The Reconstruction and Development of Ukraine’s Financial Sector after the War

By Ralph De Haas and Alexander Pivovarsky

Before Russia’s February 2022 invasion, Ukraine’s financial sector was small, fragmented and overly reliant on state banks. The sector has nevertheless weathered the initial shock of the war relatively well, reflecting the central bank’s restructuring efforts over the past decade. Even now, the authorities can start preparing for the post-war reconstruction and repositioning of the financial sector. Preparations should include the comprehensive asset quality review that will be needed straight after the war; subsequent bank-specific recapitalisations; and designing a (centralised) mechanism for resolving non-performing loans. State banks should be put on a credible privatisation path while ensuring they become less reluctant to write off or restructure loans. Ukraine’s EU candidacy will guide its regulatory alignment and (re)engagement with foreign investors. To develop capital markets, priorities include consolidating the fragmented equity market infrastructure; introducing a financial collateral law; and legally recognising modern financial instruments to adjust the balance between debt and equity risks. Ukraine may continue to face elevated geopolitical risks after the war. Financial deepening will then benefit from risk-sharing arrangements with the EU, bilateral donors and/or multilateral development institutions.