Why Europe can’t go it alone on Ukraine

Who will pay for Ukraine’s war effort now the Trump administration has turned off the financial taps? European leaders have expressed themselves ready and willing to take up the burden, with European Commission President Ursula von der Leyen affirming that “if we continue to believe that Ukraine is our first line of defense, we need to step up our assistance.”

Individual countries have come up with generous funding packages – most open-handed of all being Germany, which has recently pledged more than €3 billion in direct funding. But that’s just a drop in the ocean compared to what Ukraine says it needs. With more than 40 percent of GDP destroyed and the tax base completely wrecked by the war, it’s not just Ukraine’s military spending but also its public services which are dependent on international handouts. At present, Kyiv’s war effort is facing not just a crisis in manpower but also a serious funding crunch.

So far, the financial support of western allies has been Kyiv’s superpower and force multiplier. Without it, Ukraine’s economic collapse at the outset of the war would have quickly translated into military collapse, too. Ukraine also enjoys the goodwill of world financial institutions such as the International Monetary Fund, the World Bank and the European Bank of Reconstruction and Development – as well as of international lenders who have collectively agreed to overlook the fact that Ukraine is effectively in default on its own debt.

That’s an advantage that Russia, by contrast, absolutely lacks. Cut off from international money markets, Moscow is forced, more or less, to balance its own books, borrow from its own major companies and print more money to fund its war production. But Ukraine’s reliance on outside funding is also a strategic weakness, leaving Kyiv entirely dependent on the goodwill of outsiders to continue the fight. Kyrylo Shevchenko, the former head of Ukraine’s Central Bank, calls the system “donornomics” – defined as “the fragile system where Ukraine’s fiscal survival depends on how far its allies are willing to go.”

How much cash does Ukraine need to fight Russia and survive as a functioning state? The basic figure that the Verkhovna Rada, Ukraine’s parliament, approved for defense and security this year was 2.2 trillion hryvnias, or $54 billion – equivalent to approximately 26 percent of Ukraine’s GDP. But that sum eats up more than half of Ukraine’s depleted tax take, so Kyiv needs to find additional money to fund everything else from healthcare, pensions and education to government salaries.

Ukraine’s 40 percent budget deficit has to be covered in one of three ways – from direct donations from allied countries, from internationally backed debt and, potentially, from Russian state funds currently held in G7 countries. That’s not even counting military expenses directly shouldered by Ukraine’s backers – most expensively the vital air defenses such as Patriot batteries which cost $1 billion dollars each and fire missiles costing around $4 million a shot. With Russian missile and drone attacks now regularly topping 600 projectiles a night, it’s a small wonder that Reuters has estimated the real cost of the war to be up to $150 million a day. Ukrainian eyes are focused on getting hold of Russia’s sovereign wealth funds, which were frozen at the beginning of the war. Estimates vary, but at least $250 billion of the Kremlin’s money is held in various G7 countries. At least €150 billion of that sum is parked in Belgium’s Euroclear, a depository system used by governments and central banks around the world to hold their hard currency assets. There is, as yet, no legal way that Belgium, the European Union, the United Nations or any other national or international body can just confiscate that money.

Indeed, many European leaders including French President Emmanuel Macron have warned that doing so would seriously jeopardize Europe’s reputation of having respect for the rule of law in the eyes of other sovereign investors such as China, Saudi Arabia and Qatar – and trigger sovereign capital flight that could quickly bankrupt the continent.

Instead, western finance officials have been dreaming up various legal workarounds that would allow the funds to remain formally the property of the Russian government, while in practice making them available for Ukraine’s use. In October last year, the G7/EU came up with a scheme known as the Extraordinary Revenue Acceleration loans mechanism, which created a $50 billion loan backed by the interest payments from Russian capital without touching the capital itself. But with the war effort burning through that sum annually, this year European leaders have attempted to create a similar loan package involving the whole sum.

The idea of this Special Purpose Vehicle (SPV) – also known as the Reparations Loan – has been to create a €140 billion loan backed by Russia’s Euroclear capital that would be lent to Ukraine and, notionally, repaid by Ukraine once Ukraine is paid back by Russia for wartime damages. The trouble is, reparations are vanishingly unlikely and are not even a subject of discussion in any iteration of peace talks with the Russians. On the contrary, the Kremlin very much does want its cash back – and it is very likely to make that, along with the lifting of sanctions, a key demand once negotiations begin in earnest. In other words, handing over Russia’s money to Ukraine could become an obstacle to peace.

On a practical level, too, the small print of the SPV means that Belgium would be on the hook if and when Russia sues for its money back. Bart De Wever, the Belgian Prime Minister, has refused to sign off on the loan unless all European nations share the risk. So far, they have refused – not least because Europe’s national bankers are legally forbidden from issuing or backing loans that have next to no chance of ever being repaid. The practice is known as “bad-faith lending,” and has been much abused by China in recent years as a way to grab strategic real estate across Africa and Asia in lieu of loan repayments. And since seizing Ukrainian assets isn’t the EU’s style, European taxpayers will ultimately be liable for the entire sum of the loan when the Russians inevitably refuse to pay war damages to Ukraine, forcing Kyiv to default.

