How do Ukraine’s growing dependence on external aid, the EU’s limited fiscal capacity, and the legal uncertainty surrounding Russia’s frozen assets shape a new architecture of European macro-financial stability—and what does that mean for Ukraine’s strategic viability between 2025 and 2027?
As Ukraine’s dependence on foreign aid deepens, Europe’s fiscal bandwidth tightens, and the legal fate of Russia’s frozen assets remains unresolved, a new architecture of European macro-financial stability is taking shape—one that will determine whether Ukraine can stay economically afloat between 2025 and 2027.
Three interconnected fault lines define this tension:
first, Ukraine’s fiscal resilience amid war and internal restructuring;
second, the institutional limits of the EU’s financial solidarity;
third, the legal, geo-economic, and strategic implications of turning Russia’s frozen assets from a tactical tool into a structural pillar of European financial policy.
The Evolution of Ukraine’s Financial Dependence—and Europe’s Role
Since the start of the full-scale invasion, Ukraine’s economy has been living through a long-term fiscal distortion. According to the IMF and Ukraine’s Ministry of Finance, Kyiv’s budgetary needs have reached levels typical of countries in severe humanitarian or infrastructure crises. In 2024 alone, Ukraine received $41.7 billion in external support; it will need $39.3 billion in 2025 and an estimated $47 billion in 2026.
The European Union has become the de facto donor of last resort. EU data show that under the Ukraine Facility program, Brussels delivered more than $17.3 billion in 2024 alone. But the composition of this aid is shifting—from grants to loans—adding to Ukraine’s debt burden despite concessional terms.
The United States, Japan, Canada, and international financial institutions remain significant backers, yet the EU occupies a critical place in Kyiv’s financial stability framework. Three factors explain this:
its geographic and political proximity;
its institutional capacity to issue multi-country concessional loans;
and, crucially, the presence of frozen Russian assets on EU soil that could be repurposed as collateral for a reparation-based loan.
It’s that third factor that has become the most politically charged heading into 2025.
Frozen Assets and Europe’s Legal Dilemma
After the invasion began, the EU, G7, and Australia froze roughly $300 billion in Russian central bank reserves. About €210 billion of that lies in the European Union, with some €140 billion parked in the Belgian clearinghouse Euroclear.
Initially, the EU and G7 agreed to transfer the profits generated by these assets to Ukraine—a framework formalized under the Extraordinary Revenue Acceleration for Ukraine (ERA) program, which delivered €25.3 billion to Kyiv in 2024.
But by the end of the year, it was clear that interest income alone couldn’t cover Ukraine’s budget gap. The European Commission floated a bolder idea: a reparations-backed credit facility that would use not just the profits but the frozen assets themselves as collateral. The concept hinged on the principle of future reparations—Ukraine would start repaying the loan only after receiving compensation from Moscow.
That proposal, however, met resistance in Belgium, home to Euroclear. Brussels insisted on a collective risk-sharing mechanism among EU member states, citing the potential for future Russian lawsuits and the financial liability of restoring confiscated assets should international courts rule against the EU.
The legal status of frozen central bank reserves remains murky. There is no precedent in international law for using a sovereign’s monetary reserves as collateral for a third party during an active conflict. Neither the International Court of Justice, the European Court of Human Rights, nor the International Centre for Settlement of Investment Disputes has issued rulings that would establish a stable legal foundation for such a move.
Belgium has thus found itself at the center of a complex legal, financial, and political impasse.
Europe’s Fiscal Fatigue: The EU’s Financial Risk Spiral
The issue extends far beyond legal ambiguity. Europe’s macroeconomic fundamentals are tightening. Most EU countries now run persistent budget deficits. According to the European Commission, total public debt across the bloc exceeded 89% of GDP in 2024, while defense spending surged to its highest level in three decades. Germany, Poland, Scandinavia, and the Central European states are all boosting military budgets to meet or surpass NATO’s 2% of GDP benchmark.
This triple squeeze—rising social costs, rising defense costs, and ongoing commitments to Ukraine—has created an unprecedented fiscal strain.
The grant-based model that worked in 2022–2023 has become unsustainable. As Sweden’s EU Affairs Minister Jessika Roswall put it, “Long-term support for Ukraine can’t rest entirely on national budgets.”
The reparations-backed loan was designed to ease that burden. But the lack of consensus has left the plan stalled. Alternative options—joint EU borrowing or renewed direct budget support—face two major obstacles: rising borrowing costs, which inflate the EU’s debt load, and deep political divisions over who should pay.
A collective EU loan, for instance, would generate annual interest payments of roughly €5.6 billion—an amount politically toxic for several member states already juggling domestic austerity.
