News in Charts: The economic opportunities of Ukrainian reconstruction

More than three years have passed since the outbreak of war between Ukraine and Russia. However, following the inauguration of Donald Trump in January, and subsequent dialogue between the United States and Russia, there has been talk of a potential peace settlement. But the recent meeting between Mr Trump and Ukrainian’s president, Volodymyr Zelensky did not go well, leading to uncertainty regarding the continuation of US military and financial support for Ukraine. Europe has stated its intention to step up its assistance in response, but what that may look like remains unclear. A peace deal still seems to be the objective, although the shape, terms and feasibility of an agreement remains to be seen.

If such a deal were to be achieved, attention would turn to the reconstruction of Ukraine’s war-torn economy. Since 2022, Ukraine has experienced a sharp contraction in GDP, with its economy remaining around 25% smaller than it was prior to the start of the most recent conflict. Were a solution to be found, some of this would be recovered during a transition away from a wartime economy; however, given the loss of territory there is likely to be a permanent deprivation to Ukraine’s output.

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Ukraine would not only seek to reconstruct, but rather reinvent its economic model, which had previously shown substandard GDP per capita growth. Even when accounting for Russian aggression prior to 2022, Ukraine’s economy appears to have been fairly stagnant, showing little sign of converging towards US GDP per capita (as its neighbours have done, to a certain extent, see chart). Moreover, Russian forces have now blocked traditional sea-based export routes to Middle Eastern and Asian Markets. Russia has also bombarded Ukraine’s energy grid and key industrial zones, further disabling Ukraine’s economic growth model.

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Reconstruction and revitalising Ukraine’s economy would undoubtedly require considerable investment. As of 31 December 2024, the World Bank estimated the total cost of recovery and reconstruction in Ukraine to be $524 billion over the next decade, approximately 2.8 times Ukraine’s 2024 nominal GDP and 21.5% higher than the same estimate from two years ago. The government of Ukraine has already allocated $7 billion for reconstruction efforts in 2025, which includes net bilateral aid flows from donors. With the cost of reconstruction estimated to be around $17 billion in 2025, Ukraine must fill a total financing gap of $10 billion. Increased private investment will be essential to help fund this deficit.

However, attracting FDI is easier said than done and it often requires a somewhat stable macroeconomic environment. Aside from the recent swings in economic output, Ukraine has other issues — inflation remains high (as it has been for most of the past decade), and the real effective exchange rate has historically been relatively volatile in times of crises (during the GFC and following the annexation of Crimea). Policymakers would need to initially address these critical macroeconomic imbalances if they are to attract foreign investment, achieve economic stabilisation and post-war employment growth.

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While one extra source of income lies in a potential US-Ukraine rare minerals deal, the accession of Ukraine into the European Union, prefaced by free trade agreements with the bloc, may be the perfect charm to induce such essential foreign private investment. Free trade with the EU should reduce risk and increase expected returns for investors. One common feature Poland, Bulgaria and Romania encountered was a surge in GDP per capita leading up to EU accession in 2004 for Poland, and 2007 for Bulgaria and Romania. Again, it is worth highlighting the importance that the EU places on macro stability ahead of accession

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On the plus side for Ukraine, its commodity wealth could provide it with a unique opportunity to help enable the EU’s green transition — as the country possesses large deposits of critical minerals essential to transition technology, a nuclear energy sector capable of aiding green hydrogen production and the capacity for even greater renewable energy generation. This, paired with cheaper labour and a strong metallurgy tradition, means that Ukraine could fill a supply chain gap in manufacturing and processing, especially within energy intensive sectors such as lithium and steel processing. Eventual accession into the EU, favourable trade agreements and strong public backing could drive the private investment needed to reconstruct and modernise Ukraine’s economy, while additionally reaping benefits for the rest of the EU.

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For now, the war continues. But with Mr Trump’s preference for a more isolationist stance and a united European commitment to assist Ukraine, the EU is faced with a unique opportunity to modernise and boost Ukraine’s economy while simultaneously aiding Europe’s net zero transition. That said, the legacy of post-war economic reconstruction efforts is decidedly mixed. Ultimately, the terms of an eventual peace deal as well, as the magnitude of future private investment (and the wisdom with which it is spent), will be key in determining Ukraine’s growth path over the next ten years.

The views expressed in this article are the views of the author, not necessarily those of LSEG.

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