Ukraine’s economy, battered by war, stands at a crossroads of risk and opportunity. The country remains severely underinvested. The recently signed U.S.–Ukraine investment deal promises to unlock critical sectors, but its real impact remains to be seen. Economist Oleksandra Moskalenko analyses Ukraine's investment climate and the prospects in wartime.

April 30: U.S. Treasury Secretary Scott Bessent and Ukraine's Deputy Prime Minister Yulia Svyrydenko have just signed the minerals deal. Photo:  Facebook @yulia.svyrydenko / ANP / AFP

On April 30, 2025, Ukraine and the United States signed the U.S.–Ukraine Agreement establishing the American-Ukrainian Reconstruction Investment Fund. By May 8, Ukraine’s parliament had ratified the agreement on critical minerals, recasting it as a strategic opportunity. Initially seen as a mutually beneficial arrangement, the deal quickly drew criticism—labelled by some as neo-colonial and an attempt at economic extortion by Washington toward Kyiv—before being reframed as a potentially promising venture. Beyond economics, the deal carries geopolitical weight, contributing to North Atlantic solidarity—a clear signal that investment and security are increasingly intertwined.

The mineral deal: lifeline or leverage?

Touted by supporters as a landmark step toward economic recovery, the agreement seeks to channel American capital and expertise into Ukraine’s critical minerals sector—a cornerstone of both Ukraine’s war-battered economy and the West’s clean energy ambitions. Questions have been raised over whether the deal leaves room for non-American public and private investors. The answer is yes, though this warrants clarification.

The pitch is straightforward: Ukraine opens its vast reserves of critical raw materials—vital for technologies such as batteries and wind turbines—while the United States secures long-term supply chains and a strategic economic foothold in Eastern Europe. On paper, the agreement promises mutual gain: capital inflows, technological partnerships, and industrial renewal for Ukraine; security of supply and geopolitical leverage for Washington. In essence, it creates a joint investment vehicle backed by both governments, designed to attract private capital into Ukraine’s key sectors: energy, infrastructure, mining, and technology.

Oleksandra Moskalenko

Econoom

Oleksandra Moskalenko is Duisenberg Fellow aan het NIAS-KNAW en gasthoogleraar aan de London School of Economics and Political Science (LSE).

Beyond Ukraine’s government pledges, careful alignment with EU accession commitments will be essential to avoid legal and political friction. There is also growing discussion around the need for a parallel agreement with the European Union to ensure equal opportunities for foreign direct investment from EU member states, as Ukraine moves toward deeper integration.

The deal unlocks significant investment opportunities for both Ukraine and the United States—and sends a strong signal to other international investors. If executed well, it could enhance Ukraine’s investment climate and foster long-term technological innovation, particularly in areas such as geological exploration. Yet the reality is clear: these are long-term dividends. The true impact will emerge only over time.

Ukraine’s troubled investment landscape

Since gaining independence in 1991, Ukraine has struggled to unlock its full economic potential. Persistent challenges—ranging from the painful transition to a market economy and immature state institutions to endemic corruption, weak rule of law, and limited access to finance—have hampered progress. Despite its size, strategic location, and highly skilled workforce, Ukraine remained one of Europe’s least attractive destinations for foreign direct investment (FDI) before 2022. Decades of promoting a low-cost, high-quality labour model brought limited success in reversing this trend.

Russia’s full-scale invasion on February 24, 2022, dealt a catastrophic blow to Ukraine’s economy, infrastructure, and social fabric. The war now dominates economic management. Policy responses have necessarily been rapid and operational, focused on survival rather than long-term strategy. Alongside sustaining the war effort, the priority has been to keep the economy functioning and to lay the foundations for future reconstruction.

Direct investment in Ukraine in billion USD, 2010-2024 (excluding reinvested earnings), broken down by round-tripping, debt-to-equity conversions, other direct investment, and overall FDI as a share of GDP. Image: National Bank of Ukraine

The 2022 invasion triggered a textbook 'sudden stop' in capital flows. Gross inflows collapsed from around $2.4 billion in 2021 (including $1.6 billion of round-tripping) to just $200 million in 2022, while round-tripping itself turned negative at –$0.6 billion. As a result, net FDI dropped to approximately –0.6% of GDP. War risk, the destruction of productive assets, and the erosion of property rights protection left FDI all but extinguished.

