Europe’s decision to abandon a reparations-backed loan in favour of joint debt marks a turning point in Ukraine’s wartime finances. Economist Oleksandra Moskalenko examines how that choice reshapes fiscal sovereignty and exposes Europe’s strategic dilemma over responsibility and justice. She explains what it means for Ukraine’s state finances, inflation, growth, and household constraints, four years into the Russian invasion.
Ukrainians queue to withdraw cash from an ATM in Kupiansk. Photo: Yasuyoshi Chiba / ANP / AFP
When President Volodymyr Zelenskyy addressed the World Economic Forum in Davos in January 2026, his frustration was unusually explicit. Europe, he argued, had frozen Russian sovereign assets in response to the largest war on the continent since World War II, yet hesitated when the time came to use those assets to defend the victim of that war: Ukraine. The paradox, as Zelenskyy put it, is that Vladimir Putin is not only free but increasingly successful in shaping the debate over how ‘his’ frozen money should be used, while Ukraine continues to rely on loans to survive: ‘It’s Putin who is trying to decide how the frozen Russian assets should be used, not those who have the power to punish him for this war.’
Zelenskyy’s speech came just weeks after European Union leaders quietly abandoned plans for a so-called reparations-backed loan for Ukraine, opting instead to raise roughly €90 billion through joint EU borrowing. The decision marked a turning point. What had once been framed as a mechanism rooted in accountability and justice was replaced by a more conventional debt-financed support package. The implications go well beyond technical financing. They raise fundamental questions about Ukraine’s financial sovereignty, Europe’s strategic posture, and the long-term architecture of post-war reconstruction.
From reparations on Russia to joint debt on the EU
The idea behind the reparations loan was straightforward. Nearly €300 billion in Russian Central Bank assets have been frozen worldwide since 2022, with around €210 billion held within EU jurisdictions, primarily in Belgium. Rather than waiting for an uncertain post-war legal settlement, these assets would serve as collateral for long-term financing to Ukraine. The political logic was compelling. Ukraine would receive predictable funding, while repayment would ultimately be linked to the aggressor rather than the victim.
Yet by late 2025 the proposal had stalled. Legal concerns over sovereign immunity, fears of setting a precedent for reserve confiscation, and internal EU divisions, particularly among countries hosting the assets, proved decisive. Belgium, facing both legal exposure and financial sector risks, became a focal point of resistance.
Belgium hosts the lion’s share of the frozen funds (a little under €200 billion) and criticised the EU plan as ‘fundamentally wrong’, warning that without cast-iron guarantees Belgium could be left owing billions if Moscow were to win compensation in court or retaliate by targeting Belgian property in Russia.
Appeals to the protection of Russia’s property rights sit uneasily with the reality that Russia is actively violating Ukraine’s most basic right to exist, while the frozen assets in question could provide critical support to Ukraine’s wartime economy.
In December 2025, EU leaders formally pivoted towards issuing common EU debt to finance Ukraine’s needs for 2026 and 2027, effectively shelving the reparations concept.
From a narrow financial perspective, the new arrangement ensures liquidity for Ukraine. From a broader political and economic perspective, it represents a retreat. The burden of financing Ukraine is shifted once again onto European taxpayers and capital markets, while the principle that Russia should directly pay for the damage it has inflicted is deferred.
Hungary threatens with veto on €90 billion for Ukraine
This week, Hungarian prime minister Viktor Orbán threatened to block the European loan of €90 billion for Ukraine. According to Orbán, Ukraine is refusing to repair the damaged Druzhba pipeline, that supplies Hungary with oil from Russia. Orbán has said that as long as Russian oil cannot flow to his country, he will block the loan.
Ukraine says that Russia is responsible for damaging the pipeline. Foreign minister Andrii Sybiha has said that Hungary's energy security is the country's own responsibility, and advised it to make an end to its energy dependency on Russia.
Ukraine's dual financial burden
For many international observers, Ukraine’s financial situation remains abstract. Yet understanding it is essential to grasp why the debate over frozen Russian assets matters so deeply.
Ukraine is fighting a full-scale war while continuing to operate a modern welfare state. Pensions, public sector wages, healthcare, education, and social transfers continue to be paid even as defence spending has surged to unprecedented levels. At the same time, wage levels remain highly uneven across economic sectors and between the public and private sectors, with average wages remaining far below those in the EU, even relative to the lowest-wage member states.
In 2025, military and security expenditures absorbed more than 60 percent of state budget spending, equivalent to approximately 26 percent of gross domestic product (GDP). By contrast, aggregate social expenditures, including social protection, healthcare, education, and science, amounted to around 10 percent of GDP.
