Milakovsky, Brian

Vlasiuk, Volodymyr

English

LSE Research Online

                        “Insourcing” the recovery: maximizing engagement of Ukrainian manufacturers in reconstruction efforts  Policy Brief                Volodymyr Vlasiuk & Brian Milakovsky 30th May 2023PeaceRep’s	Ukraine	programme	PeaceRep’s	Ukraine	programme	is	a	multi-partner	initiative	that	provides	evidence,	insight,	academic	research	 and	 policy	 analysis	 from	Ukraine	 and	 the	wider	 region	 to	 support	Ukrainian	 sovereignty,	territorial	integrity	and	democracy	in	the	face	of	the	Russian	invasion.	PeaceRep’s	Ukraine	programme	is	led	by	the	London	School	of	Economics	and	Political	Science	(LSE)	partnering	with	the	Kyiv	School	of	Economics	(KSE)	 in	Ukraine,	 the	Leibniz	 Institute	 for	East	and	Southeast	European	Studies	(IOS)	 in	Germany,	 the	 Institute	 of	 Human	 Sciences	 (IWM)	 in	 Austria	 and	 Jagiellonian	 University	 in	 Poland.	Through	 our	 collaboration	 with	 KSE	 we	 work	 closely	 with	 researchers,	 educationalists	 and	 civic	activists	in	Ukraine	to	ensure	that	policy	solutions	are	grounded	in	robust	evidence	and	are	calibrated	to	support	democratic	outcomes.			This	research	is	supported	by	the	Peace	and	Conflict	Resolution	Evidence	Platform	(PeaceRep),	funded	by	the	UK	Foreign,	Commonwealth	&	Development	Office	(FCDO).	The	information	and	views	set	out	in	this	publication	are	those	of	the	authors.	Nothing	herein	constitutes	the	views	of	FCDO.	Any	use	of	this	work	should	acknowledge	the	authors	and	the	Peace	and	Conflict	Resolution	Evidence	Platform.		Country	Director’s	note		PeaceRep’s	Ukraine	programme	are	extensively	involved	in	providing	analysis,	evidence	and	data	to	prepare	discussions	at	the	London	Ukraine	Recovery	Conference,	21st	–	22nd	June	2023.	As	part	of	this	work,	we	are	pleased	to	present	data	from	our	collaborators,	Ukraine	Industry	Expertise	and	US	Aid	Economic	Resilience	Activity.	Their	analysis	underlines	the	problem	of	underutilisation	 in	 the	Ukrainian	domestic	economy	–	which	 is	experiencing	a	war-related	demand	 crisis	 –	 and	 demonstrates	 the	 need	 for	 policies	 to	 be	 effectively	 calibrated	 to	supporting	Ukraine’s	domestic	industrial	production	and	war-economy.	War-related	demand	and	 reconstruction	 can	 kick-start	 this	 activity	 if	 policies	 are	 orientated	 to	 supporting	Ukraine’s	 domestic	 producers,	 thereby	 mitigating	 the	 downstream	 risk	 of	 a	 balance	 of	payments	 crisis.	 Donors	must	 be	 alert	 to	 the	 need	 for	 tailored	 assistance,	 recognising	 the	unique	problems	facing	Ukrainian	producers	and	the	risks	that	international	competitors	gain	an	 unfair	 advantage	 in	 the	 domestic	 market	 simply	 by	 virtue	 of	 operating	 in	 peacetime	conditions	‘at	home’.	This	calls	for	flexible	policies	that	adapt	existing	frameworks	in	a	manner	that	is	conducive	to	supporting	the	Ukraine’s	resilience,	reconstruction	and	war-effort.					Dr	Luke	Cooper	is	an	Associate	Professorial	Research	Fellow	in	International	Relations	at	the	LSE	Conflict	and	Civicness	Research	Group	and	Director	of	PeaceRep’s	Ukraine	programme.			About	the	Authors			Volodymyr	 Vlasiuk	 is	 the	 CEO	 of	 Ukraine	 Industry	 Expertise	 (UEX).	 UEX	 is	 engaged	 in	research	and	consulting	services	in	various	sectors	of	the	economy,	particularly	in	industrial	production	 and	 international	 trade,	 power	 engineering,	 logistics,	 and	 transportation.	 The	company	 participated	 in	 developing	 the	 “Ukraine	 export	 strategy”	 (2016),	 “Ukraine	Processing	Industry	Strategy”	(2018),	and	elaborating	the	“Ukraine	Recovery	Plan”	(2022).	The	 established	 competencies	 allow	 the	 company	 to	 elaborate	 policy	 proposals	 for	 the	development	of	the	processing	industry	and	the	economy	of	Ukraine	as	a	whole.	