The Ukrainian economy is on its dying breath. It is on the ventilator of international financial support, and without it the patient will certainly not pull through.
This year, for the first time since 2023, our real GDP went negative in the first quarter and, having clawed back 0.4 percent, is now holding at zero. The destruction of production sites, warehouses and energy and transport infrastructure that is going on right now is rapidly turning misfortune into catastrophe. Manufacturers oriented towards the domestic market and working to supply Ukraine’s security and defence are doing relatively well. The rest, in the Finance Ministry’s delicate formulation, are showing “weak dynamics.”
So the Ukrainian government has two equally weighty tasks for next year: to fund defence in full and to give a financial impulse to the economy, which is shrinking like Balzac’s piece of shagreen. Doing that when our own resources cannot cover even defence spending is harder than hard—but not impossible. The best measure of whether the current government and its policy are adequate will in fact be whether the draft 2027 budget presented a few days ago contains even a hint of an attempt to tackle both tasks in the near term.
Defense and security
In the draft budget, the total resource for national security and defence comes to UAH 4.8 trillion, or 43.8 percent of GDP. That is UAH 517.9 billion more than this year’s already amended budget.
The largest items are the traditional ones:
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development, procurement and repair of weapons—UAH 2.4 trillion;
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military pay—UAH 1.8 trillion;
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clothing, equipment and fuel and lubricants—UAH 122.2 billion;
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food—UAH 56 billion;
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medicines—UAH 3 billion.
The half-trillion “cushion” written into the draft would appear to be enough. But there are catches.
First, the question of raising military pay. Yes, the relevant budget line has grown by UAH 173.5 billion—but recall that this year the government has repeatedly recorded a shortfall on that line and gone looking for extra money for payments to the military. Despite the data being closed, MPs this year put the shortfall at UAH 100–190 billion. So the UAH 173.5 billion set aside for next year merely patches an existing hole; it does not raise military pay or even index it to inflation.
Second, of the UAH 7.2 trillion in budget expenditure, only UAH 3.7 trillion is guaranteed state revenue of our own. Which means that we will not be able to finance even defense spending alone out of our own money. What is more, UAH 1.73 trillion of defense spending (35.7%) is EU money for weapons which, by agreement, may arrive “in kind”—narrowing the Defense Ministry’s room for financial manoeuvre still further at any given moment. It may well turn out that the weapons and ammunition are there, while the money for pay, even unraised pay, is not.
On the Finance Ministry’s plan, for it all to add up we need to attract $52.6 billion in international financing. But the sum confirmed by partners at present is around $20 billion, so another $32.6 billion (roughly one and a half trillion hryvnias) will have to be found. The figure is staggering—larger than spending on education, healthcare and social support combined. If we do not find it, or find only part of it, or simply find it late, underfunding is guaranteed.
Third, almost half of defense spending, UAH 2.2 trillion, comes from the special fund of the state budget. The Finance Ministry assumes that defence spending from the special fund will be financed by receipts generated by the Bureau of Economic Security, the State Bureau of Investigation, NABU, ARMA, the Antimonopoly Committee and the State Audit Service. Similar plans are being set for the customs service, which is to put almost UAH 65 billion into that special fund for defense needs “from improved performance.” And while the customs service at least has a plan, the others do not: whatever comes in is what there will be. On one hand this is a risk; on the other it looks like an incentive to roll up their sleeves. But in Ukrainian conditions incentives like these usually work the wrong way. Instead of chasing the grey and black economy, the control agencies will shake down legitimate business like a pear tree—pretexts can always be found, and the goal is sacred.
Which brings us neatly to how else the government plans to support the real economy.
Economic development
Directly on support for production and entrepreneurship the government has set aside UAH 9.4 billion in the draft. With it, it plans to provide:
- state aid for creating, developing or modernizing processing industry facilities;
- partial compensation for the cost of domestically produced agricultural machinery and equipment;
- state incentives for the creation of industrial parks;
- state cash compensation to buyers of Ukrainian-made goods and services (read: the National Cashback scheme);
- state support for projects involving significant investment.
Well then: the sum is modest and the support is strange. The only item beyond dispute is the incentive for developing processing. The rest is highly debatable.
Industrial parks in Ukraine are ten a penny: 121 of them as of July 2026, of which only 50 actually operate. Rather than create new ones, we would do better to support those we have—by extending support, for instance, to parks whose infrastructure has been damaged by Russian shelling.
The National Cashback scheme began as a pointless idea and is finishing as an openly harmful one. Demand is certainly not among the top problems of the domestic producer right now. Demand is certainly not among the top problems of the domestic producer right now. Strikes on production sites and warehouses, ruined logistics, power cuts, a shortage of workers—those are the real problems. Not one of the pressing problems of Ukrainian business can be solved by handing out cashback to shoppers. The ball has clearly been passed into the wrong net.
How a stingy allocation of state support will help develop projects involving significant investment is not very clear either.
In addition, the government will allocate UAH 19 billion to the National Development Institution, which runs the 5-7-9 affordable loan and 5-7-9 affordable leasing programmes. In essence this is support for agricultural producers in various forms (41% of total lending, 82% of total leasing finance), plus a little working capital for everyone else. And should that prove too little, the issue of UAH 10 billion in domestic bonds will be considered to top up the institution’s projects. The government seems not to have noticed how dramatically our reality has changed. The main problems of the agricultural sector right now are the impossibility of exporting what has been produced, warehouses in flames and fuel that is growing more expensive and may run short. Pressing the sticking plaster of 5-7-9 loans to those grazes is not much of a treatment.
Compensation for business property destroyed or damaged, meanwhile, has been cunningly tied to the surplus from tax rises: UAH 58.7 billion from the higher VAT rate and UAH 8.3 billion from the higher fuel excise. While this is a solid amount, tax changes are not adopted through the budget law, and what will become of these amendments to the Tax Code is anyone’s guess. Parliament is unlikely to fight hard over "+1% VAT or rebuilding destroyed business," though the 4 percent rise in fuel excise is another matter, given that fuel prices have already climbed 39 percent year on year since January. Tying such an important spending line to sources as uncertain as these is wrong.
And that, in fact, is all there is, so far as the real economy is directly concerned. Indirect support for the economy might also be said to include UAH 2 billion for the energy sector, UAH 900 million for space industry projects, UAH 209 million for preparing projects in the extractive sector, UAH 960 million to support projects of the US-Ukraine Reconstruction Investment Fund (if there are any), UAH 800 million for grants to veteran entrepreneurs and UAH 19.7 million for public-private partnership projects.
Frankly, that is thin.
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Evidently, the two equally weighty tasks are not both going to be managed. Nor is there any learning from the mistakes of past years, in which a hole in the Defense Ministry’s budget by mid-summer has become an unhappy tradition. Nor is there any adapting to realities that are substantially reshaping the economy. The government lives in the conviction that partners will always support it and that Ukrainian business will adapt quickly. Up to a point that is true. However badly the Ukrainian side fumbles, partners always hand it a crutch or a walking stick. Whatever challenges come down on our entrepreneurs, they go on breaking that rock. But nothing lasts forever, and while there is not much doubt at present about our partners’ readiness to support us, the resilience of the Ukrainian economy is causing more and more concern. As is the government’s general failure to grasp how fast the situation is actually deteriorating.