This dual burden has no peacetime analogue. It is sustainable only because of external financial support.
| Year Category | 2025 | 2026 | ||||
|---|---|---|---|---|---|---|
| € billion | % of state budget | % of GDP | € billion | % of state budget | % of GDP | |
| Defence and security | ~€44 | ~62.0% | ~26.3% | ~€55 | ~58.2% | ~27.2% |
| Aggregate social expenditures (social protection, healthcare, education, science) | ~€16.7 | ~23.6% | ~10.0% | ~€20.1 | ~21.3% | ~10.0% |
How much does Ukraine depend on the EU, IMF and G7?
In 2025, Ukraine relied heavily on external financing, receiving approximately €44.1 billion to sustain its budget. According to the Ministry of Finance, more than 70 percent of this support was channelled through the G7 Extraordinary Revenue Acceleration (ERA) Loans mechanism, backed by windfall revenues generated from frozen Russian sovereign assets. The European Union played a central role via the Ukraine Facility, primarily in the form of concessional loans. IMF financing under the Extended Fund Facility was smaller in volume but played a crucial role in underpinning donor confidence and coordinating international support.
In practice, this financial assistance combines grants and concessional loans. While some support is non-repayable, much of the EU-led assistance is provided as low-interest, long-term loans, which reduce immediate strain but add to Ukraine’s future debt burden. Under Pillar I of the EU’s Ukraine Facility for 2024–2027, €33 billion out of €38.3 billion – approximately 86 percent – is provided in the form of loans, with the remainder allocated as grants.
Domestically generated revenues cover only about half of Ukraine’s wartime spending needs. The difference between state revenues and wartime expenditure requirements has stabilised at around €3.6–4.6 billion per month. For 2026, the government estimates that external financing needs will remain substantial, at approximately €40–45 billion, assuming no major escalation of hostilities.
Economists describe Ukraine’s recent financial paradigm as ‘donornomics’
In 2025, external official financing covered roughly half of Ukraine’s total public spending, equivalent to nearly one quarter of GDP. The consolidated fiscal deficit reached 24.8 percent of GDP in 2025 and is projected to decline to 19.3 percent in 2026. These figures underscore the extent to which Ukraine’s wartime budget remains dependent on sustained international support.
This reliance on external financing has led economists to describe Ukraine’s recent financial paradigm as ‘donornomics’ — an economy sustained by external grants and loans, with domestic fiscal capacity becoming secondary to the ability to secure continuous donor support.
The practical implications are clear. Without stable external financing, Ukraine would not be able to balance its budget, pay public sector wages, or maintain social spending. With access to international capital markets still constrained, macroeconomic stability depends on donor inflows to sustain international reserves and preserve price stability.
The gap left by Trump
The Kiel Institute’s Ukraine Support Tracker maps allocations of military, humanitarian, and financial assistance to Ukraine by the United States and geographic Europe. In its dataset, military assistance reflects the estimated value of committed weapons and defence equipment; humanitarian aid captures emergency relief and civilian support; and financial assistance refers to external budget support provided to the Ukrainian state to cover its fiscal gap, including public sector wages, pensions, healthcare, education, and other government expenditures.
Aid allocation to Ukraine 2022-2025 (by country group). Source: Kiel Institut
In 2025, European support expanded significantly relative to the 2022–2024 annual average. Military allocations were roughly two-thirds higher, while financial and humanitarian assistance increased by nearly 60 percent. By contrast, following the effective cessation of new US allocations in 2025, American military commitments dropped to zero. Despite Europe’s substantial increase, total military aid allocated to Ukraine in 2025 remained about 13 percent below the earlier three-year annual average. The reduction in overall financial and humanitarian assistance was more moderate, as higher European contributions partially compensated for the withdrawal of US support.
Stabilisation under extreme conditions
The National Bank of Ukraine (NBU) has managed a delicate stabilisation under extreme conditions. After peaking above 26 percent in 2022, inflation in Ukraine gradually declined, reaching around 8 percent by late 2025. The NBU projects inflation to fall further towards 6–7 percent in 2026, conditional on continued external financing and the absence of major supply shocks.
Inflation in Ukraine. Data source: National Bank of Ukraine
Economic growth remains fragile. In 2022 Ukraine’s real GDP contracted by 29.1 percent as a result of the Russian invasion. Real GDP growth in 2025 was approximately 2 percent, driven by agriculture, logistics rerouting, and limited industrial recovery. For 2026, projections cluster around 2–3 percent, well below the level needed for rapid convergence or meaningful debt reduction.
