Ukraine's Defense Will Continue To Strain Government Finances

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A Ukrainian flag flies in Riga, Latvia, on May 18, 2026.

Ukraine will remain heavily dependent on external financial support and face rising debt sustainability risks unless a durable peace settlement enables a substantial reduction in defense spending. Prolonged conflict would likely necessitate further debt restructuring despite continued Western and International Monetary Fund (IMF) support. Due to the full-scale war with Russia, Ukraine has been forced to pursue a "defense-first" strategy, with over 50% of total government expenditures allocated to military and security objectives. Expenditure for Ukrainian defense and security — encompassing the National Guard, Border Guard and police forces — remains exceptionally high, with defense outlays currently equivalent to total government revenue. Consequently, the administration maintains a significant reliance on international loans and grants to finance substantial current account (external) and budget (government) deficits. As a result of these persistent fiscal imbalances, government debt has increased from approximately 50% of GDP in 2021 to more than 100% of GDP in 2025.

Ukraine's defense spending has increased massively, from 3.4% of GDP in 2021 to between 27% and 37% of GDP since Russia's full-scale invasion in 2022.
The 2026 budget foresees expenditure of $52 billion on defense and security, a significant increase from $45 billion in 2024. Ukraine's GDP will stand at around $225 billion this year.
The European Union (excluding bilateral support from individual member states) and the United States have been the largest providers of military, financial and humanitarian aid to Ukraine. The European Union has been an essential source of financial and budgetary support, while the United States has been the single largest provider of military aid since 2022. However, U.S. support has largely ended since Donald Trump's second administration took office in 2025. (The United States continues to provide military equipment to Ukraine, but Ukrainian purchases are now funded by European countries.)
According to the Kiel Institute for International Economics, the European Union has provided a total of 115 billion euros ($134 billion) in aid since 2022, while the United States has provided 122 billion euros. Germany and the United Kingdom are the next largest donors, accounting for 22 billion euros and 17 billion euros, respectively.

Ukraine will remain highly dependent on external and budgetary financing for the foreseeable future. In 2026 alone, Ukraine has financing needs worth $52 billion to cover its budget deficit. Ukraine's foreign funding gap is estimated at around $50 billion. In this context, Ukraine will need to continue to comply with the $8 billion IMF program, less because of the financing amount but because the pledged $128 billion in official bilateral and multilateral aid is conditional on Ukraine complying with the IMF program. Ukraine falling behind on IMF reforms could put official financing and aid at risk. This means that Kyiv is likely to continue meeting the IMF's demands. Ukraine understands that its financial survival depends on continued compliance and the IMF will prove sufficiently flexible to ensure continued support for Kyiv even if Ukraine were to fall short of meeting some conditions attached to the program. As long as the war continues, Ukraine's financial dependence on external financial support will remain significant. In an escalatory scenario where Russia makes significant territorial gains, Ukraine would be forced to increase military expenditure and its dependence on foreign financial support would increase. In a frozen conflict scenario, Kyiv would be able to somewhat reduce military expenditure as the need to finance ongoing military operations would diminish. However, defense expenditure would remain elevated due to the need to preserve and upgrade military capabilities and maintain a far larger army than before the war out of fear of a reignition of the conflict. Only in a scenario that leads to a sustainable, permanent peace settlement would Kyiv be able to reduce expenditure to a level where it would not need to rely on continued foreign financial support. At present, Ukraine's external financing gap is estimated at around $50 billion by the IMF. Official financing will amount to $51 billion to $52 billion, while the fiscal deficit is $40 billion and defense expenditure is $52 billion. Assuming that a favorable geopolitical scenario allows Kyiv to reduce defense expenditure by 70% (leaving defense spending at roughly 7% of GDP or twice 2021 levels, which is a plausible number and financially sustainable, though whether such a reduction is possible will be a function of the broader geopolitical situation and the balance of military power), the fiscal accounts would then be close to balance and external financing requirements would also decline sharply to around $10 billion to 15 billion. Ukraine might just be able to finance that figure on its own, particularly in the context of increased non-debt foreign direct investment flows to finance reconstruction.

Ukraine's 2026 budget foresees $104 billion in expenditures and $64 billion in revenue, projected to translate into a deficit of roughly 18.4% of GDP, compared to 23.3% in 2025. Defense and security spending will be $66 billion, or 27.2% of GDP.
Ukraine currently benefits from an IMF Extended Fund Facility (EFF), which will provide Ukraine $8.1 billion over 48 months, provided it continues to meet program targets. Ukraine received the first disbursement following the program's approval in February 2026. It is set to receive another $3.8 billion from the IMF in four separate tranches this year. IMF-led reform consists of macroeconomic adjustment policies aimed at stabilizing Ukraine financially as well as broader structural reform, such as tax and institutional reform — the latter to reduce endemic corruption.
Under the recently approved EU Ukraine Support Loan, the European Union will provide 90 billion euros in 2026-2027, covering roughly two-thirds of Ukraine's total external financing needs. Under the so-called Extraordinary Revenue Acceleration loans, Ukraine will receive $50 billion worth of funds under the so-called Ukraine Facility, backed by the profits from immobilized Russian sovereign assets.

