Funding the Ukrainian reconstruction: Building back better

It seems that 2025 will be the year when the war in Ukraine will come to an end. Across Europe, many are already working on potential ways to support the reconstruction efforts.

Let us start with some general thoughts on wars and how countries can be reconstructed, before we discuss the structure of the EU funds to support the Ukrainian reconstruction efforts.

General thoughts on wars

Wars destroy and disrupt almost every aspect of  everyday lives:

  1. Infrastructure like roads, bridges, water supply, electricity or telecommunication
  2. Residential and commercial buildings
  3. Economic activities
  4. Institutions like banks, insurances
  5. The social fabric of society

Infrastructure and building

Some wars have relatively little impact on the wider infrastructure and commercial as well as residential buildings. Examples would be the Gulf War, the Falkland War or some civil wars in recent European history. The Ukraine war, Gaza strip and Syria are examples where cities and regions have been almost completely destroyed.

Economic activities

In economic theory, companies are a bundle of contracts or relationships with suppliers, clients and employees. A typical bookstore has clients, employees and a few wholesalers to supply the books. Restoring the bookstore would be relatively easy. A factory with a long supply chain and specialized engineers producing car parts would have trouble winning back contracts once they are lost.

Institutions like banks and insurances

The loss of insurance coverage in certain parts of the southern US is a good example of how economic activities become unsustainable without several institutions. These institutions include banks, insurance companies but also registries, courts or chambers of commerce. Rebuilding these institutions seems to be a requirement for the reconstruction of areas.

Fabric of society

All economic activities are embedded in society. This society tends to be most impacted by wars.

First, wars force large segments to flee as we have seen in Syria, Ukraine or during the Yugoslav war. These people may never return or may find a very different environment once they return. Second, it erodes trust between segments of societies. That is why transparent governance, accountability and legal procedures are part of a restoration after a war. Third, it disrupts the large web of the social sector which provides services from education to healthcare and sports activities.

Ukrainian economy

The main driver of changes in Ukraine is the Russian invasion as shown in this map prepared by the Institute for the Study of War.

This war led to massive losses and damages for Ukraine. In a joint report of the World Bank, the Government of Ukraine, the European Commission, and the United Nations titled “Rapid Damage and Needs Assessment (RDNA3)” the losses, damages and needs are clustered across different dimensions.

The big question is how a peace agreement will look like and if Ukraine will lose some of its territory.

The Ukrainian economy has experienced four sharp GDP contractions of roughly 10% and more according to numbers from the International Monetary Fund. The first drop corresponds to the transition from a centrally planned economy to a market economy after the collapse of the Soviet Union.

The second major downturn occurred during the global financial crisis, which severely impacted Ukraine’s economy, particularly its reliance on exports like steel and chemicals, leading to a sharp contraction. Another contract happened following the Russian annexation of Crimea and the Donbas War. The war destabilized the economy with the associated uncertainty. The Russian full-scale invasion in 2022 led to the fourth and most severe downturn since the early 1990s.

At the same time, the population shrank from 51.6 million in 1990 to 33.4 million in 2024. That’s roughly a third of the total population, while other European countries have grown in the same period.

Let us now move to the funding of the Ukrainian reconstruction.

Ukrainian reconstruction efforts: EU funds

Ukraine’s economy used to be integrated in the Post-Soviet or Russian economic system. However, the Ukrainian people understood that the Western system is more attractive witnessing economic growth and change in living conditions across the border in Poland, Slovakia or Romania.

There is now a close relationship between Ukraine and the European Union. Ukraine is a EU candidate country since 2022 and the majority of trades (exports and imports) are with the EU. In addition, the EU is the largest investor as well as the largest provider of financial assistance.

Whoever follows EU policies, knows that it is difficult to keep track of all monetary flows since 2022 as it involves different institutions (e.g., EBRD, EIB, IFC, CEB or KfW), different programs and initiatives by Member States.

