The much hyped second Ukraine Recovery conference was dealt a heavy blow after the EU appeared to announce that it was abandoning the idea of seizing the circa €200bn of Central Bank of Russia (CBR) money frozen in the first days following the start of the war over a year ago.

Without that money it will be extremely difficult to fund the reconstruction effort after Russia has done an estimated $411bn worth of damage. Ukrainian President Volodymyr Zelenskiy said in his comments to the delegates of Western leaders, top Ukrainian officials and captains of industry that there was “decades worth” of building to do.

As bne IntelliNews has reported, there has been an European Commission legal team working on this problem for months. At first they couldn’t find about €160bn worth of the money, but it eventually turned up in Euroclear in Belgium, where it is mostly invested into AAA securities.

Actually the EC legal team has been saying for weeks that they don’t see a legal way to seize the money without declaring war on Russia, as we have reported, and if it is done anyway that could cause serious problems for the global financial system.

So where is the money going to come from, if not the CBR’s money, which is an annoyingly large amount that would have solved most of the funding problem at a stroke.

The reporting on the conference is still coming out and there are a dozen lines, but my take is that it was clear the main thrust of the event was to plead with the private sector to come and invest in Ukraine and the EU officials think that will produce the necessary cash.

I doubt that is going to work. The first problem is the sheer scale of money needed. $400bn is four times more than the entire nominal value of Ukraine’s pre-war economy. You are asking investors to buy four Ukraines that, when repaired, will produce the output of presumably one Ukraine. The logic of this pitch looks skewed.

The second problem is that even if there is a ceasefire then the danger that Russia launches a second attack on Ukraine remains. UK Prime Minister Rishi Sunak told the conference that the UK is going to organise special military risk insurance to quash that fear, but the removal of that danger doesn’t really help the investment climate.

But there is a much bigger hurdle than that: after failing to make any substantial reforms in the last three decades, Ukraine has a terrible investment climate. The basics of corporate governance, property rights, a working judicial system, contract enforcement – it’s all largely missing.

There was an investment boom in 2006 when the country seemed to have finally turned the corner and started to grow strongly. Foreigners flocked to Kyiv and bought up banks for crazy money, but they were badly burned when the bubble popped in 2008, and they haven’t really been interested since.

I went to investment conferences after the Orange revolution as well as after the EuroMaidan revolution, with most visiting in the euphoria following Zelenskiy's election. I talked to Western fund managers with a mandate for Eastern Europe, many of whom I have been talking to for years, and asked them if they were going to invest. “Yeah, it looks good, but we are going to wait for a bit and see if they stick to the plan.”

For most of the last decade investors have been demanding real concrete reforms to set up the basics of business to protect their investments – and to a large extent they are still waiting.

Foreign direct investment (FDI) flows into Ukraine has also been disappointingly low for most of the last decade. The banking gold rush saw FDI peak in 2008 at $10.7bn but then fell off to zero at the lows in 2015 and 2020. The only sector that has seen any serious outside interest is in renewables, which has attracted a total of $5bn since 2014. But that soured too when the government tried to renege on paying out on attractive green tariffs and retroactively reduce the rates. After a year of hot heads the government only caved in after a third of the companies threatened to invoke Ukraine’s investment treaties and go to court. The government raised a billion dollar bond and paid off its arrears.

There has been some progress. The project to hook Ukraine’s domestic bond market to Clearstream knocked it out of the ball park as international bond traders flooded into the high-yielding Ukraine’s Ministry of Finance federal treasuring bonds (OVDP), creating a very useful new $5bn a year funding source for the government. The Clearstream project came with legal reforms to underpin the market, so it can be done.

Trouble is, the war means all those bond investors just got burned again. When the war started the international bond investors all made for the door at once, but as a smaller underdeveloped market those doors are not very big and not everyone could fit through at once, so the prices tumbled. Today the share of foreign investors in the OVDPs is only 3%, down from a peak of 15%.

For comparison, the stock market remains tiny and has never attracted any serious Western investment, despite several attempts to kick-start the market (including a joint venture with Russia). The daily turnover in the 220 listed companies is only $30mn-$60mn a day for the entire market. By contrast, the daily turnover on the Moscow Exchange is several billion dollars. With liquidity on the Ukrainian exchange so low a single investment of a trivial $5mn will send the market soaring.

The lack of a functioning capital market also makes private equity investments less interesting. Russia’s equity markets have been cut off from international capital, but its size and robust liquidity means it is still a viable market for a local IPO that can raise tens and even hundreds of millions of dollars. The Moscow Exchange recently said it has 40 IPOs in the pipeline, although it remains to be seen how successful those will be. The first attempt at a domestic IPO since the war started fell at the first fence.

Investors into Ukrainian companies could hold an IPO on the Warsaw Stock Exchange as the biggest market in the region after Russia, but that has not seen an IPO for more than a year and liquidity there is also bounded.

An exit to a strategic investor is another classic route, but you also have to contend with the oligarchs if you have built a sexy enough business that someone like Procter & Gamble wants to buy it. Just how weak the property rights in Ukraine are was highlighted by the government’s seizure of the assets of Smart Holding in April. One of the largest and most successful industrial groups in Ukraine, the authorities were able to seize control of everything in a matter of days without a court order on the basis of an investigation that accused the owner Vadym Novynskyi of being a Russian agent, something he denies. Novynskyi, one of the ten richest people in the country, is a devout man and had given up business to become a priest in the Ukrainian Orthodox Church, which is nominally under the control of the Moscow Patriarch.

Zelenskiy made some big promises at the London event, saying that the entire government will be put online and Ukraine is going to be a paragon of transparency and corporate governance. He basically proposing to cram three years-worth of reforms down into a few short years.

German Foreign Minister Annalena Baerbock said Germany was planning to offer investment guarantees, which could be significant, and called on other countries to do the same. But for a sovereign to underwrite $400bn worth of investments doesn’t seem like a realistic proposal either, as that becomes a huge liability.

The attitude of private investors is likely to remain the same as it has done for most of the last decade: “Great! But I’ll believe when I see it, and more importantly [when] I see it working.”

Private investors will go into Ukraine. The day before the reconstruction conference cigarette-maker Phillip Morris said it was spending $30mn on a new factory this year and brewer Carlsberg said it was investing $40mn into restarting its three breweries. But to rely on the private sector to come up with hundreds of billions of direct investment is at best going to take a very long time to happen.