This	year	UEX	has	 performed	 research,	 commissioned	 by	 USAID,	 and	 prepared	 the	 policy	 proposals	 to	maximize	 the	 insourcing	of	Ukraine’s	post-war	 reconstruction.	Mr.Vlasiuk	holds	 a	Ph.D.	 in	Economics,	 is	 a	 senior	 expert	 at	 the	 Economic	 Recovery	 Council,	 and	 an	 adviser	 of	 the	Economic	Development	Committee	of	Verkhovna	Rada.		Brian	Milakovsky	 is	 deputy	 chief	 of	 party	 (technical)	 at	 the	 USAID	 Economic	 Resilience	Activity.	Begun	in	2018,	the	Activity	was	supporting	economic	recovery	and	resilience	among	micro,	small	and	medium	enterprises	(MSMEs)	in	eastern	Ukraine	and	the	Sea	of	Azov	region.	Since	 Russia’s	 full-scale	 invasion	 of	 2022	 USAID	 ERA	 has	 received	 a	 national	mandate	 to	support	displaced	MSMEs,	support	Ukraine	in	its	efforts	to	export	agricultural	commodities	to	world	markets,	improve	conditions	for	industrial	recovery	and	advocate	for	inclusive	and	sustainable	models	of	Ukraine’s	reconstruction	and	economic	recovery.	Policy	Brief		 3 		“Insourcing”	 the	 recovery:	 maximizing	 engagement	 of	Ukrainian	manufacturers	in	reconstruction	efforts		The	full-scale	Russian	invasion	of	Ukraine	in	February,	2022	led	to	widespread	destruction	of	housing,	production	facilities,	energy,	social,	and	transport	 infrastructure.	As	of	November,	2022	the	Kyiv	School	of	Economics	calculated	damages	to	housing	and	critical	infrastructure	at	around	$105	billion1,	and	this	figure	has	certainly	increased	significantly	since	then	due	to	continued	Russian	hostilities.			In	 order	 to	 repair,	 or	 replace,	 the	 homes	 and	 infrastructure	 encompassed	 by	 the	 damage	estimate	 above,	 around	 $62.8	 billion	 worth	 of	 construction	 materials	 will	 need	 to	 be	purchased.	Given	the	dire	economic	impacts	of	Russia’s	invasion,	including	a	29.1	%	decline	in	Ukrainian	GDP	in	2022,	it	would	be	desirable	to	purchase	the	needed	materials	domestically	as	a	significant	stimulus	to	recovery	of	Ukraine’s	industrial	economy.2		Interviews	 with	 diverse	 industry	 players	 and	 associations	 conducted	 for	 the	 report	“Activating	 and	 Strengthening	 Ukraine’s	 Reconstruction	 Capacity”3	 demonstrate	 that	Ukraine’s	 domestic	 construction	materials	 sector	 could	 provide	 around	 90%	 of	 the	needed	materials	for	the	damages	accrued	as	of	November,	2022.	Although	around	15%	of	construction	material	factories	experienced	damage	during	the	invasion,	the	sector’s	non-centralized	 distribution	 across	 Ukraine	 means	 that	 most	 of	 its	 capacity	 is	 intact.	 Some	important	producers	are	irreversibly	damaged	and/or	occupied	(for	example	AzovStal	and	Ilych	 steelworks	 in	Mariupol,	 Knauf	 gypsum	 plant	 in	 Soledar),	 but	 others	 are	 undergoing	renovation	after	Russian	shelling,	such	as	the	country’s	only	two	PVC	window	frame	factories	in	the	north	of	Kyiv	Oblast.		In	 addition,	 some	 producers	 are	 investing	 in	 production	 enhancement	 in	 expectation	 of	enormous	 future	demand,	 or	 even	 in	 in	 greenfield	projects	 to	provide	deficit	 construction	materials.	After	the	occupation	of	Luhansk	Oblast	by	Russian	forces	in	2022	Ukraine	has	no	operating	sheet	glass	factories,	but	ground	has	already	been	broken	in	Berezan	(Kyiv	Oblast)	for	 a	 facility	 that	 should	 be	 able	 to	 cover	 a	 significant	 part	 of	 the	 country’s	 needs.	 Other	examples	include	new	production	facilities	for	aerated	concrete	and	dry	building	mixtures	in	Lviv	Oblast.		That	being	said,	many	investment	projects	to	increase	construction	material	production	are	limited	by	the	critically	low	availability	of	credit	in	wartime	Ukraine.	The	state-supported	“5-7-9”	subsidized	credit	program	is	functioning	through	state	banks,	but	it’s	maximum	project	size	of	$2	million	limits	its	applicability	for	capital	projects.		Producers	 have	 also	 been	 limited	 by	 availability	 of	 electricity	 during	 Russia’s	 concerted	attacks	on	Ukraine’s	energy	infrastructure.	