The National Bank of Ukraine (NBU) introduced resilience measures, including capital controls and incentives to retain reinvested earnings. Even under fire, data show modest inflow recovery: $1.1 billion in 2023, falling slightly to $0.9 billion in 2024. Yet this reflects mostly retained profits by companies already operating in Ukraine, their funds effectively 'trapped' by capital restrictions. This has macroeconomic significance: while NBU’s capital controls have helped avert a balance-of-payments crisis, they obscure the reality that very little fresh capital is entering the country.

Building an investment climate in wartime

Ukraine has never been an easy destination for investors. Long-standing concerns, ranging from legal uncertainty and corruption to weak institutions, have dampened foreign appetite. The war has only made matters worse, compounding risks and undermining confidence. Yet improvements are possible, even now. Good governance, prudent and timely reforms, and a credible commitment to the rule of law remain essential. Trust in investment legislation and the judiciary is critical to restoring confidence.

Promoting Ukraine’s investment opportunities with the backing of international allies is vital. The current climate is shaped as much by expectations of how and when the war will end as by hard economic data. What Ukraine is witnessing is a delayed investment boom—one that will rely heavily on coordinated international action once rebuilding begins in earnest. Although at first glance this may seem to defy economic logic, the long-term prospects are expected to yield substantial returns once peace is restored.

Ukraine has long been significantly underinvested

Through fiscal reforms, privatization, anti-corruption initiatives, regulatory simplification, and close collaboration with international partners, Ukraine is laying the groundwork for a more attractive investment environment.

Ukraine has long been significantly underinvested, with a persistent need for capital to unlock its full potential. At the same time, it offers compelling opportunities. Its comparative advantages—namely, a large consumer market, a skilled and competitive workforce, a strategic location bridging Europe and Asia, and abundant natural resources—remain strong, though increasingly under threat.

The numbers tell a sobering story: since the full-scale war began, aggregate consumption has fallen by 30%; labour shortages in the private sector stand at around 5 million, driven by emigration and conscription; and up to 22% of Ukraine’s territory remains under temporary occupation. The private sector faces growing pressure to upskill workers to meet the demands of a fast-changing economic environment. Yet, for all these challenges, Ukraine’s workforce remains highly educated—a critical asset for future growth.

Immense scale of destruction wrought by Russia

Even before the full-scale invasion, Ukraine was already underinvested by an estimated 20–25% of GDP annually compared with its peers in Central and Eastern Europe. Analyses by the World Bank and the EBRD suggested that Ukraine required at least $20–30 billion in annual investment—both public and private—to converge with EU infrastructure and productivity standards. In reality, inflows often fell far short, typically between $5 billion and $7 billion per year, with FDI averaging just 2–3% of GDP.

The war has dramatically widened this gap. The Ministry of Economy of Ukraine, together with international partners, now estimates that the country will need $40–50 billion annually over the next decade for reconstruction and modernization. Current capital inflows—comprising mostly grants, loans, and reinvested earnings—cover only a fraction of this, leaving Ukraine underinvested by around $30–40 billion per year.

The Ukraine Recovery Conferences in Lugano (2022), London (2023), and Berlin (2024) have served as key milestones, with preliminary assessments of direct and indirect economic losses shaping estimates of the scale and sectoral distribution of needed investments.

According to the latest Rapid Damage and Needs Assessment (RDNA4), jointly prepared by the Government of Ukraine, the World Bank, the European Commission, and the United Nations (February 2025), direct war-related damage reached $176 billion (€170 billion) by the end of 2024—up from $152 billion (€138 billion) reported in RDNA3 just a year earlier.

