Ukraine after 3.5 years of war: the wind is blowing in the face, aid is ending, and there is no plan B

Over the past two years, in 2023 and 2024, the Ukrainian economy has been growing, with GDP expanding by 5.5% and 2.9% year-on-year. This growth was driven primarily by two factors. The first was a statistical rebound from a low base: following the start of the full-scale Russian invasion, Ukraine's GDP contracted by 28.8% in 2022, creating room for economic recovery without major structural changes. The second was a significant inflow of foreign grants and loans, which reached $31.3 billion in 2022, $42.5 billion in 2023, and $41.7 billion in 2024. These supported both private and public consumption, helping to keep the economy afloat during the three-and-a-half years of warfare.

The fuel of economic growth is running out

The economic growth engines of recent years are stalling. The statistical rebound has naturally weakened, and more worryingly, Ukraine now faces increasing difficulties in securing the external financing necessary to sustain its economy. $42.1 billion in external support has been allocated for 2025—primarily through the Ukraine Facility (€13.5 billion) and the Economic Resilience Activity (ERA) program, which is supported by revenues from the frozen reserves of the Russian Central Bank (€35.9 billion). However, only half of the needed financing (around $23.3 billion) has been found for 2026, and there is no guarantee that the Ukrainian authorities will be able to mobilize the additional external resources needed.

War is war, but where are the reforms?

Meanwhile, after three and a half years of war, the Ukrainian authorities have failed to propose any meaningful economic policy to even partially replace the "life-sustaining" subsidies. The tax administration system remains oppressive, costly, and hostile to businesses. The suboptimal functioning of law enforcement agencies has enabled widespread tax evasion. Instead of addressing the root causes, the government continues to increase compliance costs and pressure on those companies that already comply with the law and still have the stamina to operate in Ukraine.

War weakens benefits of US deal

A potentially promising step toward resolving Ukraine's financial problems was the so-called "raw materials agreement." The U.S.-Ukraine Recovery Investment Fund, initiated by Donald Trump, was established in May 2025. Despite the U.S. administration's initial attempts to structure the agreement in a highly "extractive" manner, the Ukrainian side managed to negotiate more balanced terms, establishing an equal partnership with provisions for arms purchases in exchange for joint mineral extraction. But while the agreement appears broadly beneficial, it is unlikely to be fully implemented while active military operations are ongoing. Any new investment could become an easy target for Russian airstrikes, especially since most Ukrainian mineral resources are located in war-affected areas.

Private consumption weakens and harvests are uncertain

Amid the lack of traditional growth drivers and ongoing Russian aggression, we see increasing worrying signs in the Ukrainian economy. In the first quarter of 2025, organized retail sales growth slowed sharply to +4.8% year-on-year, compared to +13.4% in 2023 and +15.6% in 2024, indicating a loss of momentum in private consumption. Industrial production fell by 6.1% year-on-year in the first quarter of 2025, after growing by 6.8% in 2023 and +4.6% in 2024.

The decline was primarily driven by food processing (-10.7% y/y, driven by a poor harvest in 2024), utilities (-6.3% y/y due to a mild winter), and mining (-15.0% y/y, driven by the destruction of gas extraction infrastructure and the seizure of coal mines). While food processing could recover if harvests improve, the outlook for mining remains bleak amid ongoing hostilities.

The fight for the hryvnia exchange rate is expensive

The trade deficit continues to widen. The goods and services deficit has reached $19.4 billion in 2025, up from $13.8 billion a year earlier. Despite mounting pressure, the National Bank of Ukraine (NBU) has maintained a largely stable exchange rate for over a year, even as a hryvnia adjustment appears increasingly necessary. This currency stability comes at a price: the NBU spends $2-3 billion per month on interventions, which peaked at $5.3 billion in December. Such generous support can only be sustained if significant foreign currency inflows are maintained. At the end of May, Ukraine's gross foreign exchange reserves stood at $44.5 billion, equivalent to just over five months of imports. However, this buffer will quickly run out if external aid declines.

Where is plan B?

During years of Russian aggression, the Ukrainian authorities unfortunately failed to implement a viable Plan B focused on strengthening their domestic economic potential. Instead, they hoped to secure significant foreign aid. One key expectation was the successful confiscation of over $300 billion in frozen Russian reserves. However, this has not materialized. Without alternative strategies, the outlook for 2026 appears highly uncertain—especially given that Russia is still fighting a war for survival and has no intention of ending it while it has sufficient resources.

Kyiv, July 2025

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