By Bate Toms
Russia’s invasion of Ukraine has devastated the country. In addition to thousands of military and civilian casualties, the war has also inflicted grave damage on the Ukrainian economy.
In response, the international community is helping to arm Ukraine and is also providing emergency financing in a bid to keep the Ukrainian economy afloat. However, far more comprehensive measures are required in order to prevent what could become a much greater economic collapse. If implemented without delay, the right steps could help safeguard Ukraine’s battered economy and set the stage for a strong post-war recovery.
Many Ukrainian companies currently face a lack of working capital and other business finance. This is in part due to the absence of political or conflict risk insurance (PRI), as well as the current shortage of ordinary business or property insurance. As a result, many Ukrainian businesses far from the frontlines are having to close or drastically reduce their activities.
Recent talk of a Ukrainian Marshall Plan for the post-war period is certainly welcome but Ukraine needs immediate action from the West on PRI, general insurance and business finance to avoid a further deterioration in the country’s already dire economic situation. Rebuilding Ukraine’s economy after the war will cost much more and take far longer if the necessary emergency measures are not adopted as a matter of urgency.
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While the recent Ukraine Recovery Conference in Switzerland focused on what is necessary for Ukraine’s future reconstruction, not enough emphasis was placed on what needs to be done now to halt the ongoing degradation of Ukraine’s economy.
To begin with, it is clear that Ukraine desperately needs PRI. This is not news. Indeed, there have been repeated calls for PRI from the BUCC, ICBAC and other international business associations ever since the 2014 Russian invasion of Crimea and eastern Ukraine. Ukraine is currently one of the few countries experiencing conflict that lacks a PRI program. Without PRI to protect Ukrainian property, there will not be much lending for private rebuilding or new investment into Ukraine.
The leading multinational provider of PRI is the World Bank’s Multilateral Investment Guarantee Agency (MIGA). While MIGA has an existing PRI program that can theoretically insure projects in Ukraine, this does not work for Ukraine currently because the actual allocation of insurance is subject to MIGA risk evaluations developed using non-war criteria, so PRI applications for Ukrainian projects are generally refused.
Ukraine requires a tailored PRI program that should cover not just major investments but also those by SMEs and individuals who wish to invest or continue to do business in Ukraine. Partners including the US, UK, Canada, Japan, Sweden, Norway and the EU could fund this MIGA administered Ukraine trust, ideally with at least USD 5 billion to begin with. Other multinational organizations like the European Bank for Reconstruction and Development, the World Bank’s International Finance Corporation, and the EU’s European Investment Bank should also be involved, with such PRI facilitating their ability to increase lending in Ukraine.
Although the current problem of insuring property and businesses in Ukraine receives little media attention, it is important to acknowledge that ordinary property and business insurance is no longer generally available in Ukraine from reputable insurers. Such insurance is a basic financial support for investment and business and is ordinarily required to obtain lending for the private development of real estate, facilities and other core investments. Without this insurance, it seems unlikely that many existing and potential private investors will want to be in Ukraine, or that much finance for construction and other purposes will be made available.
Unfortunately, most reliable Western insurers have recently mostly pulled out of Ukraine. Consequently, Ukraine now lacks the basic insurance capacity needed to support existing and new investment along with reconstruction finance. While there are still some local Ukrainian insurers, many have reputations for unreasonably refusing to pay valid claims so international lending institutions and Western-owned banks and businesses in Ukraine often refuse to work with them.
Multinational organizations need to urgently work with Ukraine’s government to develop the Ukrainian insurance sector so that it becomes better capitalized and more reliable. A special fund or guarantee system should be created, ideally funded by the World Bank, to provide financial support to encourage more insurers to act on the Ukrainian market despite the current war and perception that Ukraine is now a riskier place.
In the meantime, Ukraine needs to immediately open up the Ukrainian insurance market by relaxing its restrictive licensing requirements. This could be done most quickly by exempting reputable foreign insurers, such as those licensed in the EU, EFTA or G20 countries (other than Russia), from the requirement for a Ukrainian insurance license. It should also be permitted for insurance proceeds to be paid by such foreign insurers to foreign insured parties in foreign currency to bank accounts in the investor’s or lender’s country in the event of a loss, so as to eliminate the current risk inherent in requiring payments to be made only in Ukraine.
The world cannot afford to wait until Russia is militarily defeated before beginning the work of rebuilding Ukraine and reviving the country’s economy. Instead, immediate action is needed to provide access to PRI as well as general property and business insurance along with business and property finance. Vladimir Putin seeks to destroy the Ukrainian economy as part of his plan to turn the country into a failed state that cannot afford to support or defend itself. If the international community is serious about preventing a Russian victory in Ukraine, it must take urgent steps to ensure Ukraine’s economic survival.