Who will pay to rebuild Ukraine? Economists have a plan for Russia to foot what could be a $1 trillion bill
Even as Russian artillery pummels eastern Ukraine and reduces the southern port of Mariupol to rubble, economists are already calculating how much it will cost to rebuild the country.
The short answer: dizzying amounts of money, and rising all the time.
“Every day of war makes the costs higher and higher,” Yuriy Gorodnichenko, a Ukrainian economist and professor at the University of California Berkeley, told a Zoom meeting of experts this week, on rebuilding the country; he and other economists in the U.S., Europe, and Ukraine drafted a blueprint for Ukraine’s reconstruction, published this month by the Centre for Economic Policy Research in London.
“In the fog of war it’s hard to have any precise estimates,” Gorodnichenko told the meeting. “But we’re talking about hundreds and hundreds of billions of euros.” By comparison, the U.S. spent about $12.5 billion (about $450 billion in today’s dollars) on the Marshall Plan in the 1940s, to help rebuild Europe after the Second World War—which lasted six years. In Ukraine, between €500 billion and €1 trillion (about $545 billion and $1.08 trillion) of capital stock has been destroyed, after just eight weeks of combat.
Tapping frozen Russian assets
The question is, who will pay to rebuild Ukraine?
The economists suggest suing the Russian government for damages, and then using Russian assets that were seized or frozen by the U.S. and European Union after President Vladimir Putin sent his military into Ukraine on Feb. 24. Revenues from Russian oil imports could also be levied with reparations fees—much the same way that Iraq’s oil revenues were used for nearly 30 years to pay reparations to Kuwait, which it invaded in 1990.
Added together, Ukraine could cover much of its losses.
“The gross foreign assets if we include the oligarchs would be roughly around $1 trillion,” says Simon Johnson, a senior fellow at the Peterson Institute for International Economics in Washington. “If you damage somebody’s property, if you run someone over with your car, you pay compensations. That’s exactly the legal position you find yourself in.”
The footage of shattered buildings and devastated cities has stunned the world. But economists say there that is not the costliest impact of the war. More serious is the huge loss to Ukraine’s industry, especially in cities that have seen heavy bombardment, like Kharkiv.
“We have lost half of all Ukraine’s metals industry,” Andrii Dligach, founder of the Center for Economic Recovery and an advisor to the Ukraine government, told Fortune on Thursday from Kyiv. “We were one of the top 10 metals producers in the world before the war,” he said, adding that logistics is one of the biggest problems facing the economy.
“There is no sea route anymore because Russia has blocked the ports,” he said. “That was our main direction for exports.”
Half the industrial machinery too
In addition, about half the industrial machinery in the country has been lost, Dligach says. And more than 10% of Ukraine’s businesses have relocated to EU countries since the war broke out. “They probably will not come back in the near future,” he said. “It is a major loss for Ukraine’s GDP.”
About one-quarter of Ukraine’s harvest has also been lost, since Russia has bombed food warehouses, and some agricultural areas are in the combat zones; Ukraine supplies about 9% of the world’s wheat, some of which now have no way to be exported. “About 5 million tons of wheat is held up in Ukraine, and about 10 to 16 tons of corn is still in Ukraine from the previous harvest,” Tymofiy Mylovanov, head of the Kyiv School of Economics, told the Zoom meeting on reconstruction.
The World Bank predicted this month that Ukraine’s GDP could shrink about 45% this year, and that Russia’s economy could contract more than 11%. The bank loaned Ukraine about $723 million during the first weeks of the war to cover emergencies such as paying hospital salaries and pensions.
Economists say Ukraine should use the devastating war as an opportunity to modernize its economy, spending the money not on replacing what was there, but improving on it.
“Ukraine’s industry and infrastructure were built more than 30 years ago,” Dligach, the economic advisor to Ukraine’s government, told Fortune. “We need to use these dramatic days to build a new, modern infrastructure.”
Even as the country fights for its survival.
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