Ukraine asks for war insurance to attract private investors – POLICY

BERLIN – As officials from the G7, EU and Ukraine meet with experts on Tuesday in Berlin to discuss Ukraine’s reconstruction, a question will catch people’s attention: how to engage the private sector?

Part of the answer is war insurance.

To finance the reconstruction, foreign investors will have to pay premiums to protect themselves from potential losses due to the destruction of the war.

The experts meeting in Berlin will discuss, among other things, how to assess the likelihood of an attack and how to make it feasible for private investors.

“We believe that private investment insurance and all other investment projects in Ukraine will have to be part of a Ukrainian reconstruction program and should play a significant part in it,” said Sergiy Tsivkach, director of UkraineInvest, a government agency. . agency in charge of attracting foreign direct investment, to POLITICO in an interview.

This is what Ukraine has asked for and is working with institutions such as the World Bank to establish such a scheme.

Ukrainian President Volodymyr Zelenskyy, addressing world financial institutions gathered in Washington earlier this month, called for “a mechanism to guarantee military risks for new investment projects. I hope that we will be able to launch this mechanism together with the World Bank ”.

The case of war insurance

The World Bank has estimated the cost of rebuilding Ukraine at $ 350 billion, a price that increases with each attack by Russian bombs or drones.

Even if the EU governments decide to be generous, which is not yet the case, they will hardly finance the reconstruction of Ukraine entirely with taxpayers’ money, especially in a time of rising inflation and already tense national budgets.

Hence the need to attract private investors. But who would put their money in a country at war?

“Right now it is in a very, very hot phase of the war because they are bombing every day. That’s why it’s hard to say that we need to restart construction now, “said Valeria Gonteva, a former Ukrainian central banker and currently visiting professor at the London School of Economics.

So far, the money has flowed out of the country. FDI flows from Ukraine decreased significantly following the Russian invasion, from $ 577 million in the first quarter of the year to minus $ 286 million in the second quarter, according to data from UkraineInvest.

However, investors are knocking on UkraineInvest’s doors. “The war has had negative but also positive effects, because many companies now feel motivated to support Ukraine as we fight for democracy,” Tsivkach said.

His agency is currently preparing a portfolio of 25 investment projects in the real sector, ranging from agricultural processing to machinery manufacturing and energy projects, which it intends to present to foreign investors.

But war coverage is key: 89% of investors surveyed by UkraineInvest said they would change their investment decision in Ukraine if they were given investment guarantees or investment insurance.

This is where war insurance comes in.

“There is a huge demand for this program to be available for Ukraine,” Tsivkach said. He estimates that Ukraine needs about $ 5 billion in war insurance for the years 2023 and 2024. A range of one to four percent would be an acceptable premium, he said.

But the job of insurers is to calculate and evaluate risks, and war risks are often too expensive for private insurers, making their products too expensive for investors.

“At the moment it is simply impossible to use private underwriters due to fluctuations in premium rates. They react to war activities and the fluctuation is enormous. So it’s unstable, ”Tsivkach said.

Governments and international financial institutions have a role to play. The interesting part is that governments, which are World Bank shareholders, only have to bear the insurance costs (and potential losses) rather than the initial capital investment.

“It’s not necessarily providing all support directly to [Ukraine’s] budget, or directly to use cash. Sometimes it is possible to be a guarantor or to share the risk, “said Gonteva, a former Ukrainian central banker.

How does it work?

The Multilateral Investment Guarantee Agency (MIGA), an agency of the World Bank group, is the largest provider of so-called political risk insurance, which covers risks related to political instability, government expropriation and conflicts in countries where private insurers do not dare to operate.

To do this, MIGA takes the risks, charging a premium that represents on average 1% of the investment costs on the entire portfolio, but varies widely.

MIGA can also share the risks with private insurers by purchasing reinsurance from them.

In September, MIGA pledged $ 30 million for a pilot project that provides insurance to foreign investors willing to venture into Ukraine, the country’s economy ministry said in September. The amount of insurance coverage would be at least 90 percent of the capital invested, meaning the size of the project is limited, but the pilot is thought to help iron out the knots for a broader war insurance product.

“We will try to adapt our tools so that it makes sense for the private sector to get insurance, but also that it is a viable type of business. So trying to get that mix is ​​something we’re exploring, “a MIGA official told POLITICO, speaking on condition of anonymity to discuss confidential conversations.

“But in any case, we need funding from donors,” he said, adding, “We are trying to create a trust fund for donors and are discussing with many donors how to structure it.”

The World Bank is establishing a $ 17 billion Donor Trust Fund to help finance Ukraine’s reconstruction. Ukraine hopes that some of this will go towards providing war insurance so that private capital can start flowing into Ukraine again.

Other options include bilateral agreements between national governments and their investors, under which the US Government Development Financial Institution (DFC) would cover US investors, German Finance Ministry insurance would cover German investors, and so on. .

Alternatively, governments could subsidize their national insurance activities to stabilize premiums.

Finally, Ukraine could issue floating rate sovereign bonds, depending on the events of the war, and use the proceeds raised to cover premium costs and potential losses, Tsivkach said.

“It could be that governments outside Ukraine have decided to provide financial support to Ukraine. If that were the case, there’s no reason we couldn’t … provide the insurance needed to support the construction or operation of that infrastructure, “Lloyd’s CEO John Neal told POLITICO in an interview.

In any case, “we definitely need strong political will from international partners to make this program a reality,” he said.

Hannah Brenton contributed to the reporting.