The 2022 invasion and the ensuing prolonged conflict have transformed the Ukrainian economy, which has shifted its focus heavily towards defence. But there is still a lack of financial resources.
Four years of war have profoundly reshaped Ukraine’s economy. The shock of the large-scale invasion in February 2022 initially reduced Ukraine’s gross domestic product (GDP) by a third. And, as in Russia, a form of military Keynesianism has taken hold: growth is now driven by public spending and investment in the defence sector.
“Wars tend to freeze economic activity. To counterbalance this effect and resist the invasion, the Ukrainian state has injected massive funds into the defence sector, which has led to a profound restructuring of the economy, which has become much more dependent on public spending,” explains Luke Cooper, associate professor of international relations at the London School of Economics (LSE).
“Even the private sector, whose capacity for investment and growth has been weakened by the war, is now heavily dependent on government orders,” the researcher continues.
1/ Ukraine’s GDP has not returned to its pre-war level
After the initial shock, Ukraine nevertheless returned to growth in 2023.
“2022 was the year of the shock of the invasion. 2023 was a year of hope, marked by the successful counteroffensive against Russia. The following year was one of adaptation to a war that was dragging on, with no imminent prospect of an end to the conflict,” summarises Maksym Samoiliuk, an economist at the Centre for Economic Strategy (CES) in Kyiv and author of a recent assessment of the Ukrainian economy. Finally, 2025 could be defined as the year of forced normality, with the realisation for society and businesses as a whole that war is our new reality”.
Ukraine’s GDP remains well below its pre-war level (-20%). Still, the Ukrainian researcher believes that an even greater collapse could have been expected given the intensity of the war, the fact that nearly 20% of the territory is still occupied by Russia, and that all economic activity has been wiped out along the front line.
The Donbas region, the country’s historic industrial powerhouse, has been devastated. Its metallurgical plants, such as Azovstal, its agri-food companies and its thermal power stations have almost all been destroyed.
However, as Ivan Savchuk, a geographer at the CNRS, explains, many industrial production units have been relocated from eastern to western Ukraine, far from the front line:
“The Transcarpathia region [in the far south-west of Ukraine, editor’s note] is thus undergoing a process of accelerated reindustrialisation. Construction sites are springing up everywhere.”
2/ The government has managed to increase its own resources
With GDP still down by 20%, how is Ukraine finding the means to finance its war effort and the essential needs of its population? The task is daunting, especially since Donald Trump, back in the White House in early 2025, put an end to arms deliveries to Kyiv.
“Ukraine had to purchase more military equipment on its own, mobilising its own resources or foreign funding. All this was very costly: at the end of 2025, the country was in serious financial difficulty,” recalls the CES economist.
From a financial standpoint, international aid remains a crucial source of funding for Ukraine. The EU provided $56.9 billion between 2022 and the end of 2025 (mostly in the form of loans), and the United States provided $30 billion (exclusively in the form of grants). In total, international aid covered 56% of Ukraine’s needs in 2025.
For the remainder, the Ukrainian government has also managed to significantly increase its tax revenues since 2022. VAT, corporation tax, and income tax: all sources of revenue are on the rise. Compared to 2021, tax revenue growth is over 20% in real terms, i.e. adjusted for inflation.
According to analysis by Yuliya Markuts and her colleagues at the Kyiv School of Economics, this is mainly due to the increase in 2024 in the military levy – which all taxpayers have had to pay since 2014 to contribute to the war effort – as well as the broadening of the tax base through the rise in average wages, driven by inflation and staff shortages in certain sectors. Several million Ukrainians left the country after 2022, and around 900,000 men are serving in the army.
“The increase in tax revenues has been a real success story of Ukraine’s war effort,” says Luke Cooper. Furthermore, “the war has transformed citizens’ trust in the state. Whereas they previously saw it as relatively kleptocratic, it is now also perceived as a protector of the public interest.”
Corruption scandals continue to erupt at the highest levels of government, but their revelation immediately leads to dismissals or resignations. Through its recurring protests, including since 2022, the Ukrainian population is reminding its leaders of its absolute rejection of nepotism and personal enrichment.
3/ …but this is not enough to cope with rising expenditure
Despite the increase in tax revenues, resources are unable to cover the country’s expenditure, which has been inflated by Ukraine’s immense defence needs.
The EU’s promise at the end of December to grant Ukraine a €90 billion loan, confirmed this week, gives the country some breathing space. We have previous EU funding packages granted to Kyiv.
However, to obtain this €90 billion, Ukraine must commit to a new programme with the International Monetary Fund (IMF), which requires it to implement several reforms. One in particular is unpopular: lowering the VAT threshold for self-employed workers, who are very numerous in the country, which would therefore mean a tax increase for them.
This is especially true given that the war is already extremely costly for Ukrainians. Government social spending is severely constrained, while needs are increasing, with those wounded in the war, internally displaced persons, job losses, etc.
“From a global perspective, the figures show us that Ukraine’s financial and fiscal situation is satisfactory. But behind these figures lie difficult human stories,” summarises Luke Cooper.
4/ Russia seeks to destroy Ukraine’s electricity capacity
This winter, for example, the population is suffering particularly from the cold due to Russian strikes, which have destroyed much of the country’s electricity production capacity, while temperatures are around -20°C. To compensate, Ukraine has to import large amounts of electricity from EU countries. But this is not enough to meet demand.
While Russian strikes are targeting the capital, Kyiv, and the regions bordering the front line, almost the entire Ukrainian territory is affected by power cuts. Without heating, some flats are barely managing to keep the thermometer above freezing.
In early February, the National Bank of Ukraine revised its growth forecast for 2026 from 2.2% to 1.8%, attributing this decline to attacks on the energy system.
5/ Agriculture must find new export markets
Usually a major contributor to Ukrainian growth, the agricultural sector is also struggling. The leading export sector and “backbone of the Ukrainian economy”, according to Maksym Samoiliuk, had a disappointing year in 2025.
Both production and exports declined compared to the previous year.
“This is due to both poor weather conditions and the end of the free trade regime with the EU since June,” explains Maksym Samoiliuk.
After the invasion in 2022, Ukraine benefited from the removal of quotas and customs duties on its agricultural exports to the 27, but the scheme has now expired and has not been renewed in this form.
“Ukrainian agricultural exporters must find new international markets in the Middle East and Asia, via the Black Sea ports, which continue to operate,” adds the CES economist. This is just one of many challenges facing the Ukrainian economy.
For Luke Cooper, both Ukraine and Russia have to contend with heavy external dependence, Moscow on hydrocarbon exports and their price, and Kyiv on international financing.
“But I think Ukraine is in a better position than Russia, despite its smaller economy. In the medium to long term, it has access to international markets and the possibility of joining the EU, which are strong assets for development. These are prospects that Russia does not have, and it would remain in a difficult position even if all sanctions were lifted,” says Luke Cooper.
Economically and militarily, Ukraine’s resistance is far from over.
Source: Alternatives Economiques.
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