War risk insurance as a tool for attracting investments in reconstruction

War risk insurance as a tool for attracting investments in reconstruction

Photo: ua.depositphotos.com / NIKO_Cingaryuk
31 July 2023

During the Ukraine Recovery Conference on June 21 in London, Prime Minister of Ukraine Denys Shmyhal stated that “no large-scale, effective, and rapid recovery is possible without engaging private capital and private investments.” The financial aid provided and promised by foreign partners to Ukraine only partially covers the country’s reconstruction needs. Moreover, Ukraine’s need for financial resources is increasing daily in the ongoing war conditions. To attract private investments, Ukraine needs to develop mechanisms to protect them, and one way of such protection could be investment insurance against war risks. In this article, we discuss the overall need for financing reconstruction and the government’s initiatives in the field of investment insurance.

The need for reconstruction financing

Ukraine, suffering from prolonged military aggression, has experienced significant losses and destruction. According to the Kyiv School of Economics (KSE), the total amount of direct documented damages to Ukraine’s infrastructure, as of April 2023, reaches $147.5 billion (based on replacement cost). These figures are not final, as not all losses, damages, and destruction can be fully assessed to date, and furthermore, the cost of the inflicted damage increases daily. Various estimates suggest that the full recovery of the country would require anywhere from $411 billion (a joint assessment by the Government of Ukraine, the World Bank Group, the European Commission, and the UN, considering only the damages inflicted on Ukrainian-controlled territories) to $1.1 trillion (an estimate by the President of the European Investment Bank).

According to information from the Ukraine Support Tracker, as of May 31, 2023, the total amount of foreign military aid to Ukraine during the full-scale war was over EUR 100 billion, and financial aid commitments amounted to over EUR 72 billion. Out of these commitments, approximately EUR 40 billion were actually provided as budget support, including credits, grants, and guarantees.

Based on data from the Ministry of Finance of Ukraine, the state budget financing through foreign partners amounts to $55.5 billion, of which 60% is in the form of credits. Only about $2 billion of these funds were planned for reconstruction purposes, with the rest allocated for current expenses such as salaries for government employees, social support, and other ongoing expenditures.

International partners promise to support Ukraine “as long as needed.” Furthermore, discussions on Ukraine’s reconstruction strategy, needs, methods of funding allocation, and process organization are ongoing. The conference in London was dedicated to these topics, during which partners pledged to provide $60 billion for Ukraine’s needs in recovery, reconstruction, and modernization.

However, the Ukrainian government and our allies acknowledge that the funds from governments and international organizations will be insufficient for the reconstruction efforts. Ukraine requires direct foreign investments, including technology investments. Yet, to attract investments, insurance against war risks is necessary. As private insurance companies currently do not offer such products, relevant solutions are being developed by the government and international organizations.

Initiatives on investment insurance from Ukraine’s partners

A new framework for war risk insurance was initiated during the London conference. Partners announced their support for the Support for Ukraine’s Reconstruction and Economy (SURE) Trust Fund of the World Bank‘s Multilateral Investment Guarantee Agency (MIGA), with a total guarantee of EUR 40.85 million. The European Bank for Reconstruction and Development (EBRD) also expressed its intention to develop a pilot scheme for insurance against war risks. Moreover, according to lawmakers, certain countries such as the United Kingdom, Japan, Germany, France, Canada, Australia, Israel, and others have already established special funds for insuring investments in Ukraine.

Ukrainian initiative on investment insurance

In its turn, Ukraine plans to assign the responsibility for insurance against war risks to the state Export Credit Agency (ECA), which currently provides insurance for exports and investments from Ukraine. This legislative proposal, registered as Bill No. 9015 and approved in its first reading, is supported by the Ministry of Economic Development and Trade of Ukraine. If the bill is enacted, instead of direct investments from Ukraine, the ECA will provide insurance coverage against “risks that may arise from armed aggression, military actions, and/or terrorism” for both foreign and domestic investors, but only on the condition that “such investments are directed towards creating objects and infrastructure necessary for the development of processing industries and the export of Ukrainian-origin goods, works, and services.” The latter provision poses some limitations, as establishing a company from scratch that can immediately enter the foreign market is quite challenging. In our opinion, if restrictions are to be imposed on companies eligible for such insurance, it would be better to base these restrictions on the number of job positions that such companies create. By doing so, companies can first operate in the domestic market, gain experience, and then venture abroad.

