International financial institutions, mobilized by the European Union, are considering major economic assistance to Ukraine’s war-torn east, with ambitious new infrastructure projects to bolster rebuilding and recovery efforts in the Donbas.
Senior EU officials have said that they recognize that the ongoing crisis has been worsened by Russia’s de facto blockade of Ukraine’s Azov Sea ports. Investment is needed to ease severe economic pressure and reconnect isolated and besieged eastern communities with the rest of Ukraine.
Eastern desolation
Five years of Russia’s war has left much of eastern Ukraine in ruins. At least five million civilians in the Donbas region are still vulnerable and in need of humanitarian assistance, while 13,000 people have been killed and an estimated 30,000 injured.
Most hospitals are in disrepair or have been destroyed. Streets are dark and unsafe, waste water treatment is unreliable and running water is intermittent. Schools are suffering and up to 250,000 children and their teachers are considered at high risk by the United Nations.
Civilian infrastructure remains devastated and neglected. Dilapidated roads and railways, as well as poor municipal infrastructure, has left local economies weak, with extreme poverty and widespread unemployment.
Russia has engaged in economic warfare by blocking the Kerch Strait and is in control of the Azov Sea, strangling Ukraine’s vital port cities of Berdyansk and Mariupol.
Port authorities say they could lose up to $2 billion per year as a result of the blockade. Steel exporters lament that moving cargo hundreds of kilometers west to Black Sea ports on overburdened railways is adding millions of dollars to their costs. Shipping companies are abandoning Azov Sea ports because of delays in the Kerch Strait that cost them up to $100,000 per day and that last for days at a time.
While the West talks about new sanctions, none have yet been passed against Russia.
The European Investment Bank, or EIB, is among the international financial institutions looking at how to help.
Diagnosing the patient
Roads, railways and river transportation networks are like the human body’s circulatory system. In this sense, the Ukrainian patient is sick, with almost the entire road and rail network needing upgrades or repairs, and roads alone needing $7.4 billion in annual investment.
But nowhere is infrastructure worse than in war-torn and blockaded eastern Ukraine.
“The railway network and roads are in a very bad state,” says Istvan Heinczinger, a Hungarian transport expert and former head of the Hungarian state railway. Since 2015, he is the senior economist responsible for the EIB’s transport projects in Ukraine.
The EIB, essentially the investment bank of the 28-member EU, responds to humanitarian emergencies, such as the one playing out in eastern Ukraine.
“The Azov region needs fast investments, because the roads and railways are not in good condition, the goods and people there need alternative transportation options… We are ready to support these projects,” said Heinczinger.
“The bank is very keen to be a pioneer in this area… in the construction of new roads, we are in the process with the EU delegation and the Ukrainian government to select these projects. We’re looking at the most efficient projects and also in terms of implementation time.”
Rebuilding Azov region
In 2018, Ukraine’s Azov ports of Mariupol and Berdyansk moved about 6.6 million tons of goods, much of it valuable metal exports. But Russia has reduced shipping to a trickle.
Mariupol and Berdiansk are now reliant on Ukraine’s ramshackle railways or decrepit roads to get their goods to safer ports with access to the Black Sea, such as Mykolaiv or Odesa.
But overland cargo from Mariupol or Berdiansk must currently pass through Volnovakha, some 30 kilometers south of the Russian-held city of Donetsk and a 10-minute drive from the war zone.
Ukraine’s infrastructure officials say that areas of eastern Ukraine close to the Azov Sea need about $700 million for urgent investments, mostly to roads and highways.
Engineers and planners have identified areas of critical need as Infrastructure Minister Volodymyr Omelyan reportedly courts European financiers.
About $30 million is needed for the most urgent upgrades, such as a new locomotive depot, upgraded rail lines and train repairs.
Highways in the region will be a more costly affair, but vital to move cargo and passengers to safer cities of Dnipro, Zaporizhia and Mykolaiv. According to Deputy Infrastructure Minister Viktor Dovhan, these projects will cost about $500 million.
Ideally, the Infrastructure Ministry will also invest into the Azov Sea’s ports. Ministers say Ukraine needs about $130 million for the most important infrastructure upgrades at Mariupol and Berdyansk.
Jean-Erik de Zagon, the recently-appointed head of division for Ukraine at the EIB, said that the proposed projects make sense.
He also told Kyiv Post in a Feb. 13 interview that, pending an assessment, the EIB was ready to help and believed the EU could provide a “substantial amount of money.”
“The bank has big capacity, we have deep pockets — we can do a lot,” de Zagon said, adding that talks were already underway between the EIB, Ukraine and potential co-financiers, and the EIB is standing ready to help the Ukrainian government.
Highly-visible economic presence
New investments from the EIB would significantly reinforce what the European Union is already doing in Ukraine, amplifying its already conspicuous economic presence — not only in eastern Ukraine but across the country.
The EIB, by far one of Ukraine’s largest investors and donors, told the Kyiv Post it has already committed about 1.7 billion euros into Ukraine’s transport sector, as part of a 5.5 billion euro overall spending commitment to the country.
The bank says it has also allocated an estimated 700 million euros on roads alone, as well as 200 million euros for urban transportation upgrades, investing into trams, electric buses and new rolling stock. A new project allocates 180 million euros to increasing road safety and reducing traffic-related deaths.
The bank also says that it’s starting to allocate 400 million euros in funding for its new, nationwide municipal infrastructure scheme. Most of the project beneficiaries are in eastern Ukraine. The project aims to upgrade street lighting, heating, water and waste water services and solid waste management in the most vulnerable areas of the country.
A further 200 million euros is being deployed in eastern Ukraine as part of the EIB’s joint recovery initiative with the United Nations Development Programme, or UNDP. Not all of that capital has been spent yet, but it can easily be seen in action as hospitals, schools and small-scale infrastructure projects are brought back to life.
In two of eastern Ukraine’s biggest cities, Kharkiv and Dnipro, the EIB is upgrading the underground metro systems, having committed 312 million euros to date. In many of the EIB’s ventures, their funding is matched by another European IFI, the EBRD, which is also playing a vital role in rebuilding parts of Ukraine.
But the work isn’t finished, and de Zagon recognises that the Azov region especially is in urgent need of more money.
“We have to do something about the roads, and we have to see what can be done about the railways and transport in general,” he said, adding that the EU is supporting feasibility studies for new projects that can hopefully be fast-tracked due to the urgent circumstances.
Heinczinger adds that the region cannot wait, and feasibility studies and assessments should be conducted as quickly as possible. He says that Luxembourg (where the EIB is headquartered) supports extra investment for Ukraine, as does the EU as a whole.
“It’s a work in progress, we have to find the commons goals and common projects (before we) go ahead… I think the EU delegation will announce something in a very short period of time.”
