Ukraine War Economy Under Pressure as Russian Strikes Deepen Crisis

Ukraine War Economy Under Pressure as Russian Strikes Deepen Crisis

Ukraine is set to face its most challenging financial situation since Russia’s full-scale invasion in 2022 as intensified Russian drone and missile attacks damage industrial facilities, disrupt transport and exports, while reducing tax revenues and increasing the cost of the war.

The impact is seen in Kryvyi Rih, the home of Ukrainian President Volodymyr Zelenskiy and one of Ukraine’s major industrial centres, where Russian attacks have brought key steel and mining operations to a standstill and focused attention on maintaining hospitals, schools, public transport and essential services in this city of around 600,000.

The city’s largest employer, ArcelorMittal’s major mining and steel complex, suspended operations last month after a series of Russian ballistic missile strikes disrupted power supplies and forced its furnaces to go offline.

Kryvyi Rih Mayor Oleksandr Vilkul has described the situation as exceptionally challenging, noting the city’s immediate priorities are simply to keep essential services running. The situation in Kryvyi Rih is part of a wider economic crisis affecting Ukraine’s industrial regions, where steel production accounted for roughly one-tenth of the country’s economic output before the war, but is now operating at reduced capacity in Zaporizhzhia and other centres, and is also disrupted by Russian strikes on factories, warehouses, ports and railway infrastructure.

The rise in air attacks is having a direct economic cost on businesses, which have been forced to close temporarily, logistics disrupted and damaged infrastructure made it more difficult for companies to produce and move goods. This is also reducing the state’s tax base needed to finance the state.

Ukraine estimates it requires around $56 billion to cover its funding gap in 2026, equivalent to approximately one-quarter of its economic output. About $27 billion of that requirement is related to military spending.

At the same time, Ukraine’s cost of fighting is rising.

According to Roksolana Pidlasa, head of Ukraine’s parliamentary budget committee, the estimated cost of one day of fighting has increased from around $140 million two years ago to approximately $190 million today. That figure excludes direct military equipment and other in-kind assistance provided by Ukraine’s Western allies.

The rising costs are partly linked to Ukraine’s reliance on expensive medium- and long-range weapons capable of attacking Russian oil refineries, military facilities and other strategic targets. The government is also carrying a greater wage bill for an increased army, while also providing financial support to families of soldiers killed or disabled.

During the first nine months of 2026, Ukraine spent more than $44 billion on defence, while the government collected only around $42 billion in tax revenue during the same period.

This shows the state’s reliance on domestic funds given the increase in spending on the war at the same time as Russian attacks are undermining the economic activities that generate tax revenue.

Ukraine says Russian attacks caused more than 49.5 billion hryvnias, or around $1.1 billion, in lost tax revenue during the first nine months of the year. The losses were due to damaged property and goods, logistical disruptions and temporary closures of businesses.

The government estimates that the cumulative loss could reach 70 billion hryvnias by the end of 2026.

Economist Oleksandra Myronenko of the Centre for Economic Strategies has noted the problem is structural rather than temporary, with government spending continuing to rise while the domestic revenue base is under pressure.

The weakness is also affecting private investment, with some Ukrainian companies reducing their operations and others delaying or cancelling expansion plans due to security risks and uncertainty about the economy. Industrialist Vasyl Khmelnytskyi, for example, noted he had abandoned plans to construct three new factories at an industrial park near Bila Tserkva.

The agricultural sector, one of Ukraine’s most important revenue sources, is also being challenged by Russian attacks on Black Sea ports, with Ukraine’s grain exports falling 36.6% year-on-year in September and Economy Minister Oleksandr Kravchenko warned that around $40 billion in export revenue could be at risk this year because of the disruption to maritime trade.

Alternative export routes through railways, roads and the Danube have enabled Ukraine to continue shipping agricultural products, but they cannot compensate for the capacity and efficiency of Ukraine’s Black Sea ports.

The pressure on industry, agriculture, transport and domestic consumption is reflected in Ukraine’s economic outlook. Economic growth is expected to remain weak in 2026, with forecasts between 0.5% and 1.5%, compared with 1.8% growth in 2025.

