As the Russian military continues to wage a brutal war of attrition in Ukraine, the two countries are also locked in an economic competition that could play a key role in determining the outcome of the largest invasion of Europe since World War II.
Few people notice that the Ukrainian economy is actually doing relatively well in the context of the current war. The Russian offensive in 2022 reduced Ukraine’s GDP by 29 percent, but it rebounded by an impressive 5.5 percent in 2023. Last year, Ukrainian GDP grew by another 3 percent, although this year’s growth is likely to slow to 1.5 percent.
Any visitor to Ukraine can withdraw cash from an ATM or pay in shops with an international credit card. Countries embroiled in major wars usually face price controls, shortages, and rationing, but Ukraine has none of that. Instead, shops are fully stocked and restaurants are packed. Business as usual.
How was this possible? The main answer is that Ukraine's state institutions are much stronger than anyone expected. This is especially true for the Ministry of Finance, the National Bank of Ukraine, and the State Fiscal Service. After 2022, state revenues in Ukraine increased sharply.
At the same time, wartime Ukraine continued to make progress in the fight against corruption. When Russia invaded Ukraine in 2014, Ukraine ranked 142nd out of 180 countries in Transparency International’s annual Corruption Perceptions Index. In the latest edition, Ukraine rose to 105th place.
Growing Ukrainian patriotism helped fuel this progress in the fight against corruption. EU membership requirements and IMF conditions were equally important. Ukraine has passed eight quarterly reviews of its four-year IMF program. It has done so on time and with flying colors. The same was true for every EU assessment.
Looking ahead, three critical factors are necessary for Ukraine’s future wartime economic progress. First, Ukraine needs about $42 billion a year in external budget financing, or just over 20 percent of annual GDP, to finance its budget deficit. The country did not receive sufficient financing in 2022, as EU partners failed to provide the promised amounts. This led to inflation in Ukraine rising to 27 percent by the end of 2022. Ukraine’s budget was fully financed in 2023 and 2024, bringing inflation down to 5 percent. The budget will be fully financed this year.
The second factor is maritime trade through Ukraine’s Black Sea ports. Shipping from Odessa and neighboring Ukrainian ports to world markets has been virtually unimpeded since September 2023, after Ukraine disabled most of Russia’s Black Sea fleet. The vast majority of Ukraine’s exports are commodities such as agricultural products, steel, and iron ore, which are only profitable when transported cheaply by sea, so keeping the sea lanes open is vital.
The third most important factor in Ukraine’s economic prospects in wartime is a stable supply of electricity. Russian bombing of Ukraine’s civilian energy infrastructure significantly disrupted the electricity supply in 2024, which was one of the main reasons for the deterioration of the country’s economic performance.
Ukraine’s economic situation looks set to worsen this year. Economic growth was just 1.1 percent in the first four months of 2025, and inflation had risen to 15.9 percent by May. The main reason for the rise in inflation is the labor shortage. The National Bank will likely have to raise its current interest rate of 15.5 percent, which will further reduce growth. After three years of war, Ukraine’s economy is showing increasing signs of exhaustion. The country has entered stagflation, as was to be expected.
Russia's current economic situation is remarkably similar to Ukraine's, although almost all trade between Russia and Ukraine has ceased. After two years of economic growth of around 4 percent in 2023 and 2024, Russia expects growth of just 1.5 percent this year, while official inflation is 10 percent. Since October 2024, Russia's central bank has kept interest rates at 21 percent, complaining of stagflation.
The economies of Russia and Ukraine suffer from an over-concentration on the military sector. Including Western support, Ukraine’s military spending is about $100 billion a year, at least 50 percent of Ukraine’s GDP, with 30 percent coming from the Ukrainian budget in 2024. Meanwhile, Russia’s military spending in 2025 is expected to be $170 billion, or 8 percent of GDP. Unlike the Ukrainians, the Russians complain about the scale of their military spending. This makes sense. The Ukrainians are fighting an existential war, while Russia’s war is existential only for Putin.
Contrary to popular belief, Russia does not have an overwhelming advantage over Ukraine in terms of military spending or supplies. Russia does spend significantly more than Ukraine, but much of that money is actually stolen by politicians, generals, and Putin’s friends. Moreover, Western sanctions hinder the Russian military’s ability to innovate. In contrast, Ukraine benefits from innovation because its economy is much freer, and hundreds of startups are thriving in areas such as drone manufacturing.
Russia is now entering a fiscal crisis. Its federal spending in 2024 was 20 percent of GDP and is likely to remain at that level in 2025, with 41 percent going to the military and security. But the Kremlin has financed its budget deficit of about 2 percent of GDP through its National Welfare Fund, which is expected to run out by the end of this year. As a result, Russia will likely be forced to cut its government spending by a tenth.
Low oil prices could significantly worsen Russia's growing economic problems and force further cuts in the country's government spending. But an Israeli attack on Iran could now help Putin stay afloat financially by pushing the price of oil higher.
In economic terms, this is currently a balanced war of attrition. Ukraine’s Western partners have the potential to turn the tables on Russia if they choose to do so. Ukraine has successfully built a large, innovative military industry. What is lacking is not weapons but funds. The West needs to double Ukraine’s military budget from its current annual total of $100 billion to $200 billion. They can do this without using their own funds if they agree to seize some $200 billion in frozen Russian assets currently held at the Euroclear Bank in Belgium. This could allow Ukraine to outspend Russia and achieve victory through a combination of greater firepower, better technology, and higher morale.
Anders Åslund is the author of the book “Russian Crony Capitalism: The Journey from Market Economy to Kleptocracy”.
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