What is in store for Ukraine? There are two starkly different possibilities. It can become Finland — a country that lost a war, lost a tenth of its territory, swallowed neutrality, and then got rich. Or it can become Afghanistan — invaded twice, rebuilt never, and abandoned to forty years of ruin.

If the war ends in a durable settlement, Ukraine could emerge as a heavily armed but increasingly prosperous European state. If it ends without security, functioning institutions or sustained investment, the country risks sliding into permanent instability and dependence.

Which one it gets was thrown into sharp relief this week, when Volodymyr Zelenskiy sacked his defence minister and Ukrainians took to the streets for the second time since the war with Russia broke out to protest against their own president.

Zelenskiy is proposing to replace incumbent tech entrepreneur Defence Minister Mykhailo Fedorov with an old school former policeman Ihor Klymenko. The two candidates could not be more different.

Fedorov is young and tech savvy who in his six months on the job took the venally corrupt defence ministry by the scruff of the neck and shook it up with spectacular results. In his parting gibe at Ukrainian President Volodymyr Zelenskiy he listed his 22 achievements starting with a deal he brokered with Elon Musk to get access to Starlink for the Armed Forces of Ukraine (AFU), as well as buying more drones in four months this year as were bought in all of last year. Possibility more significant was his backing of the development of medium-range drones and persuading Musk to cut off Russia’s access to Starlink that has caused chaos in Russia’s supply lines.

Zelenskiy preferred replacement is current Interior Minister Ihor Klymenko, a career policeman who is steeped in the traditional bureaucracy of internal affairs.

The two men offer different visions of how to fight the war with Russia. Fedorov wants to digitize the army and use data and drones to defeat Russia. Klymenko promises a crackdown on draft dodging and bolster the size of the Armed Forces of Ukraine (AFU) and deal with Ukraine’s chronic manpower shortage.

Zelenskiy himself formally blamed Fedorov’s failure to solve the mobilization crisis as the reason for Fedorov’s dismissal, although everyone agrees it was actually due to a clash with Commander-in-Chief Oleksandr Syrskyi. The reformer lost to the old guard. Add a point to the Afghanistan scenario.

The bigger picture is the stark contrast Ukraine is facing if it fails to meet the challenge posed by Russia’s invasion and occupation of a fifth of Ukraine’s territory.

The optimistic outlook is if the conflict is frozen then Ukraine will become a new Finland, which fought the Soviet Union in the Winter War with the USSR in 1939-1940 during WWII. It also lost 10% of its territory (what is today’s Karelia region), but adopted a strict policy of neutrality, restored commercial ties with what became Russia, and invested heavily in industry and society to become one of the most prosperous countries in Europe.

The pessimistic outlook is Ukraine will end up like Afghanistan. In the 1960s Kabul had a westernised elite and a fragile modernising experiment. But after it was invaded by first the Soviets in 1979 and later by the US the country was turned it into a backward theocracy with a dysfunctional economy. The Americans spent 20 years trying to set up a democracy, but two weeks before the US pulled out the Taliban entered Kabul on August 15, 2021 and retook control. The country reverted to the chaos of the interregnum between the Soviet and US invasions.

Finland was able to blossom as despite its loss of territory to the Soviets, the ceasefire agreement fixed the borders and the policy of neutrality delivered a stability that allowed the government to focus on rebuilding the economy.

Afghanistan’s failure was not simply the product of religion, opium production or remote geography. It reflected weak institutions, factional politics, porous borders, dependence on foreign support and the absence of a political order capable of surviving after its external sponsor withdrew. The borders were never secure and its remote location and extreme Islamic government and opium production made it a safe haven for drug dealers and terrorists.

There are two elements that Ukraine needs to recreate to access Finland’s success and avoid Afghanistan’s failure: a security deal and neutrality.

Security deal

Zelenskiy has been pushing for a real security deal as part of the last nine month’s of peace talks.

The security deal is key. If the conflict is frozen but there is no deal then there is nothing to stop Russian President Vladimir Putin from reinvading Ukraine in a few years’ time and without the Donbas Fortress Belt, Russian troops have a clear route to march on Kyiv more or less unopposed. With this sword of Damocles political risk hanging over their head, no international investors will invest in Ukraine and pay for its recovery. But with a strong security deal, the cost of a new invasion that would trigger a western military intervention becomes unthinkable for the Kremlin.

The EU has refused point blank to provide Ukraine with a security deal, either in the form of Nato membership or on a bilateral basis. All it has come up with is the wholly inadequate “deterrence force” – a few thousand EU troops stationed on the western border as far away from Russian occupying troops as possible – or a Nato-lite deal that doesn’t actually include an Article 5-like  collective security clause.  The EU refusal to commit to its ally is a big point for the Afghan scenrio

The US President Donald Trump has been far more generous. He has offered a real Article 5-like security deal twice that would solve Ukraine’s security problem: once as part of the 27-point peace plan (27PPP) that was thrashed out with Putin at the Moscow meeting on December 3; and again at the Ankara Nato summit on July 8. Potentially this is a big win for the Finland scenario.

