January 22, 2024

Anchoring reconstruction in Ukraine’s EU accession process

AP Photo / Scanpix

Current estimates for the reconstruction and recovery of Ukraine vary between several hundreds of billions up to 1 trillion euros.

Under international law, it would be on the one unlawfully inflicting the damage to pay, i.e., Russia. But until a final peace agreement lays down the terms of such reparations, and as long as other members of the international community keep wavering on the seizure of some $300 billion worth of Russian Central Bank assets frozen abroad, it is up to coalitions of able and willing states to provide the reconstruction funding needed by Ukraine.

Since February 2022, the EU has wasted no opportunity to declare its commitment to playing a major role in Ukraine’s reconstruction and supporting investments needed for rebuilding villages, towns, and cities in a smart, high-quality, and sustainable way. Inspired by a New European Bauhaus, an initiative that connects the Green Deal to living spaces, the EU intends to help devastated areas in Ukraine to leapfrog well into the 21st century. But it remains uncertain just how the Union will finance these efforts and how to secure progress of Ukraine on its path to full membership.

What’s on the table?

Thus far, the EU has eliminated custom tariffs within the existing legal framework supporting the creation of a Deep and Comprehensive Free Trade Area (DCFTA), has opened solidarity lanes to facilitate access to the Single Market, and has included Ukraine in a programme to support its small and medium-sized enterprises. A revised priority action plan for enhanced implementation of the DCFTA until the end of 2024 has been adopted to accelerate Ukraine’s integration in the Single Market.

The purpose of these priority actions is not just to provide emergency relief to a beleaguered neighbour but also to invest in the transition of Ukraine towards a green and digital economy that is progressively aligning with EU rules and standards, which in turn helps attract investments by providing regulatory certainty and a dynamic business environment.

But given the scale and complexity of the challenge ahead, a longer-term solution is needed to ensure that funding is well coordinated and used efficiently; a solution that ties recovery and reconstruction to Ukraine’s accession track.

To this end, the Commission has proposed to create a new instrument, a Ukraine Facility that is designed to cater both for short-term recovery needs, medium-term reconstruction for the modernisation of Ukraine, and longer-term reforms it intends to undertake as part of its EU accession process.

The proposal is for €50bn (1/3 in grants, 2/3 in soft loans), above and beyond the EU’s multiannual financial framework (MFF) ceilings. Like a €20bn facility for weapons purchases, the adoption of the Ukraine Facility is contingent on approval by member states of the Commission’s overarching proposal for a budget increase in the mid-term review of the MFF (2024-27), which includes financial top-ups to meet, among others, climate objectives and digital transition goals.

The adoption of the Commission’s entire package was torpedoed by the Hungarian prime minister at the European Council of 14-15 December in an effort to force the release of more billions frozen by the Commission over rule-of-law concerns in Hungary. And this despite (or perhaps precisely because of) the Commission’s questionable decision one day prior to the Summit to release €10bn in post-Covid recovery and resilience funding (RFF), thereby undermining its own role as guardian of the treaties and the payment conditionality of both the RRF and the draft Ukraine Facility.

To be sure, it was not just Viktor Orbán antics in holding the rest of the Union hostage that threatened an agreement on the mid-term review of the MFF. Because of its constitutional debt-break, Germany posed an obstacle to the budget increase proposed by the Commission. Other frugal member states pointed out that the Commission should have reallocated the unspent budget which it failed to calculate into its request for an increase. Meanwhile, other countries were asking for more money to tackle other issues, like migration. Yet, while Orbán dug his heels into the sand, the other 26 member states agreed to overcome their grievances and threatened Budapest to decide on workarounds at an extraordinary European Council meeting on 1 February if Hungary would not compromise. Orbán was already bypassed when he followed German Chancellor Scholz’s advice to step outside of the European Council meeting room and go for coffee, thus allowing the 26 to reach consensus on opening accession talks with Ukraine (and thereby also Moldova).

While Orbán may have overplayed his hand, the other leaders are still keen to keep Hungary on board and reach an EU budget agreement at 27. The draft Ukraine Facility has, therefore, become a political football in a wider debate over the EU’s budget priorities and may still be weakened by the introduction of a mid-term review or emergency brake mechanism, liable to new Hungarian threats. Delays in approving EU funding may pose further existential challenges to Ukraine, at a delicate time in the war when US financial and military support is up in the air and the spectre of Donald Trump’s come-back as president is growing by the day.

How would it work?

If and when approved, funds under the Ukraine Facility will be provided based on the implementation of a reconstruction and reform plan to be submitted by Ukraine, which will be underpinned by a set of conditionalities and a timeline for disbursements. Significant emphasis will be placed on public administration reform, good governance, the rule of law, and sound financial management, including a strong focus on anti-corruption (e.g., the obligation to publish the data on persons and entities receiving more than the equivalent of €500 000 for the implementation of reforms and investments specified in the plan). This follows the ex ante rule of law conditionality and payment logic of the RRF instrument which Hungary is trying to corrupt. For the future proper functioning of both financial instruments, as indeed the credibility of the EU’s enlargement policy, it is crucial that the member states do not cave to Budapest’s blackmail. A quarterly frequency of payments should ensure both predictability of support to Ukraine and a constant policy dialogue between the Commission and Ukraine.

The funds will then be used for the mobilisation of expertise on reforms (incl. technical assistance contracts with EU companies), grants to municipalities (which raises questions about local absorption capacity), and other forms of bilateral support supporting the objectives of the Ukraine reconstruction and reform plan.[1]

In case of a negative assessment by the Commission, a part of the amount corresponding to the unmet conditions will be withheld and only disbursed if Ukraine has justified, as part of a subsequent payment request, that it has taken the necessary measures to ensure satisfactory fulfilment of the relevant conditions.

The draft regulation on the Ukraine Facility details the obligations to be reflected in the financing and loan agreements, which will include measures to prevent, detect, and correct fraud, corruption, conflicts of interests, and irregularities affecting the EU’s financial interests, to avoid double funding, and to take legal action to recover funds that have been misappropriated. In this context, the European Anti-Fraud Office (OLAF) and the European Public Prosecutor’s Office (EPPO) are at hand for investigation and enforcement, thus foreseeing another pathway for Ukraine’s gradual integration into the EU.

It goes without saying that it will be essential to ensure that available resources are spent in the most effective and targeted way to match the needs of Ukraine and its people. To this end, full use should be made of the G7 multi-agency donor coordination platform for Ukraine launched in January 2023.

Incidentally, it is worth observing that the draft Growth Plan for the Western Balkans contained in the Commission’s enlargement package of 8 November foresees a similar financing mechanism as the Ukraine Facility. So far, nothing has been proposed for Moldova and Georgia, even if they too suffer from Russia’s aggression and have been moved from the Eastern Partnership framework to that of the enlargement policy. Here, economies of scale and opportunities for regional cooperation could be achieved by expanding the existing and planned arrangements and working through the revised enlargement process.

The latter is key: the EU should tie the extraordinary reconstruction and ‘regular’ pre-accession reforms firmly in the clusters of Ukraine’s membership negotiating process. Treating reconstruction separately risks diverting attention away from conducting actual accession talks and decelerating the enlargement momentum needed to meet geo-political ends. The advocacy for Ukraine’s reconstruction should not be used as an alternative or compensation for a lack of progress in the country’s formal EU accession process.

[1] The Facility is meant to replace support that Ukraine would have received under the Instrument for Pre-Accession (IPA), which remains in place for the other candidate countries.

Views expressed in ICDS publications are those of the author(s). This article was written for the ICDS Diplomaatia magazine.

Filed under: Commentary