The debate over the appropriate level of U.S. support for Ukraine in its ongoing war against Russian invaders has now spectacularly spilled over into American congressional and presidential politics. Most of this coverage focuses on military assistance, which is not unreasonable given the scale and scope of the fighting. But as we argue here, it is becoming increasingly clear that Ukraine’s ability to endure this fight also depends in large part on its ability to begin rebuilding and rebalancing its economy in the midst of this war. This means more support is needed for Ukraine’s defense industrial sector and broader business activities to ensure its survival, long-term prosperity and ability to arm.
In fact, Ukrainians now see reconstruction as a national matter, an integral part of their desire to liberate their country’s territory. Urgent priorities such as repairing and modernizing damaged smelting works and housing stock simply cannot wait for the end of hostilities. The problem will only get worse if action is not taken now.
Assessment of the problem
The price that Ukraine has already paid since the first Russian invasion in 2014 is immense, both in human and material terms. After the much larger attacks starting in February 2022, the country’s gross domestic product fell by almost 30 percent, in what the World Bank called a “staggering decline.” In a recent article we showed that this is largely because six of Ukraine’s ten most economically important regions are in the east and south of the country, where the most intense fighting has taken place. This is confirmed by our analysis of figures from the Violent Incident Information from Newspaper Articles project, which compiles near real-time incident data from multiple sources.
War-related incidents and the pre-war index (2021) of the economic importance of regions in Ukraine (map by Timothy Hoheneder using economic data from the State Statistics Service of Ukraine and the “Violent Incident Information from News Articles” project up to August 1, 2023. Russian occupied Areas are as of 2021.)
The Kyiv School of Economics estimated the direct financial damage to material assets in the period February 2022 to June 2023 at $150.5 billion. That number is now much higher. Russia’s breach of the Kakhovka dam and hydroelectric power plant in southern Ukraine in June led to flooding and devastation in the lower reaches of the Dnipro River. Starting in July this year, Russia attacked grain export facilities on Ukraine’s Black Sea coast. Mining large areas, particularly along Russia’s defense lines in the southeast, will be a massive undertaking that is crucial to restoring Ukraine’s vast agricultural sector. But the increasing impact of the attacks and resulting destruction on the country is becoming even more problematic economically, as supplier and consumer networks are disrupted, physical factories are destroyed, and workers are displaced and deprived of housing.
As has been widely discussed, the challenges of repairing war damage are significant, politically, financially and physically. This was already evident after parts of the Donbass region in eastern Ukraine and Crimea were occupied by Russia since the 2014 invasion and the productivity of the national economy was lost. The World Bank now estimates that around $411 billion will be needed over the next decade to restore and rebuild the country’s economy, and that number is rising as fighting continues.
Making matters worse, social infrastructure such as schools, hospitals and clinics have been attacked by the Russian military, with a particularly significant impact on housing stock in the most affected areas. Millions of Ukrainians have been internally displaced and millions more have sought refuge abroad. Despite heroic efforts by Ukrainian infrastructure workers, civil defense personnel and ordinary civilians to maintain a degree of normality, the country’s economy has been seriously damaged by such attacks. Factories, mines, refineries and storage facilities were destroyed, including some of the country’s largest industrial complexes, some of which, particularly metallurgical plants, are critical to Ukraine’s war capability.
Building in combat
Even amid the horrors of that war, Ukrainians have managed to stabilize their gross domestic product, restart previously damaged factories and adopt innovative practices from construction to food processing to information technology. The number of newly registered small and medium-sized businesses has increased dramatically in the last six months, with most new firms based in the country’s safer central and western regions.
Major problems remain that will hamper the reconstruction process, particularly the challenge of maintaining electricity supply. However, there are signs that significant progress is already being made. Audrey Kurth Cronin makes clear that Ukraine has a domestic technology base and “public competence in key skills is critical to the war effort.” Ukraine’s defense industry has proven very capable of repairing damaged equipment and returning tanks and other armed vehicles to the front. Ukrainian drone strikes deep inside Russia illustrate the ability of defense contractors to develop, construct and deploy technologically sophisticated weapons.
Western foreign direct investment, although still relatively small, is already having an impact on a wide range of industries, such as modular building panels and specialty concrete for housing, innovative nuclear power plants and renewable energy production. European defense companies have already announced plans to open production facilities in Ukraine, despite Russia’s explicit threat of attack.
The degree of success of the reconstruction will also determine the viability of Ukraine’s upcoming membership applications to the European Union and will have a significant impact on the European economies themselves. Indeed, Ukraine’s size and strategic location mean that its recovery and future growth outcomes will profoundly shape the geopolitical landscape of Europe and the future national defense strategies of the United States and its allies, particularly vis-à-vis Russia.
The time is now
According to some skeptics, the task of restoring and expanding Ukraine’s economy is so daunting that it amounts to a fool’s errand. For others, domestic political considerations have made aid to Ukraine a lightning rod for large-scale funding of the U.S. government, leading to a near paralysis of American political institutions. Despite this dysfunction, important steps have already been taken to support Kyiv’s reconstruction efforts. Significantly, the latest tranche of US assistance to Ukraine, announced by Secretary of State Antony Blinken during his visit to Kyiv on September 6, 2023, included significant funding for humanitarian assistance, rule of law, anti-corruption and demining-related reconstruction. Additionally, the appointment of a U.S. special envoy for Ukraine’s economic recovery represents an important signal of the Biden administration’s commitment to recovery efforts.
New sources of financing should now also be considered, such as increased foreign direct investment, the confiscation of Russian assets, the resumption of raw material exports and urgently needed research and development aid. Addressing these issues will stimulate and expand business activity and help Ukraine achieve the economic growth it needs to strengthen its military capabilities.
Opinion polls show that 84 percent of Ukrainians want to continue the war against Russia until all the territories they have occupied are retaken. If Ukrainians’ demonstrated willingness to fight, which is continually underestimated by many Western observers, is a guide to economic recovery, support from the United States and its allies can make a crucial difference. With just over half of Americans still supporting continued aid to Ukraine, raising awareness of the humanitarian and economic dimensions is critical. Explaining both the extent of the damage and Ukraine’s success in making amends could help strengthen support for more aid, which in turn will bring real dividends for U.S. and European security.
The authors thank the Department of Defense Minerva Research Initiative and the Office of Naval Research for their support. The opinions expressed here are solely those of the authors.
Ralph Clem is a senior fellow and professor emeritus of political geography at the Steven J. Green School of International and Public Affairs at Florida International University.
Erik Herron is the Eberly Family Distinguished Professor of Political Science at West Virginia University.
Matthew Lantzy is a senior construction project manager who specializes in the design and construction of complex industrial facilities in the United States and abroad.
Image: Ukrainian Ministry of Defense
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