Economic growht in Ukraine. Data source: National Bank of Ukraine
Ukrainian households under strain
Behind these macroeconomic aggregates lies a society under severe financial pressure. Real household incomes remain significantly below pre-war levels. According to a sociological survey among Ukrainians, only 37.3 percent of respondents report being able to save from their monthly income, while the majority (62.7 percent) cannot. This disparity highlights the extent of financial constraints that limit households’ ability to accumulate savings.
Source: Oleksandra Moskalenko
One third report having savings sufficient to cover less than one month of basic expenditures, while roughly one fifth report having no savings at all. This pattern points to widespread vulnerability and a limited capacity to build precautionary buffers under wartime conditions.
Source: Oleksandra Moskalenko
Half of respondents, 50.3 percent, indicate that they save no portion of their income, reflecting the dominance of immediate consumption needs and persistent financial stress. Only a very small share of households allocate substantial portions of their income to savings, with just 2.5 percent reporting savings exceeding 50 percent of monthly income.
Remittances and humanitarian transfers play a crucial stabilising role, particularly among internally displaced persons (IDPs), who number around 3.7 million.Yet these flows cannot substitute for a functioning domestic economy. Social transfers now account for a disproportionately large share of household incomes. Pensions and social assistance continue to be paid largely thanks to external financing. This has prevented mass impoverishment, but it has also deepened the link between donor flows and social stability. According to official budget data, around one quarter of Pension Fund expenditures is financed through transfers from the state budget rather than payroll-based contributions, reflecting the growing fiscal pressure on public finances.
Financial sovereignty in wartime
Under normal circumstances, financial sovereignty refers to a state’s capacity to finance itself, manage its debt, and conduct independent fiscal and monetary policy. In wartime Ukraine, sovereignty is necessarily constrained. The state survives through a dense web of external financing, conditionality, and geopolitical negotiation.
This dependence has consequences. Budget planning is shaped by donor calendars. Policy choices are filtered through IMF benchmarks and EU facility rules. Even decisions about when and how to rebuild infrastructure are increasingly tied to donor governance structures rather than purely national priorities.
Financial sovereignty cannot be restored during active war. But it can be prepared for. Such preparation requires clarity on the role of frozen assets, not indefinite postponement.
Key numbers: Ukraine’s wartime finances (2025–2026)
Monthly budget gap: approximately €3.6–4.6 billion, equal to roughly 30–35% of average monthly state spending.
External financing (2025): approximately €48–51 billion, covering about one-third of total wartime public expenditure.
Defence and security: over 60% of central government spending and around 27% of GDP.
Household vulnerability: over 60% of households report no capacity to save, and more than half have savings covering less than three months of basic expenses.
Frozen Russian assets in the EU: approximately €210 billion, exceeding Ukraine’s entire annual state budget.
Europe's strategic dilemma
From the EU’s perspective, reliance on joint borrowing reflects caution rather than indifference. European leaders are acutely aware of the legal uncertainty surrounding asset confiscation and the potential repercussions for the euro’s role as a reserve currency. Yet this caution carries a cost.
By declining to move decisively on frozen assets, Europe risks normalising a model in which aggression generates long-term liabilities for allies rather than for the aggressor. This deferral has geopolitical consequences. It weakens the credibility of justice-based reconstruction and creates space for alternative narratives.
This concern was articulated by Zelenskyy in Davos, when he contrasted the treatment of sanctioned leaders elsewhere with Putin’s continued leverage over debates within Europe. His remarks should be read in this context. It was not about immediate cash flows, but about who sets the terms of the post-war order.
The irony is sharpened by parallel diplomatic signals. In early 2026, Russian officials promoted proposals in diplomatic talks held in Abu Dhabi to redirect frozen assets towards reconstruction in occupied territories of eastern Ukraine. While legally implausible, these narratives gain traction precisely because Europe has left the issue unresolved.
What comes next?
In the short term, Ukraine will continue to rely on EU borrowing, IMF programmes, and bilateral aid. Financial collapse is not imminent. The banking sector remains stable, international reserves are adequate, and institutional capacity is far stronger than in 2014.
In the medium term, however, the costs accumulate. Public debt is projected to exceed 100 percent of GDP by 2026. Even concessional loans imply future repayment burdens. Without a credible reparations mechanism, reconstruction risks becoming a generational debt story rather than a justice-based settlement.
For Europe, the question is whether strategic patience shades into strategic avoidance. It sits on a frozen stock of Russian wealth that symbolises unresolved questions of responsibility. Freezing assets indefinitely without deploying them creates a limbo that benefits no one except the aggressor.
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