Ukraine: Reconstruction or Modernization?

The reconstruction of Ukraine has been a topic accompanying us for the past two years. Many conferences and articles have been dedicated to it. This concept encompasses not only the literal rebuilding of destruction but also the adaptation of standards to Western ones and the integration of the country with the European Union.

Kyiv Post speaks with Bogdan Zawadewicz, Head of the Geopolitical Risk Analysis at BGK (Polish National Development Bank), about the mechanisms involved, various sectors of the economy, challenges, reforms, privatization, and the role of the state, as well as private entities and local governments.

Michał Kujawski: In July 2024, the Verkhovna Rada passed a law allowing the resumption of the privatization process, which had been halted since the beginning of the Russian invasion. The issue is controversial – privatization is seen as a key component in rebuilding and modernizing the country. However, there are arguments suggesting that if the railways had been privatized by Feb. 24, 2024, trains might not have operated, and such an effective evacuation of refugees might not have been possible. Where should the line be drawn between privatizing assets and maintaining state-owned enterprises?

Bogdan Zawadewicz: This is indeed a complex and highly controversial issue. Ukraine has had many negative experiences with privatization over the past 30 years, which heavily influences contemporary perceptions of these processes. Privatization is commonly associated with oligarchization and the enrichment of a portion of the elites at the expense of public assets. It was not a method to increase state budget revenues for modernization and development projects. Nor did privatization lead to better management of companies. Instead, it became a tool for a small group of people to accumulate wealth, gaining not only economic but also political capital. Seizing control of agricultural land, factories, and other enterprises allowed for significant political influence. Privatization also contributed to growing social inequalities, with society bearing tremendous costs. This differentiates Ukraine’s experience from that of other former Eastern Bloc countries, especially those in Central Europe.

Other Topics of Interest

Central Bank Raises Key Rate to Tame Inflation Rise

Inflation increased above the central bank’s maximum forecast, forcing monetary governors to lower the heat by raising the key rate by half a percent– but it should decelerate in 2025.

Michał Kujawski: The economic reforms carried out in Poland in the early 1990s also have many critics. We also saw an increase in social inequalities, and many rural residents suffered greatly.

Bogdan Zawadewicz: Any large-scale project, such as the simultaneous execution of thousands of privatization processes, comes with social and economic costs. In both Poland and other CEE countries, privatization brought professionalization in the management of economic entities and led to an influx of external capital. One crucial aspect is the impact of these processes on improving the functioning of state institutions and building the rule of law. In Ukraine, this did not succeed as it did in other countries in the region. Ownership changes did not go hand-in-hand with institutional and legal reforms. In Poland, everything was conducted with an eye toward integration with Western structures (EU, NATO). As a result, an independent judiciary was established, including relatively well-functioning commercial courts that regulate civil and legal relations between entrepreneurs. The marketization of state assets was accompanied by positive legal and institutional transformations, something that cannot be said about Ukraine’s privatization experience. Currently, there is a strong emphasis on continuing privatization processes in the country, but they will realistically begin after the end of the war. For now, they are happening on a very small scale. In the current year’s budget law, the government has projected privatization revenues of about €89 million, which is a relatively low amount. For large-scale privatization, external capital will be necessary, and its influx depends on the end of hostilities.

Michał Kujawski: And it will increase proportionally with integration into European institutions and standards.

Bogdan Zawadewicz: Indeed.

Michał Kujawski: What should be privatized, and what should not?

Bogdan Zawadewicz: There is a dispute around this. International financial institutions recommend privatizing large state-owned enterprises, such as those in the chemical or energy sectors, but there are also calls for the demonopolization or privatization of the railway sector. However, Ukraine’s wartime experiences suggest that this may be challenging.

Michał Kujawski: Let’s look at the United Kingdom. Even those who supported the privatization of the railways years ago now believe it was a bad idea.

Bogdan Zawadewicz: Ukraine has committed to adopting changes to the railway transport law by the end of 2025, which aims to demonopolize Ukrainian Railways (Ukrzaliznytsia). This entity is to be divided into freight carriers, passenger carriers, and an infrastructure manager. This manager would provide access to the infrastructure on competitive terms. However, it should not be expected that this action will be implemented within the anticipated timeframe, as Ukraine has repeatedly indicated the inability to lose control over key sectors in wartime conditions. Additionally, several strategically significant enterprises (including UA Railways) cannot be fully privatized—at least 51% of the shares must remain state-owned. The Ukrainian government is presenting compromise solutions. The perception of the Ukrainian elite regarding the role of the state, particularly in sectors related to security, is completely different from that of Western elites. For example, Ukraine views the energy and transport sectors as critical infrastructure.