While an end to large-scale hostilities would strengthen Ukraine's economic outlook, prolonged conflict would pose severe risks to the country's debt sustainability. A comprehensive peace agreement would lead to reduced defense spending, thereby alleviating domestic and external financing requirements. It would also facilitate increased government-supported investment in growth-enhancing projects, such as infrastructure. Demobilization would expand the domestic labor supply, though it could translate into a short-term spike in unemployment until labor is reallocated to the civilian and defense economy. Nevertheless, with public debt already exceeding 100% of GDP, Ukraine's indebtedness is projected to remain elevated; per the IMF, it will reach nearly 140% of GDP by 2027 if the conflict continues at its current intensity. The longer the conflict lasts, the greater the probability of a further debt restructuring. This would increase the extent of required debt forgiveness from bilateral creditors and increase the risk of a further restructuring of debt owed to private creditors, notwithstanding recent restructurings. The IMF has warned that a third restructuring of commercial debt may be necessary before the end of the decade.

Following the 2022 invasion, private creditors agreed to a two-year standstill on payments. A significant portion of Ukraine's official bilateral debt remains under a temporary standstill until March 2027, while debt awaits a rescheduling or partial cancellation, expected toward the end of the current IMF program in 2027.
As of May 2026, two-thirds of Ukrainian debt consists of official bilateral and multilateral concessional loans. Eurobonds and other commercial debt account for only 10% and domestic bonds (in local and foreign currencies) for roughly 20% of total outstanding debt. Ukraine owes roughly $160 billion in official bilateral debt, accounting for around two-thirds of Ukrainian GDP.
In 2024, Ukraine successfully restructured over $20 billion of eurobonds, reducing the debt stock by nearly $9 billion. In 2025, Ukraine finalized the restructuring of $2.6 billion in so-called GDP warrants, a security whose payments are linked to GDP growth. These were exchanged for new eurobonds with a face value of approximately $3.5 billion, removing a contingent payments clause that could have cost the government up to $20 billion if the economy had grown rapidly during reconstruction.

Even if Ukraine were to wean itself off foreign financial support, it would require significant financing to rebuild its economy and emerge as a stable economic and political entity after the war. Ukraine faces extensive reconstruction requirements that will necessitate financing beyond the capacity of the private sector. Although postwar reconstruction offers significant potential for economic growth, it also demands vast financial resources. Substantial official financial assistance will be essential, with reconstruction needs exceeding 200% of the 2026 GDP, or approximately $600 billion. While private sector investment may cover a portion of the required capital, additional official loans and guarantees will be required. Successful reconstruction would also be contingent on Ukraine establishing geopolitical and macroeconomic stability, as well as addressing deficiencies in economic governance — notably corruption. Failure to do so would likely result in limited private sector inflows. The European Union and other bilateral and multilateral institutions have sufficient capacity to provide the financial support necessary to rebuild Ukraine, but the political willingness to do so will, in part, depend on the stability of the political and economic outlook.

Ukrainian GDP is 20% below its pre-2022 level. Ukraine's labor force has contracted about 25% since 2022 due to 3 million to 4 million Ukrainians leaving the country and 700,000 being drafted into the armed forces. About 30 million people live in Ukrainian-controlled territory.
The Rapid Damage and Needs Assessment — authored jointly by the Ukrainian government, the World Bank, the European Commission and the United Nations — estimates that postwar reconstruction and recovery will cost an estimated $588 billion, including $96 billion for transport, $91 billion for energy and $90 billion for housing.
The combined GDP of the European Union and the United Kingdom is around $27.5 trillion. If the European Union and United Kingdom were to provide Ukraine's reconstruction funds over, for example, 10 years, it would amount to roughly 0.2% of their combined GDP annually. Not all of Ukraine's reconstruction needs will be financed by the European Union and the United Kingdom, and financial support will likely be largely provided in the form of concessional loans and guarantees rather than aid. Separately, at $160 billion, total outstanding official loans amount to a little more than 0.5% of EU and UK GDP. Even if claims were entirely written down, it would not cause EU countries any financial problems. The political ability of European governments to provide support to Ukraine is a different matter, as it makes them vulnerable to populist attacks that point to the large amounts of money "given" to Ukraine, even though in macro terms the amounts are very manageable.