Safety Margin: Ukraine's economy and budget can survive for some time without US aid and even purchase weapons, but not for long

The Keynesian effect

In December 2024, The Economist published an article with the bold headline ‘Ukraine is winning the economic war with Russia’, highlighting that Ukraine’s economy had not only adapted to wartime conditions but also appeared healthier than Russia’s across several key indicators. However, this assertion overlooks the fact that Ukraine’s GDP is currently a quarter smaller than it was in 2021.

However, in 2022, Ukraine’s GDP contraction was estimated at nearly 30%. By 2023, however, growth rebounded to 5.5%, surpassing Russia’s. The National Bank of Ukraine’s key interest rate is significantly lower than Russia’s at 13.5%. In January 2022, it stood at 10%, then, like in Russia (though slightly later), the central bank raised it to 25% and kept it at a higher level for longer than in Russia. However, since mid-2023, it has been steadily decreasing. As in Russia, the militarisation of the economy plays a crucial role in maintaining high growth rates. In 2024, according to official data, Ukraine's defence budget was 22.1% of GDP, while in 2025 it is expected to reach 26.3% (compared to just 6% in 2021).

Ukraine's GDP, 2014-2024, billion USD in current prices

The Economist identifies three phases of Ukraine’s economic restructuring. The first phase, from the start of Russia’s invasion until mid-2022, when the offensive in the south was halted, was a period of emergency response. Around 14 million people were displaced. The blockade of Black Sea ports devastated exports. The National Bank had to finance a significant portion of the budget deficit and impose strict currency controls. GDP contracted sharply, and inflation accelerated.

During the second phase – from the second half of 2022 until recently – the economy stabilised. The grain deal helped restore exports. International aid ensured macroeconomic stability: the National Bank stopped financing the budget deficit (which was instead covered by foreign assistance), began accumulating reserves, and eased currency restrictions. Businesses gained confidence and started adapting. Government spending more than doubled, reaching two-thirds of GDP. After Russia withdrew from the grain deal, Ukraine managed to establish a secure maritime corridor for exporting not only grain but also metals and minerals. The third phase, according to The Economist, is now beginning: Ukraine must identify new growth drivers while facing shortages of electricity, labour, and capital.

However, the situation is far from that straightforward. Fiscal stimulus typically has diminishing returns and can lead to structural imbalances that drive inflation – risks that threaten the economic stability of both warring countries.

Slowing recovery

The actual outcome for 2024, however, has been less impressive than expected. According to the National Bank's estimates, Ukraine’s GDP grew by 3.4% instead of the projected 4%. The forecast for 2025 has been revised down from 4.3% to 3.6%. Rising inflation forced the National Bank to raise the key interest rate to 14.5% at the end of January. The main causes of slowing growth and rising inflation are similar to those affecting Russia, with one key difference. In Ukraine, these include a poor harvest, deteriorating export conditions, rising wages due to labour shortages and high demand in the defence sector, as well as an energy deficit and rising electricity costs.

One of Ukraine’s major challenges (both social and economic) is the loss of energy capacity due to Russian airstrikes, a factor not present in Russia (→ Re:Russia: Energy Vulnerability). In 2024, Ukraine lost approximately 9 GW of energy capacity, equivalent to half of the country’s electricity consumption on freezing winter days, according to Forbes, citing DiXi Group data. However, during the same year, Ukraine managed to restore 3 GW and add an additional 1 GW.

The labour shortage problem in Ukraine is also more acute than in Russia, for obvious reasons. The pace of returning Ukrainians who sought refuge abroad has not met expectations. According to a survey of businesses by the Institute for Economic Research and Policy Consulting, cited by Interfax Ukraine, the shortage of personnel has become a key factor holding back business development. At the same time (the other side of the same coin), according to estimates by the Ukrainian Ministry of Economy, the average salary in Ukraine for 2024 increased by 20.3% in nominal terms and by 13% in real terms (by comparison, in Russia, according to Rosstat, the corresponding growth figures are 18% and 9%).

Another key factor in the slowdown was export growth, which fell short of expectations. In 2022, Ukraine’s exports collapsed by a third due to the war (from $68.2 billion to $44.1 billion). In 2023, exports remained unstable ($36 billion), and in 2024, they grew by 13.4% to $41 billion, according to the Ministry of Economy. However, this is still below the 2022 level and only 60% of the 2021 figure. Forecasts for 2025 do not suggest an improvement due to a poor harvest and declining prices for Ukraine’s key export commodities.

Sunflower (a key export commodity) and corn harvests in 2024 were approximately 20% lower than the previous year, according to Ukrainian Forbes. As a result, Ukrainian agricultural exports will decline by more than a quarter by the end of the 2024/25 season, according to predictions from the USDA's Foreign Agricultural Service. The physical export volumes of iron ore and ferrous metals in 2024 increased by 90% and 24%, respectively, notes Forbes Ukraine. However, due to falling global prices, revenue growth was much more modest. Iron ore producers' earnings rose 59% to $2.8 billion, still lower than even in 2022. Revenue for ferrous metal producers reached $4 billion, a 15% year-over-year increase.

