Posted by On 27 February, the European Parliament approved the revision of the EU’s multi-annual financial framework (MFF). As part of these negotiations, EU institutions have agreed on a regulation establishing the so-called Ukraine Facility. This facility concerns a new financial instrument worth €50 billion that is dedicated to supporting Ukraine’s reconstruction and recovery efforts until the end of the current budget cycle in 2027. The facility is set up as a standalone instrument that brings together the EU’s bilateral support to Ukraine, and replaces bilateral support provided under NDICI-Global Europe. As the latter’s cushion for emerging challenges and priorities had been fully exhausted, it became clear that a separate financial instrument for supporting Ukraine was needed.
The creation of the facility is a strong expression of the EU’s steadfast solidarity with the country. It also signals that the EU is stepping up its efforts to support the reconstruction and economic and financial recovery of Ukraine, also as a means to help the country advance on its path towards EU membership. Concerning the latter, the historic decision of the European Council of 14 December 2023 to open EU accession negotiations with Ukraine was an important step in this direction.
At the same time, Russia’s full-scale invasion since February 2022 has inflicted enormous physical destruction and economic damage on Ukraine. According to the latest rapid damage and needs assessment by the World Bank and partners, the total cost of reconstruction and recovery in Ukraine will amount to at least $486 billion. Thus, the creation of the Ukraine Facility can only be a first and small step in the EU’s and the wider international community’s efforts to support the country’s reconstruction in the long run. The facility also comes with certain limitations so its success hinges on accompanying measures by EU member states and other international partners.
Standing with Ukraine
Since February 2022, non-military support to Ukraine by the EU and its Member States has already amounted to more than €60 billion. This includes macro-financial assistance, humanitarian aid, and services for Ukrainian refugees in the EU, but also financing reconstruction measures such as the repair of schools, hospitals, homes or electricity grids.
The now established Facility intends to provide reliable and predictable funding to ensure the financial stability of the Ukraine state for the next four years. Since the Hungarian government had initially blocked an agreement, it was only at the Emergency European Council on 1 February that member states were able to strike a deal on establishing the Ukraine Facility. Hence, the delayed decision is also an important step for European unity in support of Ukraine.
A complex instrument in a nutshell
Out of the overall financial envelope of €50 billion, €33 billion will be provided as loans and €17 billion in grants, the latter being provided through a newly established Ukraine Reserve within the MFF. The facility is organised into three pillars.
The first pillar comprises financial support to the Ukrainian state for maintaining the macro-financial stability of the country and for implementing reforms and investments according to priorities set out in the so-called Ukraine Plan. The Regulation on the Ukraine Facility specifies a detailed set of requirements concerning the content of the Ukraine Plan. To sum up the EU’s expectations, the Ukraine Plan should lay out the Ukrainian government’s priorities regarding reconstruction measures in relevant sectors and a clear roadmap for reforms intended to be implemented within the next four years.
The Ukrainian government has presented the Ukraine Plan on 18 March. The plan develops a medium-term vision of the expected recovery, reconstruction and modernisation measures, closely linked to key legal, institutional and administrative reforms required for the country’s accession to the EU. As foreseen by the Regulation, the Commission will now assess the plan, and based on this assessment the Council has to finally approve the plan through an implementing decision. The approval of the Ukraine Plan is a precondition for the disbursement of funding under the first pillar. However, there is also the possibility of exceptional bridge financing, which the Commission has already used when disbursing a first tranche of €4.5 billion on 20 March. The financial envelope for the first pillar comprises around €38.27 billion in total, including €33 billion in loans and €5.27 billion in grants.
The second pillar, the Ukraine Investment Framework, serves to mobilise investments for Ukraine’s economic recovery and reconstruction. A so-called Ukraine Guarantee of €6.97 billion will be established to cover risks for loans, investment guarantees, capital market instruments and other forms of credit enhancements and insurances. Implementing partners such as the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) will be able to draw on this guarantee to cover the risks of their public and private sector lending in Ukraine.
The third and last pillar of the Ukraine Facility serves to provide technical assistance to the government and capacity development of Ukrainian authorities at national, regional and local level in order to strengthen Ukrainian capacities for implementing structural reforms and adopting the EU acquis. Moreover, the third pillar also comprises a borrowing costs subsidy that Ukraine may request. Overall, €4.76 billion will be available for this pillar.
