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EU officials have revealed that the next phase of a pioneering bloc-wide export credit initiative will target the reconstruction of war-torn Ukraine, an undertaking expected to cost almost half a trillion dollars.

Antonio Fernández-Martos, a head of unit within the European Commission’s Directorate-General for Trade, last week outlined plans to establish a “complex new policy tool” focused on significant infrastructure projects in the country.

Details on how the scheme will operate are still being ironed out, but Fernández-Martos indicated it would operate as a risk-sharing mechanism to support the work of domestic export credit agencies (ECAs).

A €300mn pilot, slated for launch in 2024 and targeting SME exports, will inform the facility’s eventual structure, he said.

“Longer-term transactions… are the key ones for the reconstruction of Ukraine’s infrastructure,” he told a committee meeting in Brussels, citing energy transmission and bridge construction projects as examples.

“These very big transactions have big companies fronting [them] but also lots of [SME] subcontractors.”

Further ahead, the facility could also be used to plug capacity gaps in other strained markets, Fernández-Martos said.

“It would be a de-risking mechanism where there is a very high demand for a particular market, which would be the case when it comes to Ukraine’s reconstruction,” the official said.

The scheme would likely draw on existing funding. For instance, guarantees could be allocated under the EU’s €50bn aid package for Ukraine, agreed in February after policymakers convinced Hungary’s Prime Minister Viktor Orbán to drop opposition to the deal.

Alternatively, they could be supplied under the EU’s European Fund for Sustainable Development Plus, the financing arm of the Global Gateway, its emerging market infrastructure initiative.

In the past 18 months, European ECAs have collectively pledged hundreds of millions of euros towards Ukraine’s reconstruction, which the World Bank forecasts will cost US$486bn.

With commercial insurers still wary of transparency, corruption and violence risks in Ukraine, public providers are set to play a key role, yet certain ECAs say war risks are still prohibitively high.

“We would not do this [provide cover in a war-affected market] without the direct compensation from the [Finnish] government,” Eeva-Maija Pietikäinen, head of trade finance and country risk management at Finnvera, told GTR in January.

“Our view is the country risk is still high and not doable under our normal risk-taking approach,” she said.

 

“Losing patience”

As the EU prepares to create a “complex” ECA solution for Ukraine’s long-term reconstruction, it will first trial the facility in a pilot focused on SME exports to the war-ravaged country.

The pilot has been well received by the market, with various European agencies including those in Austria, Finland and the Netherlands all registering interest in using the scheme.

EU support under the Ukraine pilot will be provided on a “portfolio” basis, with ECAs independently signing transactions involving Ukrainian buyers backed by partial cover from the EU budget, Fernández-Martos said.

Domestic ECAs would still market the facilities, the official noted, “because this is something that we could not be doing”.

“[ECAs] would be the ones responsible for looking for the specific transactions,” he said, adding that such an instrument “has never happened, so we have to see exactly how we put it into place”.

For the past three years, the Commission has deliberated on plans to establish an export credit strategy, and within this, a pan-EU export credit facility. An independent feasibility study last year concluded the bloc may consider creating a reinsurance function for ECAs.

When the Commission first touted an EU-wide strategy on export credits in early 2021, it cited “harsh competition” in key export markets.

For years, ECAs in the US and Europe have argued non-OECD ECAs, such as China’s, have altered the playing field and hurt exporters by offering greater levels of support – often on concessional terms.

The Export-Import Bank of the United States (US Exim) previously estimated that China’s medium to long-term ECA activity between 2015 and 2019 was equal to 90% of that provided by all G7 countries combined, with Beijing’s support peaking at US$39bn in 2018.

The new risk-sharing facility comes amid wider EU efforts to better align ECA activities across the bloc’s 27-member states, in aid of policy goals such as the energy transition and competing with China.

Earlier this month, the European Commission presented a “textual proposal” at a meeting of the OECD Arrangement on Officially Supported Export Credits – a gentleman’s agreement including ECAs from across Europe, the US and Japan – which lobbied members to introduce clear targets for phasing out fossil fuels.

The Commission plan would limit OECD ECA activities to “circumstances that are consistent with the 1.5 degrees warming limit under the goals of the Paris Agreement, or otherwise support for fossil fuel projects would be banned”, said Fernández-Martos last week.

“We will now be working in the weeks and months with the participants to try and find an agreement as soon as possible, hopefully this year.”

Members of the European Parliament’s Committee on International Trade (INTA) urged the Commission to speed up its plans for an export credit strategy, and within this, an EU facility.

“Being from the north of Germany, I am full of patience. But sometimes this patience is really at the limit. Regarding the export credit agency [in the] European Union, now is the time where the limit is reached,” said Bernd Lange, chair of INTA and a member of the European Parliament.

“The situation at the moment is we have no proper common approach regarding the export credit agencies and even… focusing on sustainability, the phasing out of fossil fuels, is not guaranteed by different agencies.”

“Even one agency, in the country I know the best, is not going in the proper way,” Lange added.