Michał Kujawski: What is the situation in the energy sector?

Bogdan Zawadewicz: The scale of destruction in the energy sector is significant. After the end of hostilities, it will require enormous investments. The only entity capable of meeting these demands will be the state. Private capital will serve as a partner that can collaborate in areas such as renewable energy sources (RES). The core responsibilities, such as the construction of new energy blocks, nuclear power plants, or hydroelectric facilities, will fall on the state. The energy market itself could rely on free market solutions. Currently, energy prices are heavily subsidized by the Ukrainian government, which will have to change at some point. To attract capital for investments in this sector, prices will need to be deregulated.

Michał Kujawski: Society will not embrace this enthusiastically.

Bogdan Zawadewicz: The socio-economic situation is difficult, and there is a visible trend of increasing impoverishment. From the perspective of financial institutions, investment projects must be bankable. It will be necessary to reach a point where subsidies and financial aid are reduced to a level that allows profits from energy sales to service loans.

Michał Kujawski: And here we move on to the issue of rebuilding Ukraine. How should it proceed?

Bogdan Zawadewicz: Personally, I am not fond of the term “rebuilding.” I prefer to talk about the modernization of Ukraine. The amounts presented in the public domain from the World Bank’s “Rapid Damage and Needs Assessment” report are estimated to be nearly €500 billion. The report categorizes three areas: financial losses, destruction, and needs. If we focus on the category of damages, it turns out that about 80% of this amount pertains to territories occupied by Russia or those on the Ukrainian side but near the front line. In the foreseeable future, no investments will be made in these areas. This highlights the inadequacy of the term “reconstruction” in relation to Ukraine’s needs. What Ukraine needs now is modernization.

Michał Kujawski: What does it mean exactly?

Bogdan Zawadewicz: This includes the expansion and modernization of existing infrastructure, investments in the energy sector, and the modernization and increased efficiency of companies and industrial facilities. This will allow Ukraine to become a modern state with a competitive economy. It changes our perspective and thinking about Ukraine’s transformation. We can also distinguish between two aspects of modernization: soft and hard.

Michał Kujawski: What do they entail?

Bogdan Zawadewicz: Hard modernization involves financial support for investment projects. Soft modernization refers to technical assistance that enhances state resources and effectiveness, improving the quality of institutional functioning. For the private sector, it involves providing a well-trained workforce with high competencies. Unlike the term “reconstruction,” the modernization process can be implemented today. We will talk about reconstruction after the cessation of hostilities and the regaining of control over territories occupied by Russia, which I hope will happen.

Michał Kujawski: You mentioned that the modernization process can be implemented today. Is it being realized?

Bogdan Zawadewicz: Legal and institutional modernization is linked to Ukraine’s integration with the EU. An important instrument supporting this process is the so-called “Ukraine Facility.” This is an integrated EU financial instrument with a budget of up to €50 billion for the next four years. It is based on three pillars. The first pillar involves direct financial transfers to Ukraine’s central budget. The second pillar is the Ukraine Investment Framework, which primarily concerns guarantee and loan instruments. Its aim is to stimulate investment processes in the Ukrainian economy. The third pillar is Technical Assistance, which pertains to the soft modernization I mentioned earlier. The “Ukraine Facility” includes a mechanism of conditionality – Ukraine has specific goals/milestones that it must meet according to the proposed reform schedule across various areas. The EU conducts evaluations every three months. If the outcome is positive, the next tranche of financial support is released. So far, this has yielded relatively good results, with Ukraine quickly implementing the reforms it has committed to.

Michał Kujawski: It sounds like Ukraine’s integration with the European Union has already begun.

Bogdan Zawadewicz: That’s correct. Ukraine has the status of a candidate country. The introduction of European standards in many areas brings Ukraine closer to European communities. Ukraine also receives support from other international institutions, including the International Monetary Fund, whose assistance is also tied to numerous conditions. All these activities aim to accelerate a deep and sustainable modernization of Ukraine, enabling it to fully integrate and connect with Western structures.