ANALYSIS: Russia’s War in Ukraine Will Extend Into 2026, Leaving Kyiv Looking for Funds, KSE Economists Warn

If Russia’s war in Ukraine prolongs into 2026, Kyiv’s defense funds may be $18B short. Economists expected the war to end in 2025 and policy makers have no new financing plans. The clock is ticking.

Despite a pretense of negotiations, Russia’s repeated strikes on civilians across Ukraine seem to signal it will continue the war until the end of 2025, and likely beyond, creating a funding shortfall in 2026 not accounted for by Kyiv officials and others, according to an in-depth economic handbook released this month.

Although the head of the Central Bank of Russia, Elvira Nabiullina, has claimed that Russia is running out of resources for its economic growth, Kremlin spokesperson Dmitry Peskov continues to claim that Russia has the “strategic advantage” on the battlefield in Ukraine – and plans to continue the war under this assumption.

Russia’s economy is larger and has more resources that can still be mobilized to pay for the war, while Ukraine has a smaller reservoir of assets available. And if the West fails to increase aid to Ukraine or impose sanctions pressure on Russia, Ukraine will be in a much more vulnerable situation when it comes to funding defense against Russia’s full-scale invasion, according to Natalia Shapoval, head of the Kyiv School of Economics (KSE) Institute.

Ukraine’s operation Spiderweb reportedly wiped out at least 10 Russian aircraft out of 40 targeted on five airfields in Russia’s Murmansk, Irkutsk, Ryazan, and Amur regions on June 1. But after that, Russia began using massive combined aerial attacks, sending hundreds of drone attacks of around 500 drones and missiles at once, in an attempt to overwhelm Ukraine’s air defenses. The strikes have left dozens dead and hundreds wounded in Kyiv, Kharkiv, Odesa, and several other cities.

Peskov has repeatedly said that Russia will not agree to a ceasefire in Ukraine. Russia’s military-industrial complex has expanded in recent years despite the international sanctions imposed on the country, according to recent KSE research, which found that the Kremlin has the economic strength to keep up the current pace of the war for months, if not years, longer.

The West banked on Russia’s war – the largest invasion of a sovereign nation since World War II – ending in 2025. It didn’t. Ukraine now faces 2026, another year of full-scale fighting, with half its defense needs unfunded and macrofinancial aid set to expire.

The make-or-break moment has arrived. Is the West prepared to watch Russia continue the war against Ukraine into 2026?

Why Kyiv is worried about 2026

Ukraine’s allies and global economists didn’t plan for Russia’s war against Ukraine to last throughout 2026, seeing it only as a worst-case alternate scenario.

Ukraine’s government forecast the effect of a protracted war lasting into 2026-2028 as an alternate economic scenario in the government’s Budget Declaration for 2026-2028.

The International Monetary Fund (IMF) took the same approach, reporting that the war may end in the second quarter of 2026 within its downside scenario – the growth scenario under the circumstances of continued hostilities.

But some experts took it more seriously. KSE economists tried to raise the alarm about the new data showing Ukraine’s defense needs were badly underfunded for 2026 – and pushed for the problem to be addressed immediately.

What was previously written with a scarcity of figures is now meticulously calculated – Ukraine lacks both the military and financial aid necessary to resist a protracted war – let alone seize the initiative – without allied support. This poses a serious danger to its economy.

“A longer war means that currently committed levels of support from partners will not be sufficient to allow Ukraine to continue resisting Russian aggression without jeopardizing macroeconomic stability,” KSE analysts wrote in their latest Macroeconomic Handbook, outlining the economy’s trends in the second quarter of 2025.

The protraction of the war in Ukraine will leave Ukraine with merely 2% of growth in 2026 “if security is not restored”, the Organization for Economic Co-operation and Development (OECD) wrote in its latest economic outlook report.

In Ukraine’s government forecast, its economy will continue to suffer from higher prices as the war drags on. Inflation will remain high, forecast to decrease from 15% to only 7.5% in 2028, driving production costs. Ukraine’s economy will stay afloat, but not recover – the government forecasts 2.4% of real GDP in 2026 versus 4-7% of growth projected by different institutions for Ukraine’s post-war recovery period.

Ukraine’s international partners have yet to come up with a solution for the lack of 2026 financing, leaving less time to design the solutions in the second half of the year. But they have promised to start negotiating future aid during the 2025 Ukraine Recovery Conference in Rome on July 10-11, according to a Ukrainian official with knowledge of the plans who spoke with Kyiv Post on the condition of anonymity due to the sensitive nature of their work.

The Ukraine Donor Platform, the coordination body of countries and international financial organizations that allocate aid to Ukraine – met in Rome on July 9 to discuss the financing options, Ukraine’s Ministry of Finance reported.

The current macrofinancial programs – Extraordinary Revenue Acceleration (ERA) loan, backed by profits from frozen Russian assets, Ukraine Facility, IMF program – will soon expire, leaving Ukraine with uncertainty about financing.

Ukrainians and Ukrainian enterprises has responded to the financial pressures by increasing its tax revenues two-fold from 2022 to 2025, 15% (adjusted for inflation) more than in 2021 before Russia launched its full-scale invasion pushing Ukraine into a war-time economy that saw the country lose millions of workers and thousands of square kilometers of occupied land, according to KSE Institute estimations.

Domestic borrowings, which became the second key domestic source of financing Ukraine’s economy in 2024 alongside larger taxes, doubled as well since the start of the invasion. This happened despite the fact that foreign investors fled from investing in Ukraine – the share of non-residents in Ukraine’s bonds almost nullified contrary to other agents.

Ukraine’s financing needs of approximately $30 billion are fully covered for 2025, and over $13 billion in ERA funding left over from this year is expected to be redistributed in 2026.