As of December 31, 2024, updated estimates place Ukraine’s total recovery and reconstruction needs over the next decade at $524 billion. This staggering figure is nearly 2.8 times greater than Ukraine’s projected nominal GDP for 2024 and exceeds last year’s estimate of $486 billion. The revised assessment underscores both the immense scale of destruction wrought by Russia and Ukraine’s vast investment needs—not only to rebuild critical infrastructure but also to achieve the 'build back better' vision and advance key priorities across the real economy.

Promising prospects and first-mover benefits

Despite significant risks, Ukraine presents compelling investment opportunities. Its candidacy for EU membership offers a pathway to deeper integration into European supply chains and regulatory frameworks. Investors who move early stand to gain first-mover advantages in sectors poised for rapid growth during the reconstruction phase.

Several sectors offer particularly promising prospects for sustainable and inclusive development. These include technology (especially IT and the digital economy), infrastructure, renewable energy, healthcare, education, and agriculture. Investment in these areas not only promises attractive financial returns but also strengthens Ukraine’s long-term economic resilience and modernization trajectory.

Key sectors with strong investment potential are:

• Infrastructure and construction: transport, energy, and housing;
• Agriculture: rehabilitation of irrigation systems and modernization of food production;
• Renewable energy: wind, solar, and bioenergy projects;
• Information technology and digital services: leveraging a highly skilled workforce to meet growing global demand;
• Healthcare and pharmaceuticals: rebuilding medical infrastructure damaged by the war;
• Defence and security industry: modernization of military production, dual-use technologies, and cybersecurity capabilities.

In addition, the government’s privatization drive offers opportunities to acquire assets at competitive prices, particularly in manufacturing, energy, and logistics.

Ultimately, beyond macroeconomic recovery, sustained investment will be critical for restoring livelihoods, creating decent jobs, and rebuilding Ukraine’s social fabric. As millions of Ukrainians remain displaced or face uncertain futures, targeted investment—especially in infrastructure, healthcare, and education—can directly support human development and strengthen community resilience. In this way, capital flows are not just economic markers but also vital tools for social stabilization and long-term peacebuilding.

Political risk and fiscal challenges remain unchanged

The single greatest obstacle to attracting new foreign direct investment remains the war itself—and the severe security risks that come with it. Until peace is restored, this reality will continue to weigh heavily on investor sentiment and deter large-scale capital inflows.

Despite meaningful progress on reforms, Ukraine faces persistent challenges. Security remains the overriding concern: no matter how ambitious reform efforts may be, the ongoing conflict and the ever-present threat of renewed escalation loom large in risk assessments.

Demographic pressures are also mounting. Millions of Ukrainians—many of them young and of working age—have left the country. While some are expected to return post-war, many may not, raising long-term concerns about labour shortages, productivity, and the size of the domestic consumer market.

Wind turbines near Melitopol, Zaporizhzhia region. Melitopol is currently occupied by Russia. Photo: Stringer / ANP / AFP

Political risks cannot be ignored. History shows that reform momentum often slows once the immediate crisis subsides, and Ukraine is unlikely to be an exception. Vested interests, gaps in governance, and institutional fatigue may impede progress on critical issues such as judicial reform, property rights, and regulatory transparency. Sustained political commitment will be essential to keep reforms on track.

Fiscal stability is another pressing concern. Ukraine’s budget deficit soared to over $5 billion per month in 2022 and $3.5 billion in 2023, with large shortfalls expected to persist. The country remains heavily dependent on external financial support. Any interruption or delay in international aid risks destabilizing the broader macroeconomic framework and complicating reform efforts.

Experts frequently highlight deeper structural problems: frequent changes to the 'rules of the game', shifting tax policies, opaque court systems, pressure on business owners, and bureaucratic delays all continue to undermine investor confidence. At the same time, alternative perspectives—and constructive debate—are essential to drive better policymaking and foster a healthier investment climate.

Sources: Agreement between the Government of Ukraine and the Government of the United States of America on the creation of the American-Ukrainian Reconstruction Investment Fund, Ministry of Economy of Ukraine, National Bank of Ukraine, World Bank.