The bill does not specify the exact process of implementing such insurance. Instead, it obligates the Cabinet of Ministers and the National Bank of Ukraine (NBU) to develop subsidiary regulations with relevant mechanisms. This will include making amendments to the ECA’s Charter, the Procedure for Providing State Guarantees by the ECA, the Regulation on Licensing of the ECA, and the conditions for its insurance and reinsurance activities. The bill proposes that the insurance be conducted within the ECA’s statutory capital framework, which currently amounts to UAH 2 billion (approximately $52 million). However, the Ministry of Economy and Trade rightly points out that this amount will need to be increased, especially if the ECA continues to perform other types of activities, such as insuring export contracts. It may be possible for the ECA to attract external funds (e.g., from the EBRD) to increase its statutory capital.

Furthermore, the institutional capacity of the ECA will need to be significantly enhanced. Since its launch at the end of 2020, the ECA has only concluded 86 insurance contracts (32 of which were in 2023). This allowed for the insurance of export credits amounting to UAH 671 million (UAH 381 million in 2023). Thus, if the agency is involved in insuring investments during the reconstruction, its capacity to review, assess, and conclude insurance contracts will need to be increased significantly. Apparently, technical assistance from the EU or international organizations will be required to achieve this.

Theoretically, the state could commission insurance services against war risks from a private insurance company. However, many developed countries have agencies that assist their exporters in entering foreign markets (this assistance is not only financial but also includes expertise on market rules and foreign consumers’ preferences). Therefore, the institutional development of the ECA will be beneficial in the long term. Hence, we support this legislative proposal and urge Parliament to approve it in its entirety (it was already approved in its first reading in May) and call on the government and the NBU to develop the necessary regulatory acts.

However, introducing insurance against war risks alone will not trigger an investment boom. Among the long-standing issues in Ukraine are bureaucracy, corruption, and distrust of government authorities. According to surveys (for example, here and here), 80% of business representatives consider the return of corrupt schemes in the reconstruction processes as the most significant risk; 73% of entrepreneurs fear the lack of control and, consequently, embezzlement of state funds. Business recovery is hindered by the unpredictability of the situation in Ukraine and the domestic market (46.9%), unpredictable actions of the government that could worsen the business environment (42.8%), and obstacles from regulatory and/or fiscal authorities (32.0%).

Therefore, alongside investment insurance, the government must work on reforms promoting domestic investments (including overhauling the judicial system, simplifying regulations, and reforming state institutions, especially those interacting with businesses). While domestic investors have significantly fewer funds for investments compared to foreign investors (for instance, in 2021, the volume of capital investments using domestic resources amounted to UAH 462.3 billion or approximately $17 billion), the investment optimism of Ukrainian enterprises will be a key signal for attracting foreign investments. For instance, purchasing a stake in a successful business is much easier and less risky for an investor than starting a production facility from scratch.

Other instruments of state support for investments include public-private partnerships and production-sharing agreements, as well as economic incentives, such as those provided by the Law “On State Support of Investment Projects with Significant Investments in Ukraine” (commonly known as the “investment nannies” law), which allows the state to support investment projects exceeding EUR 20 million. These instruments can be implemented after significant measures are taken to reduce corruption opportunities within government institutions.


Adopting Bill No. 9015 and the corresponding subordinate acts is an important step toward attracting financial resources for future reconstruction. As war risks may persist for some time, even after Ukraine’s victory, insuring against such risks will be necessary to attract investments. However, this alone will not be sufficient. In addition, there is a need to continue simplifying the regulatory environment, combating corruption, and investing in education modernization for both children and adults (as the presence of human capital is crucial for attracting investments). Other instruments of state participation, such as public-private partnerships or grants (subsidies), can also be utilized. The key is to ensure that such interactions are conducted transparently.

Implementing the bill and transforming the ECA into a strong player in the market will require attracting additional capital to the agency and significantly expanding its institutional capacity. Achieving this will require close cooperation with international financial organizations, and considering Ukraine’s alignment towards the EU, collaboration with the European Commission will also be essential.

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