The EU launched calls for investments under the Ukraine Facility
The EU established an instrument targeting to mobilize EUR 40 bn in investments for Ukraine – the Ukraine Investment Framework (UIF). The investment climate is challenging with large uncertainty and high financing costs. Amounting up to EUR 9.3 bn, the instrument is crucial in bridging the funding gap, as otherwise investment activity and GDP would be poised to remain below pre-war levels. It falls within the Pillar II of the EU’s Ukraine Facility – a EUR 50 bn facility launched for the period 2024 to 2027. The EU launched calls for the business sector to apply within the UIF. This instrument will provide grants, loans, risk coverage, and project preparation support for businesses interested in investing in Ukraine.
Background: the Ukraine Facility by the EU
In response to Ukraine’s war-related macroeconomic challenges, the EU established the Ukraine Facility that entered into force in March 2024, a support instrument with a total allocation of EUR 50 bn for the period 2024 to 2027. The Facility consists of three pillars: budget financing, the UIF, and technical assistance for EU accession.
Click the button below to load the content of Datawrapper.
As of November 2024, the EU has disbursed EUR 16.3 bn of the Ukraine Facility, most of which is directed to current budget support in the form of grants and loans. The Facility is underpinned by Ukraine’s strategy for reforms and economic recovery during this period — the ‘Ukraine Plan’. The Ukraine Plan outlines the country’s reform agenda and key sectors, which are considered as strategic for economic development and investment attraction. Investment is at the cornerstone of Pillar II. It amounts to about EUR 7 bn that is financed from EU funds. Part (EUR 1.5 bn) is financed from EU funds by grants and the remaining part is EU’s guarantee provision of 70% for loans issued by international financial institutions (IFIs). As a result, Pillar II makes up to EUR 9.3 bn available for interested businesses.
Private investment is key
Ukraine’s pre-war economy was driven by the private sector, and so the economic recovery shall follow the same model. While private domestic investors accounted for most of the investment, foreign direct investment (FDI) has the potential to accelerate productivity gains and boost economic growth prospects. The reconstruction costs were estimated at USD 486 bn already by January 2024. To avoid crowding-out effects from the public sector, private investment will play a key role in overcoming the financing challenges of reconstruction. However, Russia’s war and its associated uncertainties present significant risks for investment. Moreover, financing is very challenging. European commercial banks are restricted in activities related to countries with low country ratings. At the same time, Ukrainian banks provide (limited) lending with annual interest rates close to 20% p.a. while foreign companies also face capital restrictions and no access to the government loan subsidy programme ‘5-7-9’. Although there are occasional investment guarantee schemes, such as by bilateral ones by partner countries, no comprehensive guarantee or financing scheme exists for both private foreign and domestic. To address this, the EU has established Pillar II as the Ukraine Investment Framework (UIF).
The EU launched calls
The EU launched calls for businesses to apply with investment proposals under the UIF in October. The first call will remain open for 12 months, with an indicative amount of EUR 2.75 bn, focusing on sovereign and non-commercial sub-sovereign institutions, with priority given to the energy sector and sectors concerning vulnerable groups. In this context it is worth mentioning that Ukraine has met the IMF conditionalities regarding reforms in public investment management, enabling the disbursement of the Extended Fund Facility (EFF) programme tranche in October.
The second call was launched at the Ukraine Investment Conference in the framework of the ReBuild Ukraine in Warsaw in November. It is aimed at EU businesses, as well as joint ventures and consortia involving both EU and Ukrainian companies. Finally, the third call will focus on quasi-equity and equity investments via intermediary funds for private projects in the relevant product-specific sectors.
Pillar II – UIF: how does it work?
The technical supervision is carried out by the European Commission while it is implemented in indirect management by European and multilateral financial institutions, like the EBRD and the EIB, among others. Through these institutions, the UIF provides investment grants, loans, risk coverage, and technical assistance. At the Ukraine Recovery Conference (URC) in Berlin, the European Commission signed its first investment agreements, amounting to EUR 1.4 bn in guarantees and grants, including EUR 1 bn in loan guarantees and EUR 400 m in blended finance grants. Part of this step is EBRD’s public announcement to lend EUR 60 m, backed by financial guarantees within the UIF, to a private Ukrainian company focusing on the biofuel sector. Moreover, the EIB intends to play a key role in transactions with sovereign and non-commercial sub-sovereign entities.
What are the targets?
While the above-mentioned EBRD transaction covered the energy sector, the Ministry of Economy of Ukraine identified five further key target sectors within the Ukraine Plan:
- Energy sector
- Agricultural sector
- Transport and logistics
- Critical raw materials
- Processing industry and manufacturing
- IT industry and digitalisation
The Government of Ukraine highlights the key role of these sectors for the economic recovery. Therefore, the EU and Ukraine established these sectors as strategic orientations of the UIF. The Pillar II regulation also defines horizontal targets:
- at least 20% for green investment,
- at least 15% for start-ups, micro, small and medium-sized enterprises
- 25% for Ukrainian sovereign and non-commercial sub-sovereign institutions with support by the EIB.
The overall target is to mobilise at least EUR 40 bn of investments (~24 % of Ukraine’s GDP in 2023).
Conclusion
Ukraine has been facing a very challenging investment climate. War risks and financing restrictions are strong obstacles for investment. Simultaneously, private investment is desperately needed against the background of reconstruction costs of USD 500 bn (and counting) under a “Build Back Better” concept as of the previous year. To accelerate growth, converge to peer countries and overcome reconstruction challenges, Ukraine will need substantial investment, particularly from the private sector.
While market-based insurance and financing for investments in Ukraine are currently limited due to the war, the UIF has the potential to play a significant role in bridging the gap. However, in addressing Ukraine’s current and future recovery as well as reconstruction needs, the UIF is not a substitute for other forms of support, but rather complements them.