Just how real these offers are with Trump’s increasingly isolationist stance as part of the post Pax Americana era we have now entered remains unknown, but the promise of a deal is on the table.

Neutrality

Ukraine’s neutrality was written into its founding documents in 1993 following its independence and then was enshrined in the constitution until former President Petro Poroshenko changed it to make Nato membership a “national ambition” in 2014.

Neutrality is the complement to a security deal. The two work hand in hand to create a viable investment climate. Currently there is zero talk of returning Ukraine to its neutrality, which should at least be an option in the cease talks. As IntelliNews has long argued, even better would be to do a new pan-European security deal that includes Russia as the easiest way to solving the security deal issue – something that the Kremlin proposed in 2008.

During the Cold War tensions between the East and West were high, but the Soviet government was happy with Finland’s neutrality and built up a pragmatic, but working relationship. Not that Finland ignored the potential military threat of another Soviet invasion; today it has one of the best prepared and equipped militaries on the Continent, via a massive reservists system that includes about 15% of its population, vastly bigger than any other European nation.

The Finnish reservist model to provide for its own security would be an ideal lost cost model for Ukraine too, but also has not yet been proposed in the context of the ceasefire talks.

Rebuilding cost

Without either of these measures and funding the reconstruction of Ukraine becomes impossible. Currently the World Bank estimates the value of the damage to Ukraine at $586bn – an impossibly large number and at least twice the value of Ukraine’s GDP.

And very little money has been allocated for paying for the reconstruction. Ukraine has a mountain to climb, the Peterson Institute for International Economics (PIIE) said in a report. It estimated the total commitment by the International Financial Institutions (IFIs) is around $75bn and the EU’s Multiannual Financial Framework (MFF) budget for 2028-2034, which presumably covers a post-war period, is a mere €89bn.

The assumption has been that the private sector will come in and provide these billions of dollars, but the fund managers IntelliNews has interviewed have not only pointed to the political risk of a second war, but also say they want to see root and branch reforms of things like the judiciary and property rights completed as well before they will invest.

Happily, the reforms are happening as these are exactly the topics being addressed in the first cluster of negotiations as part of Ukraine’s EU accession bid. Count a another point for the Finland scenario.

Unhappily, those reforms are going too slowly and the EC downgraded Ukraine to a “B” in its most recent reforms assessment report. The current scandal over the appointment of the defence minister after Zelenskiy reshuffled the government will only undermine EC confidence further as the outgoing Defence Minister Mykhailo Fedorov was making highly effective anti-corruption reforms to the infamously venal procurement system amongst other things. Count a another point for the Afghan scenario

Another serious problem Ukraine faces is people, or the lack of them. The population has almost halved from the pre-war 45mn to an estimated 25mn now. Ukraine has the worst demographics in the world with three deaths for every one birth. There are over 6mn Ukrainians living abroad, with the largest numbers in Germany and Poland. Not only are few of these refugees likely to go home after the war, once martial law is ended and the exit restrictions lifted, some analysts expect a mass outflow of the remaining military aged men to join their families in their new homes. The UN is predicting that the population will fall to 16mn by 2050 as a result, a demographic crisis that will punctuate any economic recovery. Ukraine will become a country populated by pensioners, which already make up half the population, according to reports. Count a big point for the Afghan scenario

The cost is lower than it looks

As IntelliNews has reported, drilling into the details of the rebuild and the amount of money is actually less than the headline $586bn number. That is the estimate for the entire lost opportunity cost caused by the war. The bill for just the physical damage is estimated to be just under $200bn. And if Russia hangs on to the 20% of territory it currently occupies the number comes down even more, as the worst physical damage is in the east of the country in exactly the regions that Russia occupies. Presumably, the largest part of cost of the rebuild will be borne by Russia, not the government in Kyiv. A back of the envelope estimate of the presidential administration of Bankova’s bill could be as low as $100bn, putting the number within reach of what the IFIs and the EU are making available.

This could be a very big point for the Finland scenario. The key question is if this funding is enough to prime the pump and start the virtuous cycle of growth-profit-investment-wage rises-consumption-growth turning. This is what happened in the early noughties in Russia after Putin took over, primed by the flood of petrodollars as the price of oil rose to over $100 a barrel, and led to decade long boom.

Development banks and the EU are a lot more inured to a lingering war risk than private capital. And to reduce that further, at the recent EBRD annual meeting in Riga, there was a lot of talk about setting up comprehensive war insurance to reduce the risks further, although this idea has not progressed very far yet.

Bottom line is that Ukraine’s fate remains up in the air. Everything will depend on the form of the ceasefire, if it eventually happens. In January a deal looked close, as Putin said that the 27PPP was “almost” acceptable to the Kremlin. But since the start of the Iran war a deal now looks further away than ever. Zelenskiy’s government reshuffle looks like a preparation for a bitter conflict this winter where the president is anticipating a renewal of Putin’s attempt to freeze Ukraine into submission. And with passage of the €90bn EU loan, the government now has the money to fight for another two years. Zelenskiy told his cabinet last month they should be preparing for exactly that.

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