However, the EU and its Member States as well as the European financial institutions have earmarked more than €130 billion in total support since the start of the war:

For the reconstruction efforts, we can focus on three elements:

Funds to the Ukrainian budget: Macro-financial assistance and other support measures

As of January 2025, €25 billion were disbursed as Macro-Financial Assistance (MFA) and are tied to certain requirements. For example, the disbursement of €18 billion in macro-financial assistance in 2023 was tied to a number of conditions outlined in a separate Memorandum of Understanding which contained different sections. The section on “Rule of Law” included these 7 points:

  1. Finalising the selection [Q1 2023] and appointment [Q2 2023] of the new Head of the National Anti-Corruption Bureau of Ukraine (NABU).
  2. Re-establish the High Council of Justice and the High Qualification Commission of Judges (HQCJ) based on the current work of the Ethics Council and the Selection Commission [Q3 2023].
  3. Development and adoption of an overarching strategic plan for the reform of the entire law enforcement sector as part of Ukraine’s security environment [Q3 2023].
  4. Improving the selection of judges:
    1. (a) Making efforts to streamline the stages of selection and rearrange their sequencing;
    1. (b) Review of the length of the mandatory judicial training period;
    1. (c) Approval and publication by the renewed HQCJ of regulations on the selection of judges, including clear assessment criteria and scoring methodology [Q2/Q3 2023];
    1. Launching the procedure of selection of judges based on the improved framework [Q4 2023].
  5. Improving the Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regulatory framework by developing relevant secondary legislation and making progress in developing institutional capacities related to beneficial ownership [Q3 2023].
  6. Adopting and starting to implement relevant legislation aimed at criminalising large-scale smuggling of all goods, foreseeing effective prison sentences for each damage to the state budget above a defined threshold [Q4 2023].
  7. Further strengthening the capacity of the Specialized Anti-Corruption Prosecutor’s Office (SAPO), inter alia through introducing performance evaluation, improving the selection of its management, and other measures targeted to ensure its accountability and independence [Q4 2023].

An additional €12 billion were provided by Member States and included humanitarian assistance.

Funds for individuals

More than 10% of all building have been damaged through the war and it can be assumed that a majority is owned by individuals who need financial support to repair their homes.

Again, registers (check out this book) are a necessary prerequisite to distribute funds at this scale as outlined in the report by World Bank, the Government of Ukraine, the European Commission, and the United Nations:

The GoU established the Register of Damaged and Destroyed Property (RDDP), which mandates the verification and registration of damaged assets by territorial hromadas,173 and allows for monitoring he extent, nature, and location of damaged assets and progress on their repair and reconstruction. Individuals mainly need funds to repair their homes.

The necessary funds are then distributed by national and regional budgets.

There are also other mechanisms. The Council of Europe Development Bank (CEB) has approved this scheme for owners of destroyed residential properties:

In March 2024, the CEB approved a €100 million loan to partially finance a mechanism established by the Government of Ukraine to compensate the owners of residential properties destroyed by the war. The project will support eligible persons who lost their home by issuing approximately 3,000 housing certificates to purchase residential property.

Funds for companies: The Ukraine Investment Framework

It is obvious that the reconstruction of Ukraine needs support for the development of commercial activities. The main element is the Ukraine Investment Framework with the main aim to attract private capital and reduce the risk for private investors. Since the introduction of the Juncker Plan, the European Commission has a preference for guarantees as they have the best leverage.

The Ukraine Investment Framework includes €9.3 billion in guarantees and grants which aims to mobilize €40 in public and private investment. These structures are managed by the EIB Group (European Investment Bank), IFC (International Finance Corporate), EBRD (European Bank for Reconstruction and Development), CEB (Council of Europe Development Bank) or the German KfW (Kreditanstalt für Wiederaufbau). There are also funds which are managing the investment process such as the Luxembourg-based Green for Growth Fund or the European Fund for Southeast Europe (EFSE).

In practice, it means that companies can apply for loans either through local banks or directly with one of the institutions mentioned above. There will also be options to access equity investments via dedicated equity funds or again via the institutions mentioned above.

In addition, there will be multiple programs to support investment or research with grants as well as export guarantees. Next week’s article will cover the different strands in more detail.