The European Commission's spring economic outlook for Ukraine, released last week, is more optimistic about the country's outlook than might be expected given the devastating impact of a full-scale Russian invasion.. Despite a contraction of almost 30% in 2022, the Ukrainian economy, according to the Commission, has “showed great resilience” in the face of unprecedented stress. And stabilization this year could potentially pave the way for recovery in 2024, depending on the security context..

In addition, the report makes it clear that the fate of Ukraine remains largely in its own hands.. Even with continued Russian aggression, the country can start to recover and take steps towards EU membership, provided it is ready to finally address the internal reform and governance issues that have held Ukraine back since independence.. Former Special Adviser for Europe at the British Foreign Office, David Clark, writes about this in his article for the Atlantic Council..

He also draws attention to the fact that the European Commission's forecast identifies a number of specific reform goals, including reducing the significantly increased role of the state in the economy, addressing the problem of corruption, improving the efficiency of the judiciary and strengthening the protection of property rights..

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“Everyone who has dealt with the previous experience of reforms in Ukraine knows that these problems are deeply interconnected.. Organized appropriation of public resources for personal gain is the result of a state that remains too pervasive in its influence, but at the same time too institutionally weak to effectively exercise its powers of regulatory and judicial oversight in the national interest.. A successful reform program will be one that allows the government to do less but better,” writes Clarke..

He emphasizes that Ukraine will need to move away from war economy measures in favor of a private sector growth strategy so that the massive amounts of investment needed to start reconstruction and economic recovery can be attracted.. This is especially true for attracting private capital.. Clark recalls the numerous cases of nationalization that occurred in the past year. He admits that these processes were understandable at a time when weapons production and energy supply became the most pressing priorities.. But in future battles, Ukraine's survival will be determined by its economic strength as much as its military prowess..

The role of the state was significant even before the Russian invasion: more than 3,500 state-owned enterprises accounted for a tenth of Ukrainian production and about 18% of employment. Military mobilization demands have created a public sector that is now much larger than in any other EU country.

“Only in the banking sector, the share of the state reached almost 60%, which suppressed competition to such an extent that the Ministry of Finance was forced to admit the absence of a functioning financial services market in Ukraine,” the expert writes..

Although the pre-war goal of reducing the state's share to less than a quarter remains in place, the Ukrainian parliament is now debating a bill that could allow even more banks to be nationalized.. The bill is designed to address one specific case, namely the nationalization of Sens Bank. However, it is worded too broadly, so critics fear that it will give the state discretionary power to take over almost any bank.. This applies not only to those banks against which official state sanctions have been introduced, but also to those that have been included in the “shameful list” of enterprises that continue to trade with Russia..

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“While it is clear that Ukraine should want to punish businesses that have failed to sever their ties with Russia, the satisfaction of seizing their assets could be very costly if market confidence is eroded by weakening property rights,” explains Clarke..

Some lawyers also question the consistency of such broad powers with the Constitution of Ukraine and argue that only the National Bank has the right to approve the nationalization of a bank in the event of its insolvency.. Politically driven nationalization likely to be successfully challenged in courts, legal observers say.

An additional factor is that any increase in state control over the economy is likely to heighten concerns about corruption, which remains one of the main obstacles to EU accession..

“The lines between political and economic power, which too often remain blurred in characteristic post-Soviet style, need to be more clearly delineated.. As numerous scandals have shown, state-owned banks and businesses create huge opportunities for self-enrichment and abuse of power by those who ostensibly control them on behalf of the state, including kickbacks, nepotism, excessive salaries and favoritism in government contracts..

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Instead of considering new measures to expand the state's influence on the economy, Clark advises the Ukrainian government to think about how the state can dispose of the assets it has already acquired in a way that is fair, transparent and most likely to promote economic growth..

“If one of the few positive consequences of the war was the acceleration of the de-oligarchization of Ukraine, then one of the new risks after it will be the danger of re-oligarchization due to opaque and favoritized privatization. Ukrainian President Volodymyr Zelensky must resist the temptation to use protectionism to create a loyal business class. This will lead to the fact that Ukraine will not look like a future EU member, but like a miniature version of Putin's crony capitalism. In such a result, there will be no victory, ”writes a British expert.