A	steep	decline	in	domestic	demand	in	2022	meant	 that	 many	 factories	 were	 only	 operating	 at	 around	 30%	 capacity,	 which	understandably	 allowed	 them	 to	 conserve	 power.	 But	 once	 demand	 rebounds	 and	 is	potentially	 massively	 increased	 by	 donor-supported	 reconstruction	 projects,	 electricity	availability	could	become	a	limiting	factor	for	construction	material	production.	Stabilization	of	electricity	supply	in	Ukraine	in	the	first	three	months	of	2023	is	a	positive	development	in	this	regard,	but	targeted	interventions	may	be	needed	to	address	lingering	shortages.			1	Report	on	Direct	Damage	to	Infrastructure	from	Destruction	as	a	Result	of	Russia’s	Military	Aggression	Against	Ukraine	as	of	September	1,	2022.	This	report	was	prepared	within	the	framework	of	the	National	Council	for	the	Recovery	of	Ukraine	from	the	Consequences	of	the	War	by	the	analytical	team	of	the	Kyiv	School	of	Economics	(KSE)	together	with	the	Ministry	of	Development	of	Communities	and	Territories	of	Ukraine,	the	Ministry	of	Infrastructure	of	Ukraine,	the	Ministry	of	Health	of	Ukraine,	under	the	coordination	of	the	Ministry	of	Reintegration	of	the	Temporarily	Occupied	Territories	of	Ukraine		https://kse.ua/wp-content/	uploads/2022/10/Sep22_FINAL_Sep1_Damages-Report.pdf		2	“Ukraine's	GDP	fell	29.1%	in	2022	during	Russia's	invasion.”	Reuters,	April	13,	2023.				3	USAID	Economic	Resilience	Activity,	2023	Policy	Brief		 4 		Using	Ukrainian-made	construction	materials	could	benefit	around	100,000	workers	in	the	sector	whose	 livelihoods	are	precarious	after	16	months	of	war,	 facilitating	$5.6	billion	 in	wages	 and	 $4.4	 billion	 in	 tax	 revenue.	 Production	 increases	 to	 meet	 the	 increasing	reconstruction	needs	will	surely	result	in	increased	employment	as	well.			Importantly,	a	policy	of	“insourcing”	construction	materials	for	Ukraine’s	reconstruction	will	direct	 tens	 of	 billions	 of	 dollars	 to	 its	war-affected	 economy,	which	will	 need	 to	 perform	exceptionally	well	in	order	to	repay	international	debts	accrued	before	and	in	the	course	of	Russia’s	2022	invasion,	and	also	to	begin	catching	up	with	peer	counties	such	as	Poland	in	such	indicators	as	nominal	GDP	($688	billion	in	Poland	in	2022,	while	in	Ukraine	it	decreased	to	$160	billion)4	and	percent	of	GDP	contributed	by	industry	(17%	in	Poland5	versus	10.4%	in	Ukraine6).		Through	their	actions	donor	countries	and	international	financial	institutions	can	influence	the	 extent	 of	 “insourcing”	 of	 construction	materials.	 First	 of	 all,	 they	 can	avoid	 imposing	conditions	on	credit	or	grants	to	the	Ukrainian	government	that	require	purchase	of	materials	 from	the	donor	country.	 	Conversely,	donors	could	signal	active	motivation	to	support	 Ukraine	 in	 procuring	 domestically	 produced	materials,	 setting	 target	 proportions	that	reflect	the	domestic	sector’s	production	capacity.			Reaching	 such	 targets	 might	 require	 technical	 assistance,	 such	 as	 training	 programs	 for	Ukrainian	producers	to	be	prepared	for	tendering	requirements	of	donor-funded	programs.	Poor	understanding	of	and	compliance	with	such	requirements	has	proven	a	common	barrier	to	Ukrainian	businesses	in	competition	with	international	peers.			Donors	and	IFIs	can	provide	funding	for	access	to	finance	programs,	either	through	Ukrainian	state	banks	or	directly	through	international	development	banks,	which	can	provide	credit	at	rates	 attractive	 to	 construction	material	 manufacturers	 that	 wish	 to	 invest	 in	 production	improvements.	Existing	instruments	such	as	the	“5-7-9”	subsidized	credit	program	could	be	adjusted	to	serve	more	significant	investment	needs,	for	example	by	raising	the	current	$2	million	loan	cap	to	$10	million,	but	for	larger	investment	needs	new	programs	would	likely	be	necessary.			