Daniel F. Runde is a senior vice president and William A. Schreyer chair in global analysis at Center for Strategic and International Studies. He is the author of the upcoming book “The American Imperative: Reclaiming Global Leadership Through Soft Power.“
The G7 is meeting in Berlin this week to discuss Ukraine’s reconstruction.
As it stands, there will not be enough foreign aid to rebuild the country, with some current cost estimates easily exceeding $200 billion, and others going far higher. Clearly, as the war prolongs, the cost of reconstruction rises too. And yes, there are Russian Central Bank assets that might be confiscated — and that avenue should be pursued — but this solution will take time.
Realistically, it is the private sector that will end up playing an outsized role in rebuilding Ukraine over time, but it can’t do this alone either. And to this end, both the G7’s and Europe’s development finance institutions (DFIs) should pledge to commit collectively at least $5 billion a year for the next 5 years, for a total of $25 billion.
This $25 billion in DFI investment capital could leverage as much as $100 billion in other investment capital, all of which could then be used for Ukraine’s short- and longer- term needs.
However, the global private sector is currently reluctant to invest in Ukraine while the war continues. Yet, the country has immediate financing needs, such as viable insurance for shipping and logistics companies, as well as providing loans to the many existing businesses that continue to operate in Ukraine.
Over the medium term, there are going to be other enormous needs as well, including financing for housing, railroads, airports, telecom and energy. And many of these projects may have a regional dimension impacting countries like Poland, Moldova, Hungary, Slovakia, Romania and others.
DFIs are important, if little known, institutions that have the potential to play a large role in Ukraine’s reconstruction and covering these needs. For example, DFI’s could bring enormous potential fire power through unused lending and equity investing on their balance sheets, but to date, they’ve largely sat on the sidelines.
Government shareholders need to motivate DFIs and harness them for collective action now. And to do so, they must make exceptions to their current operating rules, provide unusually large amounts of grant/guarantee monies to mitigate risks and, in some cases, spur much deeper partnerships with multilateral institutions, like the European Bank for Reconstruction and Development (EBRD), the European Investment Bank and the International Finance Corporation (IFC).
To achieve such changes, in Berlin next week, both the G7’s DFIs and the DFIs of other European countries should announce a concrete set of commitments.
Currently, all of the G7 members have a DFI. However, some of them, such as Canada and the United Kingdom, don’t have a mandate to invest in Ukraine — which their governments need to change. Others, such as Italy and Japan, have limited experience investing in Ukraine, while countries like France, Germany and the United States have invested in Ukraine in the past but are now leery while the war is ongoing.
Some DFIs will be reluctant to invest in Ukraine in the short run, either for regulatory reasons or for reasons related to their risk capital. Given the stakes for the West, however, all of the G7 and European DFIs should be enlisted to participate in this pledge.
Those of the G7, in particular, should learn from the recent steps taken by some of the EBRD’s shareholders, which put grant monies in a “Crisis Response Fund” to provide critical risk-sharing. The U.S., Canada and the U.K. committed over $500 million to this fund, which will enable the bank to invest billions over several years.
Variants on this model could be used for other DFIs, and both the G7 and other European countries should issue a communique making the following pledge for similar collective action:
First, parliaments should empower all European and G7 DFIs to be able to invest in Ukraine.
European countries and the G7 will then commit to providing grants/guarantees to DFIs — 10 percent of investment capital deployed — collectively enabling them to invest $5 billion in investment capital, guarantees, insurance and equity a year for five years. These grants monies would be pooled and administered in a trust fund established in the EBRD or the IFC, and could be used both in Ukraine and for projects in “frontline states” directly benefiting Ukraine, as well as accompanying technical assistance if needed.
DFIs should also agree to finance the greenest forms of energy possible for the country, while agreeing to finance LNG terminals and gas transportation in places such as Poland and Romania as well. Some, or even all, the DFIs involved should agree to finance nuclear and hydrogen if needed too.
Additionally, either the EBRD or the IFC should set up a special purpose vehicle to allow those that don’t have a large presence or a mandate to invest in Ukraine to coinvest in projects. Those DFIs will meet their country’s commitments through this new vehicle.
Finally, to ensure the timely delivery of investment, DFIs should agree to shared “due diligence” and a “single-term sheet” to accelerate coinvestments in projects for the next five years.
Russia’s illegal invasion is not only about Ukraine. It’s about the future of democracy, the rules that have worked since World War II and the values of the West.
The G7 is an important vehicle to marshal the collective resources of the U.S., Europe and others in the broader Euro-Atlantic world, and it’s imperative that immediate action is taken to revitalize private firms operating in this challenging environment.
The G7 governments need to make these historic commitments at the Berlin conference — before it’s too late.