Ukraine has a projected budget deficit of $46.3 billion for 2026. Why the increase over 2025? Ukraine’s partners have not announced any grants for 2026 at the time of this article’s publication, meaning Ukraine will need to borrow more money elsewhere, increasing its future debt and budget spending for interest payments.

Assuming the IMF program, the remainder of the ERA money, and the Ukraine Facility project offer another $15.1 billion loan for the next year, Kyiv will still have a funding gap of roughly $17.7 billion in 2026.

The prospects for 2027 look even dimmer. The Ukraine Facility, ERA, and IMF programs are set to completely expire, leaving Ukraine with almost zero macrofinancial aid packages for 2028 or beyond. The IMF will likely continue its program, but its size is too limited for investments – IMF’s tranches are only enough to repay the old IMF loans.

Ukraine’s pending budget gap

The $17.7 billion of the financing gap is necessary for Ukraine to finance its needs with the defense budget in 2026. Previously, it was considered the war would end, also decreasing the costs for Ukraine.

As Russia continues its war against Ukraine, Kyiv’s relatively high defense and security expenses will not vanish. On the contrary – Russia’s war will require a higher expenditure every year. Ukraine spent $49 billion to fight against Russia in 2022, but the paycheck is only increasing to $73 billion each year during 2023-2025, KSE estimates.

KSE forecasts that Ukraine will not be able to reduce defense and security spending if the war continues for most of 2026. The spending will remain at $73.7 billion in 2026, with total defense needs again increasing to $68-105 billion each in 2027-28, KSE’s Macroeconomic Handbook says.

What’s included in the defense needs beyond the war, according to KSE?

The salaries for military personnel should be increased to approximately $2,000/month (or $24,000/year), with a personnel around 350,000 needed to defend against risks of another Russia’s invasion, and together with basic equipment, it will total $17.5 billion. $28-35 billion should be allocated to Ukraine’s military inventories filling. And $23-53 billion of defense needs can be satisfied with unconditional access to western countries military inventories should Russian invasion repeat after Russia retreats.

The debt and investment war

Ukraine’s Minister of Finance promoted a cautious debt policy before Russia’s invasion, succeeding in having debt-to-GDP ratio in 2018-21 below 50%, almost as suggested for emerging markets to have less than 40%, with Poland having a 52-67% in the same period.

But the war skyrocketed the debt-to-GDP to 84.6% in 2024. KSE forecasts the figure to increase to just below 100% by the end of 2026, even closer to 110% counting loan-backed $17.7 gap, and to decrease very slowly thereafter.

Ukraine, left with the need to finance its military to survive Russia’s attack on its sovereignty, could be left with barely any money for reinvestments and recovery.

Paired with still elevated defense needs, it may cause a “no growth scenario” for the country for a long period of time. Every additional year of war worsens the problem to the tune of over $30 billion in more debts and interest expenditures per year.

Normally, the spending of any country is rather stable, and doesn’t change much over time, while some crises (like COVID-19) may influence it, being a one-off situation. With Ukraine being a country at war, it’s totally opposite. Debt, servicing costs, and repayments are steadily increasing, eating into a larger and larger part of the total budget. These payments cut into investment capital available for recovery and the economy’s development.

Fewer investments will not leave much revenue for the economy, forcing Ukraine’s central bank to weaken the hryvnia and burn its reserves to offset the lack of revenues. And the weaker a country is economically, the fewer resources it has left to deploy against enemy advances.

Lack of financing for Ukraine means less defense for allies

If the Russian forces attack the West, it will do so having learned from its experience fighting on Ukrainian territory.

Ukraine’s neighbors would also pay more for a new potential phase of war. An attack on Poland or Baltic countries, for example, would require the government to increase the Polish Armed Forces to the size, comparable with current Ukrainian Armed Forces, roughly 0.8-1 million of personnel. With a Polish salary of $1,400/month for each soldier, Poland will be forced to make additional payments for fighting on the battlefield, suddenly receiving a large financial burden.

Poland would need to muster up the total defense budget of Ukraine merely for salaries, but the country will also pay for the maintenance costs like clothes, food, ammunition, weapons, and logistics.

Russia could swell its ranks for the push, as it continues to mobilize Ukrainians from territories occupied both after 2014 and after 2022, like it has in Ukraine’s Zaporizhzhia and Kherson regions, according to information from Ukraine’s military intelligence headquarters, HUR.

But this worst-case scenario for Europe can be avoided.

Ukraine’s Minister of Finance, Sergiy Marchenko, previously proposed a plan for the West to help finance the Ukrainian military. Maintaining Ukraine’s Armed Forces will cost EU and NATO countries a small share of European GDP and can be distributed among participating countries, according to Marchenko.

EU countries will need to spend much more of their GDP if Russia attacks them directly with Ukraine acting as a buffer. European think tank Bruegel estimated that the EU would need to form 50 new European brigades of 300,000 personnel, spending more by about €250 billion ($292,8 billion) annually (to around 3.5% of GDP) in the short term, simply to deter a potential Russian invasion of Europe.

The West should do three things to bolster their own defense alongside Ukraine’s, according to KSE economists: take a share of funding for the Ukraine’s army personnel directly in exchange for mutual training and other services, come up with new financing programs replacing the old ones, including novel approaches such as distinct “military debt,” and give Ukraine full and unconditional access to military equipment stockpiled by partner countries.

Ukraine can still become a vibrant economy, in line with both Europe and the US. There are numerous projects in the works to ensure that future – but for now, Kyiv still needs to dedicate its financial resources to the fight for its sovereignty.

And that fight costs lives and money – is the West ready to pay the same price?