As	many	other	sources	have	pointed	out,	international	funding	of	wartime	risk	insurance	for	investments	 in	 Ukraine	 (including	 in	 the	 construction	 materials	 sector)	 could	 stimulate	foreign	direct	investment	where	the	business	case	is	strong	but	excessive	risk	is	a	barrier.7		If	 these	various	approaches	are	adopted	simultaneously,	 it	may	be	possible	to	develop	a	virtuous	 circle	 in	which	 commitments	 by	 the	 Ukrainian	 government	 and	 donors	 to	“insource”	 construction	 materials	 make	 banks	 more	 inclined	 to	 provide	 credit	 to	domestic	 producers	 (potentially	 drawing	 on	 donor-	 or	 IFI-funded	 access	 to	 finance	programs).	In	turn,	as	production	increases	“insourcing”	will	become	even	more	realistic	and	viable	as	an	option.		In	conclusion,	a	strategy	of	maximizing	the	use	of	Ukrainian-made	construction	materials	in	the	reconstruction	process	could	make	international	funding	of	the	Ukrainian	recovery	work	two-fold:	first	for	meeting	urgent	needs	for	reconstruction	of	housing	and	infrastructure,	and	second	as	tens	of	billions	of	dollars	of	stimulus	for	the	country’s	war-ravaged	economy.			4	Reuters	2023	5	World	Bank.	https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=PL	6	Calculated	by	dividing	the	value	added	generated	by	processing	industry	by	the	entire	value	added	of	the	Ukrainian	economy.	Source	data:		https://www.ukrstat.gov.ua/operativ/operativ2021/vvp/vvp_kv/vvpf_21_ue.xls	7	For	example,	Ganster,	R.,	Kirkegaard,	J.,	Kleine-Brockhoff,	T.,	&	Stokes,	B.	(2022).	Designing	Ukraine’s	recovery	in	the	spirit	of	the	Marshall	Plan.	Policy	Brief		 5 													                        About PeaceRep	PeaceRep is a research consortium based at The University of Edinburgh. Our research is re-think- ing peace and transition processes in the light of changing conflict dynamics, changing demands of inclusion, and changes in patterns of global intervention in conflict and peace/mediation/transition management processes. PeaceRep: The Peace and Conflict Resolution Evidence Platform PeaceRep.org | peacerep@ed.ac.uk | Twitter @Peace_Rep_ School of Law, University of Edinburgh, Old College, South Bridge, EH8 9YL PeaceRep is funded by the Foreign, Commonwealth and Development Office (FCDO), UK Consortium members include: Conciliation Resources, Centre for Trust, Peace and Social Relations (CTPSR) at Coventry University, Dialectiq, Edinburgh Law School, International IDEA, LSE Conflict and Civicness Research Group, LSE Middle East Centre, Queens University Belfast, University of St Andrews, University of Stirling, and the World Peace Foundation at Tufts University.              The views and opinions expressed in this publication are those of the author(s) and do not necessarily represent those of the London School of Economics and Political Science (LSE), the Conflict & Civicness Research Group or the UK Foreign, Commonwealth and Development Office (FCDO). This document is issued on the understanding that if any extract is used, the author(s) and Conflict & Civicness Research Group should be credited, with the date of the publication. While every effort has been made to ensure the accuracy of the material in this paper, the author(s) and/or the Conflict & Civicness Research Group will not be liable for any loss or damages incurred  through the use of this paper.  The London School of Economics and Political Science holds the dual status of an exempt charity under Section 2 of the Charities Act 1993 (as a constituent part of the University of London), and a company limited by guarantee.   

Insourcing the recovery: maximizing engagement of Ukrainian manufacturers in reconstruction efforts

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Insourcing the recovery: maximizing engagement of Ukrainian manufacturers in reconstruction efforts

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