Ukraine could be broke by 2026, even if war ends tomorrow

There's a gaping hole in Kyiv’s finances that no amount of tax increases or Western donations will be able to fill

I recently published the piece below in Responsible Statecraft. The Paris Summit on 27 March produced nothing that indicated European leaders are focused on the issue of longer-term funding. This is worrying, not least as the Paris Summit appeared designed to prolong, not end, the war. Do the Europeans still have their collective heads in the sand?

I hope you find my article interesting!

BEGINS

There is no plan in place to fund the Ukrainian budget after 2025.

Even if the war ends by the summer of 2025, it will take some time to reduce military expenditures, leaving European nations on the hook. It’s not clear that European elites have fully understood the political costs, however much longer the war continues.

With intensive, U.S.-brokered negotiations ongoing in Saudi Arabia involving separate Ukrainian and Russian delegations, hopes are rising that the Trump administration will finally be able to bring an end to the war.

But even if the war ends tomorrow, it would be unwise to assume that Ukraine could reduce military spending close to prewar levels.

Ukraine now has almost 900,000 men and women at arms, a threefold increase from peacetime, and that doesn’t take into account irrecoverable losses through death and injury. Estimates vary widely, but the casualty rate is commonly thought to number in the hundreds of thousands, with compensation provided to the injured and families of the deceased.

The war in Ukraine has therefore come at a vast financial cost to that country. Ukraine’s defense spending has risen tenfold since the 2021 budget was announced, when social welfare payments were the country’s biggest expenditure.

This has left a gaping hole in Ukraine’s finances that no amount of tax increases or Western donations will be able to fill over a sustained period without political consequences.

Since 2022, Ukraine has run an average budget deficit of over 22% of GDP. Based on the current exchange rate, Ukraine’s budget shortfall in 2025 amounts to around $41.5 billion. And that assumes defense spending falling slightly this year. In the hopefully unlikely event that war continues to the end of the year, the Ukrainian state would need to revise its budget upwards as it did in 2024.

Today, Ukraine’s domestic revenue, including taxes, excise, and duties, just about covers the cost of the defense effort, which in 2024 accounted for 64% of its total budget expenditure. That includes significant tax increases as the war has gone on. Total tax revenue will have risen by more than 100% since the war started and personal income taxes by over 200%. This in a country in which, according to the Wilson Center, 50% of the population lives at a basic subsistence level.

As Ukraine is cut off from international capital markets, it has had to meet the difference through aid and loans from Western nations.

Put simply, Western donations and loans have paid the salaries of Ukrainian state officials and kept the lights on in their buildings. At the start of the war, donations took the form of free financial aid to meet the country’s budgetary and military needs. According to the Kiel Institute, the United States has provided just above $50 billion in direct budgetary assistance. The European Union provided $51.5 billion in financial assistance – i.e., budgetary support – between 2022 and 2024.

However, since the start of 2024, free aid has progressively shifted to lending as Western governments have felt the political and economic cost of unlimited financial assistance.

So, Ukraine has increasingly resorted to borrowing money. In some regards, that is to be expected. Governments tend to borrow heavily at times of war. The UK only settled its World War II war debts to the United States and Canada in 2006.

Ukrainian debt has therefore soared to over 100% of GDP and, critically, the cost of servicing its debt has tripled, and now makes up the second largest line of expenditure in Ukraine’s budget, after military spending. To put that into context, Ukraine will spend more than twice the amount on servicing its debt in 2025 than it spends on the health of its population. That ratio will only widen the longer the war continues.

Ukraine should just about be able to make ends meet in 2025 thanks to the G7 Extraordinary Revenue Acceleration loan agreed in June 2024. As part of a last-ditch compromise by the outgoing Biden Administration, the $20 billion U.S. contribution to the G7 loan was directed through the World Bank to provide specific project-based support – i.e., to help rebuild power infrastructure - rather than generalized budgetary support.

The crucial point is that I’ve seen no plans for how Ukraine’s budgetary needs will be met from 2026 onward. Even if the war ends tomorrow, Ukraine may still be at risk of running out of money in 2026 if Western donor countries falsely assume that it will be able to return to prewar spending on Day One.

Therefore, the big question is how quickly Ukraine can reduce military spending in 2026 and who will cover the shortfall. To balance the books in 2026, Ukraine would need to reduce its military spending by 80%, or around $41 billion.

But decision-makers in Kyiv may understandably push to maintain a big army against the threat of future Russian aggression. While the huge expenditure in weapons and ammunition from war fighting may fall away, maintaining a standing army, even if its numbers are reduced, would still carry a heavy price. Even if Ukraine’s future budget deficit wasn’t as high as $41 billion, it is easy to imagine that it might be $20 billion.

The International Monetary Fund also doesn’t expect Ukraine to be able to access international lending markets before 2027. That will leave the Ukrainian state reaching out to donor nations for additional funding. With the Trump administration looking to pare back its financial commitments to Ukraine and focus instead on investing, including in minerals, the pressure will be on European states.

There is significant political risk here. In the past few days, the Europeans struggled to agree to an additional weapons package of $5 billion for Ukraine. Funding $20 billion in budgetary support to Ukraine in 2026 following a ceasefire this year may still herald a backlash from those on the nationalist left and right who believe the war should have ended in 2022. I assess the UK and Europe would find it economically and politically unsustainable to prop up the war beyond this year without the United States. That’s another reason why European leaders should get behind ongoing peace negotiations.