Blended finance in fragile contexts: Ukraine as a test case

An OECD and Environmental Finance conference discussed the role of blended finance in crises and conflict-affected contexts, using Ukraine as an example. Romina Bandura and Emilia Stazi summarise

On February 4-5, the OECD convened its bi-annual conference on mobilizing private capital, where experts discussed new ways to use blended finance to help the poorest countries in the world meet their development needs.

Recognizing that the amount of mobilized private capital in recent years has been meager, experts agreed that there is an urgent need to accelerate funding for the SDGs. This requires that donors and development finance institutions (DFIs), working in tandem with governments, find more creative ways to achieve these goals.

In 2023, only 12% of the $67 billion private capital mobilized was directed to LDCs¹. In these settings, country risks remain high, and private actors are more reluctant to invest.

Projects might have high development impact but high-risk perceptions regarding their commercial viability and return profile limit private sector mobilisation.

During the conference, a panel discussed the role of blended finance in crises and conflict-affected contexts, using Ukraine as an example. The discussion highlighted blended finance strategies in scaling up financing for development and climate action in the country.

Like many other conflict-affected contexts, Ukraine faces numerous challenges in attracting private capital, including an unstable environment due to the ongoing war, a weak investment climate and workforce shortages. So far, $800 million of private capital has been mobilized in 2023², mainly using instruments such as loan portfolio guarantees (e.g. provided by the EBRD and DFC), political risk and war risk insurance. Other instruments such as equity investments remain sparsely used.

Ukraine's reconstruction requirements are vast, which entails significant private finance to complement limited public funding.

Ukraine faces immediate reconstruction and recovery priorities at both the national and community level, including housing, demining, infrastructure and social services, energy, and transport.

However, there are also long-term investment opportunities to decentralize the energy supply and heating, develop the minerals and mining industry and add higher value to the food agriculture sector.

All in all, Ukraine needs more than $500 billion for recovery and reconstruction in the next decade, which is approximately 3 times its current nominal GDP.

Blended finance is being tested in Ukraine and the learning experience can be applied to other crisis settings.

Ukraine's rebuilding efforts also present an opportunity to integrate sustainability and innovation, again, serving as a test case for blended finance in post-conflict recovery.

The country can adopt greener, decentralized and more resilient approaches that align with global climate and sustainability goals.

"Ukraine needs more than $500 billion for recovery and reconstruction in the next decade, which is approximately 3 times its current nominal GDP"

With major donors — including the United States, Germany, and the United Kingdom — reducing foreign assistance, all stakeholders must collaborate to find original ways to utilize blended finance instruments in support of Ukraine's private sector.

The actions and strategies that panelists discussed, include:

• Pushing donors and DFIs to work more creatively: In crisis settings, defining the financial objectives and risk appetite early is crucial for structuring effective blended finance solutions. Given the scale and complexity of Ukraine's reconstruction needs, stakeholders must push their own risk boundaries, use donor resources more effectively, and ensure co-ordination among themselves. A prime example of this forward-thinking approach is the recent $435 million ICT deal between the European Bank for Reconstruction and Development (EBRD), the European Commission, and the International Finance Corporation (IFC) aimed at enhancing Ukraine's digital connectivity. While this may appear as a single transaction, it serves as a powerful demonstration of how organizations can innovate and collaborate to address complex challenges, paving the way for impactful and sustainable solutions.
• Increasing donor-government collaboration: Moreover, effective coordination among donors, DFIs, and Ukraine's government is crucial, not only to attract private investors but also to pave the way for Ukraine's eventual accession to the European Union. In this regard, Ukraine has been actively implementing a series of governance, and economic reforms, to foster a more business friendly enabling environment as well as consolidating and streamlining project needs. Among the recent reforms and initiatives include:
• Establishing a Reforms Matrix to consolidate more than 200 reforms (and over 400 indicators) that Ukraine has to undertake under different international commitments (IMF package, EU accession, etc).
• Implementing the public investment management reform to attract partners and ensure that public projects are well selected, prioritized and implemented. Ukraine also approved a Single Project Pipeline of more than 760 projects housed in an electronic platform – the DREAM website.
• Establishing the Project Preparation Unit, to streamline the preparation of public investment projects.
• Utilizing more innovative instruments: Along with donor coordination and government reforms, there is also a need to deploy innovative and more complex instruments such as local currency financing and equity investments. While the development community has traditionally used hard currency, this creates challenges for financing small businesses and infrastructure, as well as for building local capital markets. Moreover, expanding local currency financing can help reduce currency risks for borrowers. To address this, donor and DFIs should focus on increasing local currency financing, strengthening domestic capital markets, and engaging local financial actors, while still providing hard currency options when necessary. In addition, considering the significant need for private finance, de-risking approaches, including leveraging the use of guarantees, remain essential for Ukraine and in other FCS.

As Ukraine navigates its complex recovery journey, it serves as both a critical test case and a valuable learning opportunity for the international community. The lessons learned in Ukraine will be instrumental in shaping future approaches, offering crucial insights into what should—and should not—be done in other fragile contexts to ensure sustainable development.

Ukraine's road to reconstruction is undoubtedly long and challenging. The scale of its needs is immense, and mobilizing the necessary resources to address them will be no easy feat.

Despite the immense scale of the endeavor, this also presents a unique opportunity — to rebuild, innovate, and create a more resilient future.

As one EU senior official recently put it, Ukraine is the biggest business opportunity in the European Continent of our lifetime.

Ukraine has huge investment potential, given its low-cost skilled labor, large consumer base, and proximity to European and Asian markets. Industries such as oil and gas, strategic minerals, IT, manufacturing, and agriculture are ripe for investment. That is why investors should not wait until the war is over; they should start engaging with Ukrainian counterparts now, as turning ideas into projects takes time. Otherwise, they risk losing out on numerous business opportunities and the chance to transform a crisis-stricken country into a modern European nation. Donors and DFIs can become key partners in driving these investments forward.

Romina Bandura is Senior Fellow at the Center for Strategic and International Studies.

Emilia Stazi is Junior Policy Analyst at OECD.

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