Ukraine’s animal spirits against rocket attacks, 1-0

There are two parts to today’s article, as I want to update you on two timely questions: Ukraine’s economic outlook and how to deal with banks whose deposits can flee at lightning speed in this new normal of digital banking and rumors about social media.

Since I sent you a first shipping from Kiev two weeks ago, the Ukrainian capital is once again under an almost daily bombardment, so I wondered – but more importantly, the people in Kiev – if my largely positive impressions hadn’t already become obsolete.

I don’t think they did. THE latest concrete data available shows that the positive developments I have outlined there continued throughout April, but that was, of course, before the shelling again intensified much behind the front line (where things were bad all the while ). It will take some time before hard data can show whether the recovery has been stalled or is overcoming adversity.

But my hunch is that the positive outlook is solid. Tomas Fiala, who runs Kyiv-based asset manager Dragon Capital, told me that since all the drones and rockets aimed at the capital were shot down, “there has been no negative impact. People are comfortable that we have a good shield, and especially the Patriots, finally.

Hlib Vyshlinsky, director of the Center for Economic Strategy, told me that “this factor [of renewed attacks] it was already a given” — people expected an escalation ahead of celebrations for Russia’s victory in World War II on May 9, and some left the city preemptively. “The air defense worked perfectly in Kiev and made people more reassured,” she said.

This confirms two lessons I learned from my visit and shared with you: a sense of predictability, even before full victory, is what matters for economic recovery, and this is one more reason why it is so important that Ukraine’s partners strengthen the country’s air defenses.

The new attacks, however, underscore the importance of something the Ukrainian government has been focusing on for some time, namely war insurance. A private investor thinking of investing serious money in rebuilding infrastructure or physical property in Ukraine will have to guess – it can be no other way – the likelihood of it being destroyed in a missile attack. An investment, even in intangible business assets, could also lose money because war disrupts the economic activity it serves. Add in the risk of a change in the political environment and government policy choices destroying the original business case for investment, and it’s easy to see how a lot of money can be waiting on the sidelines, but never delivered.

Insurance against war or political risks is traditionally the responsibility of national export promotion agencies and the Multilateral Investment Guarantee Agency within the World Bank group. Miga it is preparing to climb the guarantees it provides for trade with Ukraine, and no doubt some national agencies are trying to help their companies. While whatever they can do is helpful, however, it will be far from insufficient.

A game changer could be to involve large private reinsurance groups, so that the private insurance sector inside and outside Ukraine can safely offer war-related insurance policies to companies interested in building or expanding the economic activity of Ukraine. This would undoubtedly require public support from the reinsurance group, but at this stage of the war it could be a very productive use of reconstruction aid by friends of Ukraine. So I’m delighted to hear of the active work being done within the multilateral financial institutions to understand how this could be designed; There is no time to lose. Having a new system for war (re)insurance ready for the Ukrainian reconstruction conference in London next month would be a major achievement.

There are other glimpses of good news. President Volodymyr Zelenskyy last Friday managers hosted by BlackRock, the US asset manager giant, to involve the company in creating a fund for private investors to invest in reconstruction projects. This followed a announcement from the previous week by Horizon Capital, a private equity group, to have completed a $250 million capital raising to finance Ukrainian technology and export companies.

These announcements are encouraging even if not unexpected: Horizon had a first closure last year and BlackRock has been in talks with the government since 2022. But moving forward is in itself “good for sentiment,” Fiala, the Kyiv-based investor, told me.

But the big prize would be to see fresh private money on the table, which neither does. While Horizon brings in a chunk of new money, it’s funded by public or philanthropic sources. As for BlackRock, the deal so far appears to involve only an advisory role in the creation of a “Ukrainian Development Fund,” an investment fund focused on reconstruction. BlackRock’s presence will raise some eyebrows in the West: suspicion will be that even a consultancy role puts the asset manager in pole position to pick the best investments going forward, or worse, have first pick on overfunded or undervalued projects. History is full of public-private partnerships that covered the plundering of the nation’s wealth and such an outcome would be a disaster for Ukraine and all of its friends as well as a gift to Russian President Vladimir Putin. It is therefore urgent to publicly specify a governance structure for the fund that ensures an open and fully competitive investment environment.

If that can be ensured, BlackRock could certainly be a powerful partner. It will add weight to Ukraine’s future roadshows that will offer rebuilding opportunities to global investors and no doubt can be helpful in unblocking some capital flows.

Kiev’s determination to become attractive to global private capital is astonishing. Last month in Kiev, Rostyslav Shurma, deputy head of Zelenskyy’s office, told me how he thought about the need and desirability of large-scale private financing. Private investment should cover 70 to 80 percent of total reconstruction investment, he said. This is because official funding can be counted in the “tens of billions”, but the need for reconstruction amounts to hundreds of billions. “Now look at global money pools,” he said, which are measured in the “tens of trillions.” So the task is to bring 1 to 2 percent of that amount to Ukraine.

If BlackRock can help with this, while the governance of reconstruction investment remains open, transparent, competitive and protective of public wealth, then so much the better. Kiev has a captivating vision of the future that it wants investors and governments around the world to accept, based on the role the country can play in Europe’s green industrial transition. In a future article, I will describe that vision.

A new way to protect banks

Former Deputy Governor of the Bank of England Paul Tucker is an intellectual force to be reckoned with, so I highly recommend my colleague Laura Noonan interview with him. Tucker recommends a new approach to prevent the run on deposits from upsetting banks and the banking system: They should be required to pre-position collateral with central banks to cover 100% of their demand deposits (deposits that can be withdrawn without notice). .

Free Lunch readers will know how exasperated I am with the how we keep coming back to the same error to bail out bank investors who really don’t need to be bailed out. So I’m a fan of this idea. It is in line with Lord Mervyn King’s recommendation to make the central bank a “pawn loan for all seasons” in a book he wrote after his time as governor of the BoE. You can explore Tucker’s much more detailed elaboration of those ideas in a wise released in 2019.

Such a reform would mean, first of all, that banks could no longer be killed by a severe liquidity crisis. It would provide an incentive for more use of time deposits rather than demand deposits. Furthermore, such a framework would give the central bank a better view of banks’ creditworthiness: it is hard to see how it could fail to notice the impact of interest rates on the market value of banks’ balance sheets if it were to regularly value such assets as collateral for its loans. . And in the Eurozone, an all-weather pawnbroker solution could help overcome differences on a pan-European deposit insurance scheme, which remains stuck in a rut.

Others readable

• In my column this week, I argued that we need to update our views on how Ukraine is fighting corruption.

• Washington’s green industry subsidies are working better than anyone expected, so much so that the cost could be much higher than initially assumed. Additionally, state governments are piling incentives on top of federal grants as they compete for investment, like our sister newsletter Energy Source relationships. A more likely problem than rising costs is that the program could run into other constraints such as permit and licensing delays or a lack of skilled workers.

• FT’s weekend magazine is always great; last weekend was stellar. Check out Tim Harford’s argument on why bother with math and math skills valuing curiosity in lifeand I read about my colleague Cristina Criddle’s discovery that TikTok he was spying on her.

Numbers news

• As did Germany get through the winter without Russian gas? Benjamin Moll, Moritz Schularick and Georg Zachmann – who were on the optimistic side of the debate about how quickly the country could end its energy dependence on Vladimir Putin – updated their earlier analysis in light of what transpired. The result: the economic cost of running without Russian gas was even lower than they had anticipated, and going full throttle “cold turkey” (as I argued for) it would have been possible.