Foreign Financing Has Become Critical to Ukraine’s War Budget

International financial assistance has enabled Ukraine to maintain its government during more than four years of war as Ukraine has received almost $200 billion in foreign financial support since the full-scale invasion by Russia.

But obtaining additional funding has become increasingly dependent on economic and governance reforms.

Ukraine has faced delays in passing legislation demanded by its international partners, including those relating to taxation, anti-corruption and other structural reforms. Prime Minister Sergii Koretskyi has warned that around $29.5 billion in foreign assistance is at risk this year due to delays in meeting these requirements.

The government has postponed approximately $900 million in capital spending until December, seeking to preserve cash for military spending, public-sector wages and pensions, while waiting for the legislation to pass.

Koretskyi has set October 15 as the target for completing the required legislation.

The European Union is central to Ukraine’s financial position. The EU has set up a €90 billion ($101 billion) loan programme for 2026 and 2027 to support Ukraine’s budget and defence requirements.

On October 2, the European Commission announced another €2.9 billion disbursement to Ukraine under the Ukraine Facility. The EU has stated that Ukraine’s financial and military requirements for 2026 have been covered by coordinated European financing, alleviating the immediate concerns over this year’s funding gap, but further payments are dependent on agreed conditions and reform.

Ukraine had been seeking to bring forward some financing expected next year to reduce the immediate pressure on the state budget. This approach could, however, increase the financial burden in 2027 if additional international support is not secured.

The government is already preparing for a more challenging financial situation next year.

Ukraine’s proposed 2027 defence spending is around $110 billion, a record level reflecting the continuing costs of the war. The draft state budget envisages total expenditure of around 7.27 trillion hryvnias, with security and defence accounting for around 4.89 trillion hryvnias.

The planned 2027 budget deficit is around $36 billion, while more than $32 billion in international financing remains to be firmly secured.

This makes foreign assistance crucial not only for Ukraine’s military efforts, but also for the overall state budget.

The European Bank for Reconstruction and Development has also continued to provide substantial support for Ukraine. The EBRD expects to provide around €2.7 billion in financing during 2026, with more than 80% being directed at the private sector, including investment in energy infrastructure, Ukrainian Railways and other key economic projects. The bank has also cut its 2026 Ukrainian growth forecast to 1.5% from 2.2%, citing increased uncertainty caused by the war.

Germany has provided additional support as Ukraine prepares for another difficult winter.

During his October 4 visit to Kyiv, German Chancellor Friedrich Merz announced a package worth more than €1.3 billion, including around €1 billion in military assistance and around €350 million for energy infrastructure. The military package includes long-range weapons, combat drones and satellite technology, while the energy funding is intended to support generators, substations and repairs ahead of winter.

The new German assistance comes as Russia continues to target Ukrainian infrastructure and cities with drones and missiles, requiring air defence, emergency repairs and alternative energy capacity.

Ukraine is also looking toward frozen Russian assets as a source of long-term financial support. European countries have immobilised around €210 billion in Russian central bank assets since the invasion.

The use of those assets remains politically and legally complex, but Kyiv argues that Russia’s war has created financial requirements that Ukraine cannot meet with domestic revenue.

The immediate funding situation for 2026 has become less critical after European officials confirmed this year’s budget and defence requirements could be covered, but the underlying issue remains.

Ukraine is struggling to finance an increasingly expensive war, while Russian attacks are undermining the industries, businesses, infrastructure and exports that need to generate the revenue to sustain the state.

For Kyiv, the immediate challenge extends beyond finding the money for weapons, as it must continue to pay soldiers, public-sector workers and pensioners, maintain energy and transport infrastructure, support damaged cities and maintain essential public services.

The economic outlook will therefore depend on a number of variables happening at the same time – continued international financing, Ukraine’s ability to meet reform conditions, the resilience of domestic businesses and exporters, the scale of Russian attacks and the cost of the war in the future.

For now, Ukraine’s finances are heavily reliant on foreign support, and ensuring long-term international funding has become one of the key economic challenges of the war.

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