The money the West grants to support Ukraine’s economy and military campaign gets a lot of attention. So far the West has sent a total of $133bn to Ukraine over the last three years, according to the Ministry of Finance (MinFin) and continues to get a bit less than $40bn a year, although MinFin is anticipating that to more than halve in the next two years. From a fiscal point of view, Bankova needs the war to stop in the next year or so as it will become increasingly difficult to finance.

However, there are two other big and important funding questions that get almost no attention. The first is how is the reconstruction going to be financed? The second is that the EU is about to reimpose duties on Ukraine’s exports to Europe in June and that will swell a $20bn trade deficit that is already growing in the first quarter of this year. Ukraine’s corn and metal exports – two of the biggest revenue earners – are already becoming uncompetitive with rivals. How will that be funded?

The most recent World Bank estimate of the cost of the damage to the economy was $524bn, of which $178bn is physical damage – the housing, transport, energy, commerce and industry and education sectors, including 13% of Ukraine's entire housing stock needing repairs or rebuilding, some 2.5mn households.

Private sector investment

Where is money going to come from? The common plan is that the “private sector” will provide it but, having talked to a lot of fund managers that know Eastern Europe, they all say they won’t commit anything until the risk of a second Russian attack falls away. Don’t bank on seeing funds like Blackrock or private equity houses moving in for years.

The G7 issued a communiqué on May 23 re-emphasizes that mobilizing the private sector will be “crucial” for Ukraine’s recovery and reconstruction. “We collectively commit to help build investor confidence through bilateral and multilateral initiatives,” the signatories to a joint communiqué adopted following the G7 finance ministers' summit, which concluded in Canada Ukrinform reports.

Moreover, the G7 is so sure of the flood of inbound private investment it warned that Russia and its allies will not be allowed to profit from investing into Ukraine.

“We agree to work together with Ukraine to ensure that no countries or entities, or entities from those countries that financed or supplied the Russian war machine will be eligible to profit from Ukraine’s reconstruction,” the document states.

Some direct investors might move a little faster. The FMCGs (fast moving consumer goods) companies are in it for the long haul and so are usually willing to invest as soon as physically possible, as for them it's all about grabbing as much market share as they possibly can as soon as they can and then hunkering down until the market eventually booms. They have decades-long time horizons, which is why some beer and fag companies like Carlsberg and Phillip Morris have already made investments into factories in Ukraine. I also discovered in the early 1990s in Russia that luxury luggage companies like Samsonite get into emerging markets very early for much the same reason: people tend to buy only one set of posh luggage in their lifetimes.

But even this foreign direct investment (FDI) will be minimal and won't touch a lot of things that need investment most. FDI has been on its back since the war started, falling 97% year on year to a mere $121mn in 2022, before bouncing back to $4.8bn in 2023 (which is still peanuts for the $200bn Ukrainian economy) and is expected to have received about $4.3bn in 2024. (The final number is not out yet.) At this rate it will take Ukraine 125 years to raise the money to rebuild its economy.

The biggest source of investment capital in the meantime is going to be development banks like the EBRD and the IFC that are going to carry the bulk of the load. Also quango development banks like the European Investment Bank (EIB), which is a proxy tool for EU-back investment aid to Ukraine, are already playing an important role. The EU is now sending Ukraine about $1bn a month, as part of the G7 $50bn loan to Ukraine, approved on June 13 at a G7 summit in Italy, backed by Russia’s frozen assets.

If you add up all the Multilateral Development Bank (MDB) pledges then there is some $75bn due over the next decade, which is still not enough but it can at least make a real dent in the physical damage repairs.

However, during conversations at the recent EBRD annual meeting in London it was pointed out to me that most of the extreme damage – cities wiped off the face of the earth – is in eastern Ukraine and still under Russian occupation. It is Russian President Vladimir Putin who will have to pay for that repair work, not Ukrainian President Volodymyr Zelenskiy.

Now it becomes more interesting. The experts I talked to estimate that some $300bn worth of damage has been done in the occupied territories, leaving Bankova to deal with the remaining $200bn worth of destruction, which isn’t as bad anyway.

If you use the same proportions of overall damage to physical damage that the World Bank does then the bill for physical repairs in the parts of Ukraine under government control comes to a much more manageable $68bn – in other words the MDBs can fund all of those repairs and as part of the “build back better” programme I'm sure we will hear a lot about when a ceasefire comes and these programmes get under way. Indeed, people like the EBRD are already doing the preparatory work for the obvious things, starting with emergency residential construction and small-scale local generators to power things like hospitals and villages.

The key issue is if enough money can be invested to start a virtuous circle of: investment that primes a local economy, leads to jobs and rising incomes, to consumption, to profits, and closes the circle with increasing investment. How much pump priming money is needed to start the wheel turning? That is an open question.

Ironically, the problem of rebuilding the occupied territories has led to a little noticed comment by the Kremlin saying that it is not entirely against signing over the frozen $300bn of CBR money to the West, but only if “part of that money is used to rebuild the occupied territories.” Clear the Kremlin realises that hanging on to the four regions it annexed in particular is going to come with a massive reconstruction bill, as well as subsequent subsidies in the peace, if it hangs on to them. Gifting Ukraine the $300bn, but with a commitment to investing in Donbas, is one of the practical ways for the Kremlin to claw back at least some of this money, as surely at this point Putin never expects to see that money again even if there is a ceasefire.

Trade deficit

The West has sent a lot of money to Ukraine, but actually the EU is making a $20bn a year profit from trade with the country. It exports more to Ukraine than it imports, and those exports are going up.

One of the most useful funding policies the EU put in place in 2022 was to suspend the incredibly restrictive duties and miniscule duty-free quotas it granted to Ukraine as part of the pre-war Association Agreement and Deep and Comprehensive Free Trade Areas (DCFTA). For example, Ukraine is a big producer of honey, which is also made in the EU, but the duty free export of honey quota for honey was so small that it was used up every year before the end of January.

Opening the borders to Ukrainian products allowed Kyiv to earn money from trade to supplement the Western loans and grants. And that caused problems. Last year cheap Ukrainian corn wrecked the Polish grain market, causing prices to collapse in this key sector, and on June 5 the EU is due to reimpose the limits and duties on 30 Ukrainian products – mostly in the agricultural sector. These won’t be dropped again until Ukraine becomes a member of the EU, in at least ten years’ time.

Polish Prime Minister Donald Tusk, who is chairman of the Council of Europe until July, was explicit about this dual view of Ukraine saying that he supports Ukraine politically in its struggle with Russia, but not at the expense of Polish farmers, a core election constituency. There is a double standard here: the EU is willing to support Ukraine but only as long as it doesn’t bring it into a potential military confrontation with Russia and as long as it doesn’t negatively affect member states’ agricultural sectors.

In the meantime, officials in Kyiv are desperately looking for new markets and have done deals in the Middle East, Africa and Asia. Zelenskiy even asked US President Donald Trump for a free trade deal, but instead has got the basic 10% tariffs everyone else got.

How big a problem this will be going forward is hard to say. When Ukraine broke off trade relations with Russia in 2014, which used to buy half of its exports, it actually proved very good at finding new markets for its goods, pretty quickly. Given we now live under Trump’s transactional multipolar world model it should be able to do the same thing again and the Global South is also open for business and increasingly active. But in the short term, funding the trade deficit will be a headache that the EU is about to make a lot worse.