Rebuilding Ukraine: Navigating Investments, EU Integration, and De-oligarchization

Ukraine needs investments, which are one of the key aspects of its reconstruction. Kyiv Post speaks with Bogdan Zawadewicz, Head of the Geopolitical Risk Analysis at BGK (Polish National Development Bank), about the role of integration with the European Union, Poland’s role, and challenges such as deoligarchization.

Michał Kujawski: Ukraine needs investments, but many entities are hesitant to invest. One reason is the war. What are some other reasons?

Bogdan Zawadewicz: The challenges they face relate to several aspects. The first group concerns the risks associated with investing in Ukraine. Partially mitigating these risks depends on decisions made by external institutions. The main risk is the war risk, which prevents the construction and opening of new factories and undertaking large greenfield or brownfield investments. The risk of such infrastructure being destroyed is real. Although there are insurance instruments, such as those offered by Poland’s KUKE, their costs are very high. The second group of risks involves political conditions. Democratic processes are suspended, which is entirely understandable given the ongoing war. There is still a problem of corruption, although it should be noted that Ukraine has already made significant progress in reducing this phenomenon. Full results will still take time; this is not an issue that can be resolved in the short term. An important risk also involves the economic aspect. Currently, the Ukrainian state and economy operate largely due to the influx of external financial resources. The ongoing functioning of the state – not including military expenditures – requires about €35-40 billion annually. Besides covering current needs, these funds also help maintain the exchange rate of the Ukrainian currency. The Central Bank of Ukraine allocates about €2-3 billion monthly to support the hryvnia’s exchange rate. The public finance sector’s deficit is nearly 30% and is also covered by external funds. This dependency makes Ukraine reliant on external capital. This brings certain risks; any interruption in the flow of these funds would impact the country’s macroeconomic situation and economic stability. These resources also help sustain the current level of consumption and demand. We sometimes hear that Polish companies have increased exports to Ukraine – these purchases are covered by these funds. If the funding were to be halted, the purchasing power of the Ukrainian population would dramatically decline.

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Michał Kujawski: Foreign institutions can influence these challenges. Are there any with limited room for maneuver?

Bogdan Zawadewicz: We are dealing with challenges of a structural nature. The risks described above are indeed matters of political and economic will and decision-making, and here we find ourselves with tied hands. This involves issues related to labor shortages and demographics. The war has led to migration and, consequently, a shortage of workers. Many men have been drafted into the army, resulting in an interesting phenomenon where women are increasingly taking on physical jobs typically dominated by men. For men, companies cannot guarantee that trained employees will not be conscripted into the military. Demographics will have a massive impact on the Ukrainian economy and labor market for decades to come. Another difficulty is the situation in the energy sector, which has been devastated by Russia. The lack of electricity can negatively affect the operations of businesses, which in turn leads to challenges in meeting their financial obligations (loans). Rebuilding the energy sector will be a multi-year process and will be crucial from the perspective of both the banking sector (particularly European development institutions) and future foreign investors. Ukraine’s economy is supported by external funding, and its problems mean that it is not currently a competitive economy. Its stability does not stem from market factors.

Michał Kujawski: Which industries are considered safe from the investors’ perspective?

Bogdan Zawadewicz: The so-called light assets. Areas that do not require significant investment, such as building a factory. The most attractive fields include transportation, logistics, as well as educational, consulting, and medical services. The risk here is relatively low, and the needs are substantial

Michał Kujawski: BGK (Polish National Development Bank) is also active in Ukraine.

Bogdan Zawadewicz: In 2023, BGK implemented actions under the European Commission’s guarantee support for the micro, small, and medium-sized enterprises sector in Ukraine through KredoBank, which allowed KredoBank to continue its lending operations for its clients during the ongoing war. The total value of the program is €20 million. Financial support is mainly directed towards companies operating in challenging areas near active conflict zones (the so-called red and yellow zones), with the main beneficiaries being entrepreneurs from the agricultural sector, industry, and agri-food producers. From January 2023 to April 2024, support worth nearly €14 million was provided to 83 companies, which, in turn, created almost 4,000 jobs. Currently, BGK plans to expand support for Ukrainian SMEs through an additional guarantee from the European Commission under Pillar II of the Ukraine Investment Framework (UIF). BGK has requested €20 million from the European Commission to continue support for KredoBank (€10 million) and to include an additional Ukrainian bank in the guarantee program (€10 million). Furthermore, BGK is preparing to submit an application for guarantees from the European Commission under Pillar II of the Ukraine Facility. At this stage, BGK is seeking investment projects that support the economic development of Ukraine, which could be implemented by Polish and Ukrainian entities. The investments should have a developmental and modernization character.

