How Will Ukraine Rebuild (and Who Should Pay)?

BRUSSELS — Even as Russia’s war on Ukraine grinds on with no end in sight, Ukraine’s allies are facing complicated questions about the country’s reconstruction.

Who will pay for what, and who should control the process and funds? What kind of external oversight of the money should be required and what changes must Ukraine make?

An international conference on reconstruction is scheduled for next month in Berlin to grapple with those thorny issues, and also determine whether reconstruction should begin before a peace settlement. There is also the vexed question of what kind of security guarantees should be offered to encourage private investment in the rebuilding.

To that end, the German government has asked a research institution it helps finance, the Washington-based German Marshall Fund, to come up with proposals for donor countries. Their report was provided to The New York Times and is already being discussed among donor countries as “a private note to stakeholders.”

Among the key recommendations are that the Group of 7 industrialized nations appoint a Ukraine coordinator to oversee reconstruction, ideally an American with global stature; that existing institutions be used for the project to ensure timeliness; and that different multilateral financial institutions should be used, to limit the influence of Russian or Chinese board members. The report also says that Ukraine must accept strict oversight of the funds, as well as strengthening its legal and judicial systems, to reduce the potential for corruption.

“The vision of a free and democratic, modernized and European Ukraine is the answer” to Russian aggression, the report says.

In June, at an international conference in Lugano, Ukraine presented its own national recovery plan. But its democratic allies have not responded in kind, with the Berlin conference already postponed a month until late October.

This report tries to fill the void and deal with the main challenges. First, how to keep Ukraine afloat, given that it needs some $5 billion to $6 billion a month to finance the government, according to the International Monetary Fund. “Reconstruction won’t be possible with a collapsing, failed state,” said Thomas Kleine-Brockhoff, Berlin director of the German Marshall Fund and one of the authors. Donors need reassurance to keep pouring large sums of taxpayer money into a state that has a reputation for corruption.

That leverage will push Ukraine to overhaul its institutions and courts if it wants a rapid integration into Europe, the report says, along with the help of the European Union, which has high legal standards and has offered the country candidate status.

“We will also need very solid donor oversight, and Ukraine must understand that,” Mr. Kleine-Brockhoff said. Ukraine would need to appoint an independent inspector-general with real teeth and join the European Public Prosecutor’s Office, designed to investigate fraudulent use of E.U. funds. Foreign aid of this size will require foreign oversight, which Ukraine must accept, the report says.

Another challenge is whether to create new institutions for the massive reconstruction project; the report suggests that is unnecessary and would waste time. Funding should be phased with the progress of the war and any eventual peace, moving from relief and reconstruction to modernization and eventual accession to the European Union.

Non-European donors from the Group of 7 would front-load aid, with the European Union gradually becoming the predominant donor as international interest fades. The United States would continue to be the largest contributor to Ukraine’s security, while other countries would invest more in recovery and modernization.

The report envisages a total of some $100 billion over time to rebuild Ukraine’s infrastructure, far less than the $750 billion over 10 years that Ukraine cites, but in line with a study from the Kyiv School of Economics, which in late August estimated the cost of damage at that point at $113.5 billion.

But much of that money would have to come as grants or extremely long-term loans, given the financial pressures on the Ukrainian government. Those are decisions that European countries must make soon, the report says, because other countries are likely to condition and scale their own contributions on what Brussels gives.

Some suggest the European Union should come up with more collective debt to fund Ukraine’s reconstruction, but large countries will object to that, especially given current demands from high inflation and energy costs. One senior European minister, who spoke on condition of anonymity because of the sensitivity of the topic, ruled out the use of new collective debt, saying he had to take care of his own people first. Ukraine deserves and will receive financial help, but any new funds raised in that way should be used for E.U. countries, he said.

Some countries, like Estonia, Latvia, Lithuania and Slovakia, have also suggested confiscating the $300 billion of Russian Central Bank assets frozen in the West to rebuild Ukraine, and in June, the Group of 7 committed to exploring their use. But the report regards that as unrealistic in the short term, possibly illegal and hard to get through the courts. Instead, the authors suggest, as part of any settlement, that Russia be asked to provide a percentage of those assets for Ukraine in return for getting the bulk of them back.

“Obviously that depends on the outcome of the war,” Mr. Kleine-Brockhoff said. But Ukraine has immediate financial and military needs that must also be met.

Beginning serious reconstruction while the war continues is a difficult task, and it would only be after some sort of settlement and some special “war insurance” arrangements, backed by states, that Ukraine could expect to attract much private investment, Mr. Kleine-Brockhoff said. “Without peace and security Ukraine would need ever more grants and that becomes unrealistic,” he said.

Another author of the report, the economist Jacob Funk Kirkegaard, added: “Of course there is uncertainty about when the war ends and how, but there will be a sizable bill for Ukrainian reconstruction and there is an urgent need for that not to linger.”

There is inevitable reluctance from big countries like Germany and France, facing their own domestic economic challenges, he said. “But we can’t allow this to linger, so we need to think hard about how Europe pays for the vast majority of it. And we have to ensure that there is a clear trans-Atlantic aspect and an inclusive framework that includes the G7 and others,” like the Turks and even the Chinese.

“A Ukraine that isn’t quickly rebuilt can’t enter accession negotiations with the E.U. and can’t be a viable state,” Mr. Kirkegaard said. “No one wants Ukraine to be a failed state.”