1.9 billion. At the same time, the presented plan for the country's recovery at that time was estimated at $750 billion. Yes, this is spread over 10 years. But those almost 2 billion against the background of this sum look, to put it mildly, meagre.
We should, of course, not forget that international partners already allocate considerable amounts of financial aid. These are both loans and grants. Their volume for 2022 was about $32 billion. The plan for 2023 is $41-44 billion. At the same time, most of the funding goes to cover the deficit of the state budget, for payments on "old" debts. In addition, the Minister of Finance Sergiy Marchenko stated at the end of May that Ukraine wants to receive about $14 billion in 2023 specifically for recovery and stimulation of the economy.
However, it should be taken into account that this money comes from those donors with whom long-term agreements already exist. These are the governments of the main partner countries, such as the USA, EU countries, the UK, Canada and so on, as well as financial institutions – the IMF, the World Bank, the EBRD, the International Finance Corporation.
Therefore, the London-based event, as has already been said, is most likely a call to investors, to big international business to participate in the recovery of Ukraine. But is foreign business ready to invest capital in a country at war? A big question. For instance, the volume of FDI in Ukraine in 2023-2024, according to IMF estimates, will be $0.6 billion per year. Only from 2025 will the growth of foreign investments begin, and in 2028–2032 the amount of FDI will approach the mark of $10.5 billion per year.
And this is very little, considering the colossal need for money to eliminate the consequences of the war. Moreover, as long as hostilities continue, losses are also growing. According to the UN and Cabinet estimates, by the beginning of April, the damage caused to Ukraine by the war exceeded $400 billion. And in June, this figure approached $500 billion.
But it's not just about war. Foreign companies want to invest in countries with a stable regulatory field, with a fair judicial system and with predictable tax legislation that promises investors some benefits. Meanwhile, the Ukrainian government, on the contrary, is moving towards increasing tax pressure, justifying this by the need to fill the state budget. And the IMF, which may soon allocate another $900 million tranche, has taken a commitment from Ukraine to refrain from any actions that could undermine tax revenues. By the way, in the Economic Freedom Index (compiled by the Heritage Foundation research centre) Ukraine is well below the 100th position. This is another bad marker for investors.
So, the event in London is an opportunity to once again gather the international community under one roof and secure agreements for the post-war future. But hoping that the Ukrainian delegation will return home with suitcases packed with money is probably not worth it. Especially since the world is firmly entering a recession, and even the wealthiest companies are beginning to count money, cut expenses and roll up investment projects.
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