The IFC, the part of the World Bank Group that focuses on the private sector, in December announced a $2bn package to provide for the immediate needs of Ukraine’s private sector, which previously contributed around 70% of the country’s GDP.
As Kaestner explains, the IFC has made significant investments in Ukraine since it became an IFC member 30 years ago, “We’ve managed to keep an engagement, even with all the risks of the war,” explains Lisa Kaestner, who took on her current role July and whose career in eastern Europe dates back to the 1990s.
Since the war broke out, however, the IFC’s large Ukrainian clientele has witnessed damage, directly or indirectly (supply chain issues, etc.). The IFC has continued to provide short-term assistance, but not only--all in all about $60m of trade ($40m in imports, $20m in exports).
“But the reason that this event and discussions among different potential partners for Ukraine are important is the risks are so high right now, that to attract ‘normal’ commercial investment is very difficult. Even to attract investment from IFC is challenging because we take risk on commercial terms normally--but the risk is just so high in Ukraine.”
Alleviating immediate private sector needs
Kaestner’s responsibility is overseeing IFC’s response to the war and its post-recovery agenda in Ukraine. She’s also charged with mobilising support and investment to help the private sector in those countries.
Ukraine’s economy ministry estimates some 5m jobs were lost as a result of the war. But the $2bn package sets out to alleviate the shorter term hardships suffered by the private sector. “But in order to do that, we need partners, probably mostly governments, to work with us, to help de-risk some of the investment, with the idea that we would carry about half of it on own balance sheet,” Kaestner explains. Bilateral discussions are already underway.
“One of the interesting things about that approach is that, say, we have €1 from a partner, which leverages then another €1 from IFC on the balance sheet, we also then have investments from partner banks or local partners on the ground,” Kaestner adds. “We’re estimating, based on the opportunities we see in Ukraine right now, that €1 of partner support could bring €4 to the Ukrainian economy.”
There has, moreover, been a 40% reduction in sowing of winter cereal, not to mention challenges to the exportation of grains: war-related blockages impacted granaries and even the Black Sea for months--factors that threatened not only Ukraine’s agriculture sector but also global food security and prices.
“At some point, even the storage was backed up, so they couldn’t even get the grain out,” Kaestner explains. And it’s a problem that can be compounded over a longer term, given that movement of grain can impact future sowing plans. It’s more time sensitive.
Some of this has been alleviated: through the Black Sea Grain initiative, brokered between the UN and Turkey in July 2022, for example, 18m tonnes of grain and other foodstuffs have been exported. Maintaining Ukraine’s grain flow has remained a priority--not just for Ukraine itself, but also as a way of ensuring global food security.
“And it’s not only the grain sector… there’s all these risks that if you tried to price that interest rate to a client, it would be so high that credit would become unaffordable,” Kaestner adds.
Although many had hoped the war would end soon, with the one-year marker less than one month away, now international financial institutions (IFIs) are focused on keeping the private sector going.
“They pay taxes, they provide jobs, they generate export revenues, they’re producing the goods that people need on an everyday basis. If you let that collapse, you’re starting even from a lower basis when you start to think about construction.” A reconstruction bill that as of June 2022 was already standing at $350bn.
Kaestner explains that IFC has investment of $160m with Luxembourg partners globally, and almost 90% of that is with Luxembourg financial partners. “When we think about Ukraine and the importance of attracting financing to Ukraine--now, but even more so later in the reconstruction, I could imagine that the financial sector in Luxembourg could play a really strong role in financing that, if they can find ways to manage the risk, which I hope they could do partnering with IFIs like the IFC.”
Updated, 31 January at 11:45am, to correct the spelling of Lisa Kaestner’s name