Potential challenges and limitations of the instrument
Although the Ukraine Facility’s financial envelope may look impressive at first glance, it is already clear that it will not be sufficient to address two main challenges. First, according to IMF estimates the financing gap in Ukraine’s state budget will amount to at least $86 billion in 2024-2027. Even though the EU will contribute with €38 billion to the Ukrainian state budget through the Ukraine Facility until 2027, in addition to an IMF program worth $15.6 billion until 2027, at least €26 billion from other sources will still be needed to fully cover Ukraine’s financing needs. Second, also given the limited financial envelope for the Ukraine investment framework, the financing of comprehensive reconstruction measures with the Ukraine Facility will therefore only be possible to a limited extent in the next few years, although the instrument is also intended for this purpose.
Another challenge relates to the funding available for technical assistance and capacity development under the third pillar. As most of the funding under this pillar is likely to go into the borrowing costs subsidy, less than €1 billion will be left for technical assistance and capacity development. Although Ukraine has built up considerable state and administrative capacities over the past few years in the context of the EU approximation process, it is evident that the parallel tasks of reconstruction efforts and EU accession negotiations might bring Ukrainian capacities to their limit, both in terms of absorption and implementation capacities. According to Ukraine’s Ministry of Finance, in 2024 alone Ukraine will have to meet 230 conditionalities and recommendations given by its international partners. The costs the state has to make to navigate these requirements – and the amount of attention and state capacity that doing so requires – should not be underestimated.
Next steps for the implementation of the Ukraine Facility
Stepping up and coordinating member states’ bilateral assistance to Ukraine. In the medium term, the EU will only be able to make a significant contribution to Ukraine’s reconstruction if EU Member States are willing to provide more and long-term money for support to Ukraine – both bilaterally and through the EU budget. So far, bilateral financial support by EU member states has been modest across the board, as figures provided by the Kiel Institute for Economics’ “Ukraine Support Tracker” show, with Belgium (€1.95 bn), Germany (€1.54 bn), the Netherlands (€1.1 bn) and Poland (€1,01 bn) being the only EU member states having committed over €1 billion in bilateral financial assistance. As larger EU member states and G7 members, France and Italy are notably absent from this list.
The adoption of the Ukraine Plan could now be a good starting point for greater European coordination of bilateral financial assistance. Once the Ukraine Plan has been assessed by the Commission, EU development ministers should discuss how to best align their bilateral aid to Ukraine to the objectives of the Ukraine Plan and how to strengthen coordination between their individual thematic and geographic priorities in supporting Ukraine’s reconstruction. Ideally, voluntary, additional contributions by Member States to the Ukraine Facility would strengthen the EU’s collective support to Ukraine’s reconstruction and recovery. Finally, member states could make an important contribution to increasing the impact of EU support to Ukraine by strengthening the technical assistance and capacity development element of the facility through additional contributions to the third pillar or through bilateral programmes.
Mobilising international support to the Ukraine Facility. Although the Ukraine Facility is a financial instrument established by the EU, it is open for voluntary contributions as external assigned revenue by third countries, international organisations and international financial institutions. External contributions can be made to all three pillars of the facility and need to be implemented according to the rules and conditions laid out in the regulation. Similarly, despite the crafting of the Ukraine Plan being primarily driven by a demand from the EU side, the plan has the potential to provide some sort of overall strategy for the international support to Ukraine’s reconstruction efforts. In order to realise these potentials, the European Commission and EU member states should reach out proactively to non-EU donors supporting Ukraine to promote their alignment with and support to the Ukraine Facility and the Ukraine Plan. Even if some non-EU donors may not be ready to channel their financial assistance to Ukraine through the EU’s Ukraine Facility, they might still be willing to tailor it in support of the Ukraine Plan. The next sessions of the multi-agency donor coordination platform for Ukraine (MDCP) as well as the 2024 Ukraine Recovery Conference in Berlin might be suitable venues for coordinating on these issues.
Authored by: Julian Bergman (IDOS)
This content has benefitted from the review provided by Amandine Sabourin and San Bilal (ECDPM).
Picture credits: Viacheslav Tykhanskyi available at iStock.