In 2025, industry revenues – and consequently, the broader economy – could shrink due to the continued decline in global prices, warn experts from the analytical company GMK Centre. In January 2025, according to the data from the State Customs Service, as cited by Forbes, Ukraine’s exports fell 11% year-over-year to $3.2 billion, while imports rose 9% to $5.5 billion. This highlights another issue: Ukraine’s economy is facing a growing trade deficit. In 2021, it stood at $4.7 billion, in 2022 it widened to $11 billion, in 2023 it ballooned to $26.4 billion, and by 2024, it reached $29.1 billion.

At the start of the year, the National Bank’s Business Activity Expectations Index recorded negative sentiment across all economic sectors. Beyond labour shortages and rising wage costs, businesses in every sector report deteriorating security conditions, increased attacks on energy infrastructure and prolonged recovery times, higher energy and logistics costs, accelerating inflation, and declining investment demand.

The most crucial factor for improving economic performance is boosting Ukrainian exports.

Dynamics of Ukraine's foreign trade, 2021-2024, in million USD

Safety margin and its limits

Despite these negative trends, a key factor in the resilience of Ukraine’s economy in 2024 was the introduction of a new budget stability mechanism.

Ukraine's state expenditures in 2025 are planned at $95.5 billion, with $53.7 billion allocated for defence. The budget deficit will amount to $38 billion, roughly 20% of GDP. As in 2024, when the deficit reached $31.9 billion, it will be almost entirely covered by international aid. A crucial role in this is played by the so-called Extraordinary Revenue Acceleration Loans for Ukraine (ERA) programme, which was agreed upon and launched at the end of last year. Under this mechanism, Ukraine receives loans to finance its budget deficit, with interest payments covered by revenue generated from frozen assets of the Russian Central Bank (→ Re:Russia: The ‘Ukraine Plan’ and Scholz’s Plan). In an emergency, part of these funds can, under the programme’s terms, be directed toward arms procurement.

A key feature of the ERA mechanism is that the loans are structured as contingent liabilities, meaning Ukraine will only have to fully repay the principal under certain conditions, such as receiving reparations from Russia. If that does not happen, the debt could be settled through other means, for example, by confiscating the frozen Russian assets themselves. As a result, despite being formally classified as loans, ERA financing does not negatively impact Ukraine’s national debt dynamics, experts from the Kyiv School of Economics say.

Under ERA, Ukraine is expected to receive $50 billion in loans: $20 billion from the US (already allocated), $20 billion from the EU, $3 billion from the UK, and the remaining funds from Canada and Japan. In addition to these loans, between 2024 and 2027, Ukraine will also receive $52 billion under the Macro-Financial Assistance (MFA) programme. This totals around $100 billion. When combined with accumulated reserves, the total financial buffer amounts to $150 billion, according to Chatham House expert Timothy Ash has calculated.

This mechanism and system of measures were configured (with the active participation of the outgoing Biden administration) to ensure Ukraine could hold out throughout the year, even in the event of a suspension of US economic aid. For this reason, the halt in USAID funding is a painful but not critical blow for Kyiv, especially since USAID funding had already been gradually decreasing.

The real threat, therefore, is not that Ukraine will run out of money this year – it will not – but that it may run out of weapons and ammunition. The latest $61 billion US aid package, approved under Joe Biden, is likely to last only until the middle of the year, Ash points out. A similar assessment was given by Igor Romanenko, former deputy chief of general staff of the Ukrainian Armed Forces, in an interview with Al Jazeera. Europe, according to Romanenko, is unable to compensate for the drop in military aid.

The US remains Ukraine’s largest arms supplier, although Europe nearly caught up between mid-2023 and early 2024, when US military aid was blocked. According to data from the Ukraine Support Tracker project of the Kiel Institute for the World Economy, US military assistance is valued at €64 billion, while Europe’s totals €62 billion. Unlike the early days of the war, when Ukraine received two-thirds of its weapons from existing stockpiles, it now receives them directly from manufacturers – a key finding of a new report by the Kiel Institute). For this reason, it is extremely important for Ukraine to retain all donors. At present, there is no open discussion in the United States about providing Ukraine with a new military aid package.

According to Reuters, in late January, shortly after Donald Trump’s inauguration, US arms deliveries were temporarily paused but later resumed. Currently, deliveries are ongoing, according to Fedir Venislavsky, a member of the Ukrainian Parliament’s National Security, Defence, and Intelligence Committee. The good news for Kyiv, Ash argues, is that even if new US aid is not approved, Ukraine has the funds to place commercial orders for weapons in the US. This means Ukraine can hold out for some time without support from the US administration and Senate, as long as no deliberate obstacles are placed on arms deliveries.