EU integration is crucial for Ukraine’s future

In the long term, Ukraine’s effective integration with the EU will be the main factor influencing the pace and quality of post-war reconstruction.

EU leaders will on December 15 decide whether to start accession negotiations with Ukraine—currently unlikely, given Hungary’s current determination to use its veto in order to block Kyiv’s European aspirations.

In this context, Kyiv faces a number of challenges, the greatest of which in the short term is ensuring stable sources of financing, especially for significant needs linked to conducting military operations.

In the medium term, Ukraine will need to overcome infrastructure problems and attract investments. In the long term, the primary change will be successful reforms that will build strong institutions that will ensure the country’s socio-economic development and allow Ukraine to join the European Union.

A timely new report from the Polish Economic Institute (PEI) and the Ukrainian Centre for Economic Strategy, Stronger Together: Present and Future Challenges on Ukraine’s Road to EU Integration, sets out all of these issues and offers insight into Ukraine’s short and long term priorities.

If the immediate need is for cash, the longer term need will be for investment and reform.

Short term cash

As a result of the Russian invasion, Ukraine had to redirect more than half its budget in 2022 and 2023 to war purposes. In the face of the loss of market sources of financing and 30 per cent of GDP, financial assistance from the West was—and is—a necessity.

Since the start of the war, Ukraine has already received 68.5 billion US dollars, 62 per cent of it in the form of direct subsidies, and 38 per cent in the form of grants. In 2022, Ukraine’s budget deficit and debt servicing costs reached 55.6 billion US dollars. Foreign financial support helped cover 31.1 billion US dollars, leaving a gap of 24.5 billion US dollars.

In 2023, Ukraine will receive enough global aid to avoid this kind of gap: a total of 42 billion US dollars in financial aid over the course of the year.

“In the first year of the war, Ukraine encountered problems in securing financing for state activities. In the second year, especially thanks to the EU and its member states, which together provided 18 billion euros in aid, this was avoided,” says Marek Wąsiński, head of the PEI global economy team.

“However, we are now once again entering a period of uncertainty, with problems on the part of Ukraine’s two most important allies, the US and the EU. Almost as important for Ukraine as the consent to start accession negotiations will be the European Council’s decision to launch the Ukraine Facility programme with a budget of 50 billion euros to support Ukraine in 2024-2027.”

Medium term investment

Medium term challenges include reconstruction, attracting investment and the modernisation of infrastructure on the Polish-Ukrainian border.

Ukraine faces a huge challenge in rebuilding the country destroyed by the Russian invasion. One particular challenge will be the reconstruction of the economy: since the war began, it has lost its ability to function normally and its development prospects have been limited significantly, says the report.

Foreign direct investment (FDI) in Ukraine was already lower than in other Central and Eastern European countries before the war, but when the war began, it came to an almost complete halt.

“For Ukraine’s reconstruction to be a success and to ensure its stable, sustainable and long-term economic development, it is necessary to attract private capital. While it is mostly a challenge to convince investors to invest in Ukraine now, it may prove easier in certain sectors,” says Iana Okhrimenko, a senior economist at the Centre for Economic Strategy.

“One example is the arms sector, where, as a result of military operations, production in Ukraine is increasing and local start-ups are developing. In connection with the great reconstruction project, the necessary public-private partnerships in the field of infrastructure, construction, building materials and logistics will also be an opportunity.”

Since the start of the war in Ukraine, the Polish-Ukrainian border has become one of the most important EU borders for military, humanitarian and economic reasons. The blockade of the Black Sea ports has made it the main route for the export of Ukrainian goods.

However, the border infrastructure has turned out to be ill-prepared for such high traffic.

The most pressing need is to improve railway connections given the difference in gauge between the two countries. It is also necessary to build transshipment terminals and increase the existing number of connections that Ukraine needs to fight Russia and develop its economy, integrating it more closely with the EU.

“Ukraine needs to rebuild its transport infrastructure to develop its economy and integrate with Europe,” says Jan Strzelecki, deputy head of the PEI global economy team. “The involvement of the European Commission as part of the Connecting Europe programme creates an opportunity to secure financing for transnational infrastructure projects. Including Ukraine in them will also benefit current EU members; for example, by building new connections between Poland and Romania.

“Multimodal transport solutions are needed that will allow us to become independent from crowded road transport. It would be beneficial to extend the TEN-T trans-European transport network in Ukraine by the shortest route from Ukraine to Poland, via Lublin, among other things.”

Long term reform

In the long term, Ukraine will need to carry out many reforms, including the fight against corruption In addition to economic issues. Fighting corruption can be effective in attracting FDI, which will enable technology transfer and create the conditions for fair competition in the internal market for both private and state entities.

“In the long term, Ukraine’s effective integration with the EU will be the main factor influencing the pace and quality of post-war reconstruction,” says Dominik Kopiński, a senior advisor in the PEI global economy team.

“Integration may be accelerated by investments, and adaptation to the rules of the EU single market could become the foundation for Ukraine’s economic growth. To achieve this goal, Kyiv must adopt EU regulations, modernise national law and implement instruments to protect investments, including providing greater exchange rate flexibility.

“Poland’s experience in introducing an independent monetary policy, building strong local institutions, creating effective public procurement mechanisms and well-developed capital markets could be a valuable point of reference for Ukraine. The Ukrainian political system also requires decentralisation.”

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