The cost of war for Ukraine: Three years of economic strain and the search for financing

As Ukraine marks the third anniversary of the Russian invasion, the economic consequences of the ongoing war remain staggering. The conflict has not only devastated the country's infrastructure and human capital but has also placed an immense financial burden on the government. While international aid has played a crucial role in supporting Ukraine's war effort and economy, domestic sources of financing have become increasingly important as the country seeks sustainable revenue streams. One such option is the increase in excise taxes, including on tobacco, which was referenced in the latest International Monetary Fund (IMF) review of Ukraine's economic program under the Extended Fund Facility (EFF) Arrangement.

The economic impact of three years of war

Since the Russian invasion began in February 2022, Ukraine’s economy has suffered severe setbacks. In 2022, the country’s GDP contracted by approximately 30.4% due to widespread destruction, disrupted supply chains, and a decline in industrial production. However, despite the grim outlook, Ukraine demonstrated resilience by achieving a GDP growth of 5.3% in 2023, driven by international financial assistance, a gradual return of economic activity, and continued agricultural exports through alternative trade routes.

The financial burden of the war is immense. A joint assessment by the Government of Ukraine, the World Bank, the European Commission, and the United Nations estimated the total cost of reconstruction and recovery at $411 billion (€383 billion) as of March 2023. Some estimates suggest that the total cost could exceed $1 trillion (€911 billion) depending on the war’s duration and intensity.

Ukraine’s efforts to raise domestic revenue

While international financial aid remains essential, Ukraine has also turned to domestic measures to fund its war effort. The issuance of war bonds, introduced on March 1, 2022, was one such initiative, with the government raising 6.14 billion hryvnias through this method within a single day. Additionally, the Ukrainian government has been exploring tax policy adjustments to generate revenue for defence and reconstruction.

One of the key measures under discussion is the increase in excise taxes, including on tobacco. The IMF’s latest review under the Extended Fund Facility (EFF) Arrangement referenced this as a potential avenue for boosting state revenue. Excise taxes on goods such as tobacco and alcohol are considered viable options because they provide a steady income stream while also aligning with public health objectives. By raising these taxes, Ukraine could generate additional funds to support military operations, civilian aid, and infrastructure rebuilding.

For example, the Parliament of Ukraine adopted a law on amendments to the tax code of Ukraine on revising excise tax rates for tobacco products, in 2024. The law stipulates the extension of the current excise tax increase schedule till 2028 – in order to meet the EU requirement of 90 Euro minimum excise per 1000 cigarettes, and switching excise rates from UAH to EUR – in order to avoid Ukrainian currency devaluation risks. It is expected that this measure will bring an additional UAH of 28.9 bln. (about EUR 634 mln.) revenues to the Ukrainian budget.

The role of international assistance and frozen Russian assets

While domestic financing is crucial, international support remains the backbone of Ukraine’s economic resilience. The West has provided billions in direct financial aid, military assistance, and humanitarian relief. However, as the war drags on, discussions have intensified around the potential use of frozen Russian assets to finance Ukraine’s recovery.

Since the invasion, approximately $300 billion (€275 billion) in Russian central bank assets have been frozen by Western governments. In May 2023, the G7 countries and the European Union affirmed that these assets would remain inaccessible to Russia until it compensates Ukraine for the destruction caused. By late July 2023, the total amount of frozen Russian assets had risen to $335 billion (€300 billion), with the majority held in Europe.

Some European leaders, including former EU foreign affairs chief Josep Borrell, have suggested confiscating these assets and redirecting them toward Ukraine’s reconstruction. However, this approach could pose legal challenges, as seizing state assets without violating international law requires careful legal justification. Despite these complexities, discussions are ongoing, with some Western policymakers advocating for mechanisms that would allow Ukraine to benefit from these funds without breaching sovereign immunity principles.

The road ahead: Balancing domestic and international support

As Ukraine enters the fourth year of war, balancing domestic resource mobilization with international assistance will be critical. The country must continue exploring tax reforms, such as increasing tobacco excise taxes while ensuring that the financial burden on its citizens remains manageable. Simultaneously, Ukraine and its allies must navigate the legal and political challenges surrounding the use of frozen Russian assets The resilience of Ukraine’s economy, coupled with sustained international support, will determine the country’s ability to withstand the ongoing conflict and lay the foundation for post-war recovery. As discussions on financing continue, the global community remains committed to ensuring that Ukraine has the resources necessary to defend itself and rebuild for the future.

Photo by Ehimetalor Akhere Unuabona on Unsplash

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