Billions from Europe in Exchange for Reforms in Ukraine

The European Union is to provide Ukraine with €90 billion. After all the wrangling around Hungary's blocking of this financial assistance, the money is finally on its way. And with it comes the customary set of conditions. Some of these are already causing concern: they involve tax changes that may prove unpopular with the public. But the key question is not whether conditions are needed at all. The question is which conditions are actually capable of increasing Ukraine's revenues and strengthening its economy in the middle of a war. Recent discussions show that international partners are worried about the size of the shadow economy and the efficiency of revenue collection. And the answer most often proposed looks obvious enough: raise taxes.

It is a quick fix, but a strategically misguided one. Ukraine's problem is not that its taxes are low. The problem is that a significant share of its sectors are not paying them at all. According to experts cited in the analytical materials of the ANTS Network, the shadow economy accounts for as much as 40 percent of GDP. That means tens of billions of euros lost every year. And before demanding that law-abiding businesses pay more, the state ought to be ensuring that everyone at least pays what the law already requires.

Reforms for immediate implementation

Before nudging Ukraine towards politically sensitive and socially unpopular decisions, European partners ought to be concentrating on reforms that are both realistic in terms of implementation and capable of producing a quick fiscal effect. The most obvious—and at the same time the most underused—tool is customs reform. Ukraine's customs system remains one of the largest sources of lost state revenue. The understatement of customs value, smuggling and "grey" imports constitute a systemic problem that costs the budget billions of euros every year. The potential fiscal reserve here is UAH 105–120 billion a year, based on estimates of losses from customs violations, smuggling and border corruption in 2024. A realistic first-year effect, after the launch of measurable KPIs, can be conservatively estimated at UAH 25–60 billion, if 25–50 percent of this reserve can be closed off.

Under such conditions, raising the tax burden on legal business does not solve the problem—it deepens it, sharpening the sense of injustice and demotivating those who already operate transparently. That is precisely why the EU's approach to the conditions for financial assistance needs to be rethought. Instead of focusing on quick but politically toxic decisions such as tax increases, the European Union ought to tie its financing clearly to concrete progress on customs reform.

The second critical strand is a systemic effort against tax avoidance schemes. The problem of Ukraine's tax system lies not so much in the level of its rates as in the scale of actual non-compliance. VAT carousel fraud (with budget losses in 2024 of UAH 13–15 billion), the splitting of businesses to take advantage of simplified tax regimes (10–13 billion), the use of sole-proprietor status (FOP) in place of employment contracts (16–19 billion), informal self-employment (16–24 billion) and "envelope" wages (UAH 200–265 billion) are all well-established practices, and they undermine the very logic of fair taxation.

In these conditions, raising rates not only fails to solve the problem; it creates additional incentives to deepen it. Crucially, solving this problem does not require fiscal pressure. It requires political will, quality administration and the state's ability to enforce the rules already on the books. That is what the attention of both Ukraine's government and its European partners ought to be directed at.

The third element is the digitalization of oversight, risk-based data exchange with the European Union and transparency. Reducing the role of the human factor remains the most effective anti-corruption tool. Ukraine has already shown that digital solutions can work, but the scaling-up of those solutions has remained limited. Effective international instruments—such as the Protocol to Eliminate Illicit Trade in Tobacco Products, which is an example of a comprehensive mechanism for combating the illegal tobacco trade rather than an imitation of one—ought to be applied in state policy.

The European Union should be encouraging the expansion of electronic control systems, automated risk analysis and data exchange. This will reduce corruption risks and improve the efficiency of administration without putting additional pressure on business. The direct fiscal effect is hard to separate out from the effects of customs and tax reforms, but it is an instrument for bringing the economy out of the shadows in general—and for increasing revenue to the budget.

The principal advantage of de-shadowing reforms lies in how they are perceived by society. Unlike tax increases, they do not provoke mass resistance. On the contrary, the fight against smuggling, corruption and tax evasion enjoys broad public support. This is one of the rare cases in which economic logic and political logic coincide.

That is precisely why the approach of "tax increases first, reforms later" is strategically wrong. It undermines trust in the state and creates a sense of injustice. The logic of "first a level playing field, then a possible adjustment of rates" has far greater potential to produce a sustainable result.

In Ukraine's case it is fundamentally important not just to demand changes, but to demand the right changes — the ones that do not patch up the budget in the short term but lay the foundations for long-term economic growth.

The reserves that are already there

Beyond bringing the economy out of the shadows, there are a number of other ways of either increasing revenues to the budget or improving the efficiency of its expenditures. They include, in particular, the abolition of harmful and ineffective tax breaks. The elimination of preferences for heated tobacco products (HTPs) and the harmonization of excise duties with European levels could, according to various estimates depending on the change in the model of taxation, bring in anything between roughly UAH 3 billion in 2025 and UAH 18.6 billion over the period 2025–2028; under the scenario of the Vienna Institute, the difference between the two models by 2028 amounts to around UAH 66 billion. The policy of raising excise duties on tobacco products enjoys the support of most Ukrainians, and its implementation would help to overcome the demographic crisis and would strengthen the country's defense capability.

The efficiency of public procurement remains one of the most underrated reserves for budget savings. This is a matter not only of preventing corruption, but of systematically improving the quality of management—through the professionalization of procurement, its partial centralization and the active monitoring of risky tenders. There is a confirmed example: in 2024, Prozorro Market, with a procurement volume of more than UAH 30 billion, saved roughly 3 billion. Scaling this approach up to broader categories could yield savings of UAH 5–15 billion a year, depending on the breadth of coverage and the discipline of the procuring entities. In addition, public oversight of state procurement—through DOZORRO's queries to procuring enterprises in the preceding months, and through cooperation with law enforcement—helped to prevent the inefficient use of UAH 133 million in July 2025.

Not raising taxes, but making sure they are paid

And even if the EU does intend to insist on tax increases, it should do so only in respect of those goods and types of economic activity that harm Ukrainian society—above all the health of its citizens (tobacco products, alcoholic drinks, goods with a high sugar content, gambling and betting, CO₂ emissions and environmentally damaging production, single-use plastic and packaging, fuels with high emissions, goods with excessive trans-fat content or ultra-processed foods and extractive or environmentally risky activities). The introduction of an excise duty on sugar-added drinks, for instance, could add UAH 8.5 billion a year to the state budget.

***

The €90 billion package is a powerful instrument of leverage. And how exactly it is used will determine whether Ukraine becomes a more effective, institutionally capable state — or whether it simply acquires one more temporary resource and postpones reforms that are genuinely necessary. The paradox is that the most effective way to increase budget revenues today is not to raise taxes, but to ensure they are paid. That is where the policy of both Ukraine's government and its international partners ought to be focused.