Despite the shaky legal and political foundations of the SPV, “Kyiv sees these assets as the main pillar of budget stability for 2026-2027,” says Shevchenko. Indeed, securing a reparations loan from the EU is key to Kyiv’s parallel negotiations with the International Monetary Fund, from which Ukraine is hoping to secure a four-year multibillion-dollar extension of its existing $11 billion credit facility. But Ukraine has no real plan to repay the IMF except out of the SPV – effectively, one loan paying for another. European states do this kind of thing all the time – but they, unlike Ukraine, have predictable revenues and single-figure deficits. “The plan is risky,” says Shevchenko. “Without a deal, Kyiv’s $60 billion [budget] gap could deepen fast.”

Though using Russian assets to help Ukraine sounds like a panacea, many in Kyiv are also crying foul over Brussels’ suggestion that €45 billion of the SPV money be used right away to repay last year’s G7/EU Extraordinary Revenue Acceleration loan. More egregious still to Ukrainians has been German Chancellor Friedrich Merz’s suggestion that much of the SPV money be spent on arms for Ukraine manufactured by expensive European suppliers such as Germany, cutting Kyiv out of the picture. That is, more or less, what happened to the lion’s share of US aid which was never paid out to Kyiv at all and was instead sent to US defense contractors to replace old military equipment dispatched to Ukraine. And as the SPV-Reparations loan will be disbursed by the European Union, the temptation to buckle to lobbyists and spend the money inside the EU, pork barrel-style, will be high.

In addition to massive physical destruction, Russia’s invasion has also disrupted two key structural elements of Ukraine’s economy – access to cheap Russian gas, which was the secret to the competitiveness of much of the country’s industry, and cash income from transit of Russian gas to Europe. Remarkably, for the first three years of the war Ukraine continued to quietly move Gazprom gas across its land and into the EU via a network of pipelines to Slovakia. As late as last year, Kyiv was using the $900 million annual transit fees paid by Moscow (via a Swiss subsidiary) to help fund its war effort. Those payments, bizarrely, made Gazprom one of Ukraine’s biggest wartime budget contributors.

Some of Gazprom’s gas was even re-imported into western Ukraine’s Lviv and Ivano-Frankivsk provinces having looped through Slovakia, creating the legal fiction that the gas was European. It’s the same story with Russian crude oil pumped to Slovakia, the Czech Republic and Hungary via the Druzhba pipeline – which in fact crosses Ukrainian territory and generated precious revenue for Kyiv.

Under pressure from Brussels, Ukraine shut down most Russian gas transit at the start of this year, and is now moving to close down the Druzhba oil pipeline too. But that leaves Ukraine dependent on liquefied natural gas (LNG) imported from halfway across the world – and which costs up to three times as much as piped Russian gas. Early this month, under the auspices of Europe’s Partnership for Transatlantic Energy Cooperation, Ukraine’s Naftogaz signed agreements on the supply of at least 300 million cubic meters of American LNG with the Polish company ORLEN. Such western-provided supplies will, Kyiv hopes, be enough to keep heating and electricity going over the coming winter. But there’s no way Ukraine’s heavy industries can return to their prewar competitiveness with energy costs tripled.

The long-term outlook for a postwar Ukraine is as bleak as its current cashflow. A rapid damage and needs assessment, prepared by the Ukrainian government with the World Bank, UN and European Commission, estimates immediate recovery and reconstruction needs to be approximately $524 billion over the next decade – roughly 2.8 times Ukraine’s 2024 GDP. The good news is that official creditors – including holders of Kyiv’s government debt – have agreed to pause Ukraine’s debt service until the end of March 2027 pending restructuring. But with Kyiv already struggling to make ends meet without repaying its debts, that’s as useful as a chocolate teapot.

Underlying Kyiv’s coming cash crunch is a fundamental disconnect between Europe’s undoubtedly sincere desire to support Ukraine and the reality that the UK, France and Germany are facing serious fiscal crises of their own. Promises to support Ukraine are of a piece with European NATO members’ pledges to commit 5 percent of their GDP to defense spending by the end of the decade – both declarations are, for the most part, unfunded. Yet senior Brussels bureaucrats such as António Costa, President of the European Council, continue to make sweeping pledges – including in person to Ukrainian President Volodymyr Zelensky. “Today we will make the political decision to ensure Ukraine’s financial needs until 2026 and into 2027,” Costa told Zelensky last month. “We are not tired and we are here to continue to support Ukraine diplomatically, politically, militarily and financially.”

Costa isn’t lying – Europe’s material and political support for Ukraine will undoubtedly continue. The question is at what level – and for how long. The story so far of Europe’s engagement with Ukraine has been one of big pledges followed by considerably smaller deeds – and that was before Trump took away Uncle Sam’s billions. Unfortunately for Kyiv, there’s little to suggest that Europe has the means or the will to actually provide Ukraine as much as it needs, for as long as it needs.

This article was originally published in The Spectator’s November 24, 2025 World edition.