Michał Kujawski: So it’s a booster for investments in the event of the end of hostilities.

Bogdan Zawadewicz: The creators of this mechanism (Ukraine Facility) assumed that it could operate even in wartime conditions. Unfortunately, the reality is somewhat different—companies fighting for survival are not investing because they need funds to sustain their current operations. They are supported by working capital loans or refinancing. The proportion of investment loans is relatively low. This is best seen in the structure of the preferential loan program of 5-7-9%. Moreover, there is a risk that investment funds will mainly go to areas where there is a guarantee of liquidity and employee retention, primarily state-owned enterprises or large private companies. Originally, these entities were not meant to be the main beneficiaries of the EU financial instrument. Of course, we still hope that it will be the SMEs or municipal companies that will most frequently apply for these funds.

Michał Kujawski: The end of the war could accelerate this.

Bogdan Zawadewicz: That’s correct. Sooner or later, it will happen, which is why it’s worth acting now. The EU plan concerns a four-year perspective, and these funds are already being activated. The European Commission and EU member states view Ukraine as a kind of long-term investment project aimed at a deep reconstruction of the state and its economy, so that Ukraine is deeply integrated into Western structures.

Michał Kujawski: If the war were to end within a year, would the funds allocated by the EU be sufficient?

Bogdan Zawadewicz: The issue won’t be financing, but rather the absorption capacity of both the private and public sectors in Ukraine. There may be obstacles due to a shortage of qualified workers and experts who can implement these projects, as well as the availability of entities capable of executing them. The private sector is suffering from competency deficits. The Ukraine Facility sets conditions for implementation that even a moderately developed country would struggle to meet. Ukraine is engulfed in war, is outside of EU structures, and expectations placed on it are very high.

Michał Kujawski: Should this be treated as a reference point, a high benchmark?

Bogdan Zawadewicz: There will certainly be many compromises and concessions. The goals set by the European Commission were very ambitious, perhaps even too ambitious. When they were prepared in the spring of 2023, not all circumstances and the dynamics of the wartime situation were taken into account.

Michał Kujawski: This is related to Ukraine’s integration with the European Union. We often hear that membership is a matter of political decision, not of meeting stringent conditions, as was the case 20 years ago with Poland or the Baltic states.

Bogdan Zawadewicz: I have concerns about whether such political decisions can be made at this time. We see the kind of politics that Hungary is pursuing, for instance. There may be politicians who will block these processes.

Michał Kujawski: In a sense, a high bar could prove beneficial for Ukraine in the political arena.

Bogdan Zawadewicz: Ukraine must demonstrate that it is at the forefront, thereby removing the arguments from politicians who try to block EU assistance for the country. An example of this is the delays associated with the establishment and implementation of the Ukraine Facility. Viktor Orban blocked the revision of the EU budget perspective, thus hindering the allocation of funds to the Ukraine Facility, arguing that the funds would go to Ukrainian oligarchs or large state-owned companies. Ironically, these are precisely the entities that have sufficient capacity to absorb these funds. Ideally, these resources should reach local governments, but they are currently struggling with significant legal and financial challenges, as well as issues related to the professional management of municipal companies. Transformation in these areas will take many years, which is also confirmed by our Polish experience.

Michał Kujawski: In Poland, there was no process of oligarchization.

Bogdan Zawadewicz: Within the framework of privatization and economic openness, foreign capital entered Poland very quickly. Comparing these two situations, we face the dilemma of whether we want to have strong domestic capital with the risk of creating an oligarchic group, or foreign capital at the expense of weaker domestic capital. The most optimal scenario is likely to maintain a balance between domestic and foreign capital.

Michał Kujawski: Will Ukraine undergo de-oligarchization?

Bogdan Zawadewicz: I believe that after the war, the oligarchs will withdraw from some areas in a negotiated and controlled manner. They will retain certain assets, but these will be significantly smaller. Gradually, foreign capital will also flow into Ukraine. Ukraine is becoming a large laboratory, an experiment. There is a belief in the European Commission that this is a project that cannot end in failure. Ukraine will face a whole range of challenges and dilemmas; however, the fundamental question for the Ukrainian elite will be about the sources of the country’s future economic growth, which is a question about the desired economic model. This is crucial for further modernization and building its own financial resources.