For many in Western Europe, Ukraine’s future seems deceptively simple: End the war, and recovery will follow. But the economic facts tell a different story, as a Kyiv economist explains.
Hardly anyone in the Ukrainian economy believes the war will end in 2025. State finances remain unsustainable, and a funding gap in the billions looms for 2026. Defense already consumes more than half of the state budget. A peace agreement would not eliminate these costs. This is despite the fact that securing international financial aid is already proving difficult.
The good news is that many of the economic challenges Ukraine faces could be overcome through joint efforts with the EU. But the underlying question is: Can and will Europe act strategically? Then it would have to view EU enlargement as a difficult but inevitable, geopolitical decision.
Slower growth, higher inflation
After recovering from the initial war shock in 2022, Ukraine’s growth slowed again amid uncertainty and weak investment. While nominal gross domestic product (GDP) will reach its pre-war record of $210 billion in 2025, this will not translate into substantial long-term expansion, as industry and agriculture remain weak, plagued by destroyed infrastructure, financing shortages, and extreme weather events. While forecasters once expected a growth rate of 3.5 percent for 2025, they now expect only 2.3 percent—half of the 2024 figure.
Similarly, economists’ expectations regarding the inflation rate have also worsened. The average of eight forecasts for 2025 has risen from 7.2 to 9.4 percent. Analysts cite three main reasons: first, rising electricity prices due to Russian attacks on energy infrastructure; second, crop failures due to poor weather conditions; and third, the weak external value of the Ukrainian hryvnia, which makes imported products more expensive. A ceasefire could only partially alleviate this challenge.
More urgent than improving economic indicators, however, is something else: air defense. Only under safe skies can companies operate without the constant fear of missile attacks. Ukraine should be included in the European Sky Shield Initiative and similar programs, as air defense, independent emergency power supplies, and shelters are now the most important prerequisites for survival, but also for any business activity.
Impending financing gap
The budget deficit is expected to exceed 20 percent of GDP this year and nearly 19 percent in 2026. Since more than half of the budget must be spent on defense, analysts expect large funding gaps for those two years. This could rise to nearly $31 billion in 2026. Even with a peace agreement, the Ukrainian army will not and cannot disappear overnight. Soldiers must continue to be fed, clothed, and equipped. Veterans and their families need social support. Those who have lost their homes must be housed. And many who served will need jobs or a social safety net. These are unavoidable budget expenditures.
If foreign financing dries up, Ukraine would be forced to borrow heavily domestically or allow its currency to devalue. This would mean higher prices, weaker businesses, and a faltering recovery. The EU should therefore not only be prepared to continue providing financial support but also help alleviate the growing debt burden since the subsidies were withdrawn. Without new mechanisms, such as the release of frozen Russian assets, Ukraine will face a financing gap too large to close, even under the best reform conditions.
More imports while exports weaken
Ukraine’s trade deficit represents a weak point. In the first five months of 2025 alone, it reached eight percent of GDP, partly due to rising imports of weapons and replacement energy-supply machinery such as generators, transformers, and accumulators. Analysts also take into account increased imports of natural gas in preparation for the winter. This sustained import demand is likely to continue to put pressure on the balance of payments and thus on the currency.
Exports are stagnating as the two most important sectors, agriculture and metallurgy, have lost momentum. Agriculture is suffering from climate change, mine-contaminated soil, and territorial loss. The minerals industry is suffering from global market pressure, the destruction of capacity in occupied or war-torn regions, and logistical bottlenecks. Yet Brussels has taken no action to alleviate Ukraine’s trade problems. Instead of maintaining the special market access granted in 2022—the so-called autonomous trade measures—it has begun to withdraw these benefits. This could at least mean a new, promising approach for Ukraine: opening the EU single market to Ukrainian goods long before accession.
Fight against corruption
Analysts calling for EU support also point to Ukraine’s potential to close tax loopholes, broaden its tax base, and advance rule-of-law reforms. However, these very reforms have come under severe pressure, the fight against corruption has stagnated, and in some areas, there have even been significant setbacks.
At the same time, even in wartime, Ukrainian society has shown remarkable resolve by defending the independence of the anti-corruption authorities – and the government, as befits a democracy, responded to this expression of public will. This process speaks volumes about Ukraine’s alignment with European values. Now it is up to the EU to live up to this resolve.
Source: Frankfurter general
