I am speaking today at Chatham House on the state and prospects for the Ukrainian economy. I know it’s a bit naff - and I did not go to business school - but I think a SWOT framework helps explain the story.

I would start here by arguing that the Ukraine recovery/reconstruction is the most important eco-strategic project for the West since the fall of Communism in 1989, and the transition from plan to market which saw the creation of the EBRD – this project is that important

  • War will likely end in 2024/2025;
  • Russia has no path to victory in Ukraine, it cannot secure/hold much more territory;
  • Ukraine has proven it is sustainable on 85% of territory as of independence in 1991, and could still take more territory back thru on-going counter-offensives;
  • Ukraine has proven its durability and, thru innovation, its economy has continued to function – banks, infrastructure, telecom, trade – macro financial has proven remarkably stable (FX reserves at record highs);
  • Talk of Ukraine’s “State of Israel” moment – innovation plus tech, plus Western aid and defense spending being transformational;
  • Ukraine has suffered a huge economic loss – 30% real GDP decline, $50bn annual GDP loss, and estimated (KYIV School) $349bn loss in infrastructure/assets as of March 2023, and counting;
  • Ukraine has demonstrated its critical importance as a buffer against future Russian aggression against Europe – and the West has committed long term to its succession transformation via:
  • $150bn+ Western financing to Ukraine from Feb 2022 to date, and EU commitment of EUR50bn for period to 2027;
  • EU has green lighted EU accession for Ukraine (potentially game changer);
  • Form of longer-term defense commitment/security guarantees in the offing;
  • Likely longer-term access to $300bn+ in frozen Russian assets for reconstruction, at the minimum likely early access to up to $5bn pa in interest earned on $150bn in assets in Euroclear;
  • Low base recovery expected (real GDP growth of 5-10% pa possible), with possible $25-50bn pa reconstruction spend makes Ukraine the best recovery opportunity in Emerging Europe since Glasnost/perestroika and the Transition from plan to market after the collapse of the Warsaw Pact and the USSR in 1989/1991.

Key country Strengths:

  • Macro-economic stability demonstrated thru the war;
  • Strong/proven technocratic reform cadre at NBU, MOF, et al;
  • Resiliency in infrastructure et al, - money, banks, roads, rail, energy and telecom infrastructure all work, despite war;
  • Proven resiliency/competitiveness of food/agricultural sector – ability to survive and export, whatever;
  • Civil society/NGOs have a strong drive/desire for change, and strong public backing which could drive economic reform forward;
  • EU accession angle – experience from Copenhagen 94’ is that real EU accession perspective drives reform in emerging Europe. Being given a date will be critically important – to be believable for foreign investors and the local population.

Key country Weaknesses

  • Ingrained corruption – and evidence suggests that it has continued/even worsened in some respects during the war;
  • Loss of much of traditional industrial/export base particularly in the East – metallurgy, ports, export potential;
  • Depleted labor force: Out-migration of young, women – perhaps as many as 5 million; death/injury to many in the war;
  • Loss of much of the social infrastructure (schools, hospitals) needed to encourage return of refugees;

Key country Opportunities

  • Low base for recovery – one third real GDP decline in 2022 – provides opportunity for big bounce back, but then what?
  • Huge initial reconstruction needs/likely spend ($500bn?) – most exciting reconstruction/recovery/strategic project since 1989/91 and the transition from plan to market;
  • Experience gained during war, and need for continued defense makes Ukrainian defense/IT sector a beacon for the future;
  • Ability to build back better – blank piece of paper;
  • Ukraine’s “State of Israel Moment” – direction of travel is clear, no other way forward.

Key country Threats

  • Risk of elongated war, and continued security risks from Russia;
  • Financing – how will it be funded? Political flux in the US/EU could threaten continued financing of war effort and recovery;
  • Lack of clear institutional framework around reconstruction and recovery – is there need for a Ukraine Recovery Agency, akin to EBRD?
  • Is there commitment from West to do what it takes to fully utilize frozen Russian assets for Ukraine
  • Expectations of the local population – 1 million soldiers returning from the war will demand a better life. Risk of institutionalizing problems in high war pensions (experience of Croatia here salient) – might need to be resolved by solutions such as land grants to soldiers;
  • Vested interests – resistance to change still from traditional sources (oligarchs);
  • Ukraine has no market access after the August 2022 debt standstill deal – debt restructuring talks could be long drawn, limiting early market access and constraining private sector financing of recovery;

Reprinted from @tashecon blog!  See the original here.

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