Ukraine’s Fiscal Fault Line: Between War and Welfare
Kyiv enters 2025–2026 under intense financial strain. Defense spending now accounts for 27.2% of GDP—one of the highest ratios in the world, comparable to Israel in the 1970s or Iraq during the Iran–Iraq war. Defense costs are untouchable in the short term, meaning any external funding shortfalls will inevitably hit social programs and humanitarian budgets.
By late 2024, the pressure was already visible:
two-month delays in social transfer payments;
the suspension of agricultural grant programs;
the cancellation of state-funded school awards;
and midyear budget amendments to cover military salaries using funds originally allocated under the ERA program.
Ukraine’s finance ministry estimates the war costs roughly $120 billion annually. About half of that is covered by domestic revenues; the rest—another $60 billion—must come from abroad each year.
That dependence creates a structural vulnerability. Unless the EU and its partners find a legally and politically sustainable mechanism to unlock or leverage Russia’s frozen billions, Ukraine’s fiscal future—and Europe’s financial credibility—could unravel together.
Global Incentives and the “Future Viability Problem”: The IMF Steps In
The International Monetary Fund has become the ultimate referee of Ukraine’s macroeconomic survival. So far, the IMF has disbursed $10.6 billion under its ongoing Extended Fund Facility (EFF), but future tranches hinge on the stability of Kyiv’s medium-term fiscal model.
According to Politico, three European diplomats and a European Commission official confirmed that the IMF may delay its next $8 billion disbursement unless the EU agrees on either the proposed reparations-backed loan or an alternative mechanism to guarantee Ukraine’s liquidity through 2025–2026.
For the IMF, the core metric is not just debt repayment—it’s whether Ukraine can remain solvent without spiraling into unsustainable debt or gutting its social spending. That requires a predictable, steady flow of external financing, something Europe has yet to secure. As a result, a legal debate in Brussels has quietly morphed into a global factor shaping Ukraine’s economic stability.
The Legal Groundwork—and the Limits—of Using Russia’s Frozen Assets
The legal context surrounding Russia’s frozen reserves remains central to Belgium’s position and to the EU’s internal decision-making. Since 2022, European policymakers have been operating in a near-void of international precedent.
Under established principles of international public law, central bank assets are protected by sovereign immunity—a principle enshrined in the 2004 UN Convention on Jurisdictional Immunities of States and Their Property. Not every EU member has ratified the convention, but the rule is broadly accepted as customary law: the financial assets of a sovereign state, especially those of its central bank, cannot be seized, reassigned, or repurposed without an explicit international legal process.
Exceptions to this rule are exceedingly rare, typically tied to UN Security Council resolutions or rulings against states guilty of major international crimes—as in Iraq’s case after 1990. But the UN Security Council remains paralyzed over Russia, and no international tribunal has issued a ruling authorizing the confiscation of Russian state assets.
That gap creates a legal gray zone. EU governments can tap the profits generated by frozen assets—because those legally belong to Euroclear—but not the assets themselves. This distinction explains why the EU’s Extraordinary Revenue Acceleration (ERA) program is permissible, while the proposed reparations loan crosses into legally contested territory.
Belgium’s Caution and the Euroclear Dilemma
As Euroclear’s host jurisdiction, Belgium bears both reputational and legal exposure. In the event of lawsuits by Russia or third countries, Belgian financial institutions would be the first defendants. The European Court of Human Rights has handled comparable cases—though never on a scale involving hundreds of billions of euros.
Brussels has therefore demanded a collective guarantee: EU countries must share liability if courts later compel the bloc to return any portion of the frozen assets. France, Germany, and Italy, among others, have balked, wary of locking themselves into a decades-long financial obligation in Ukraine’s name.
The standoff has turned the “Euroclear case” into a structural fault line within the EU—between the political imperative to keep Ukraine solvent and the institutional caution rooted in Europe’s legal DNA.
The EU’s Institutional Boundaries: When Collective Action Hits Its Limits
The European Union operates under a hybrid structure—part intergovernmental, part supranational—that often struggles to move decisively under pressure. In Ukraine’s case, three constraints define that reality:
- Budgetary sovereignty. The European Commission cannot compel member states to make new national contributions without unanimous approval. The reparations-backed loan requires precisely that kind of agreement—making any national veto a potential dealbreaker.
- Domestic political cycles. Between 2025 and 2026, Europe will face elections in France, Poland, Austria, and Spain. With domestic politics leaning inward, governments are reluctant to commit to large, long-term financial obligations, even for Ukraine. Support for Kyiv remains high, but voters are increasingly sensitive to fiscal fatigue.
- Limited authority over sovereign assets. The EU can confiscate property belonging to sanctioned individuals and entities—as it has since 2022—but not the assets of a foreign state. Belgium, understandably, refuses to cross that line without airtight legal backing.
The result: Europe finds itself trapped in an institutional dilemma. Ukraine’s growing dependence on macro-financial aid is colliding with the EU’s procedural rigidity. Supporting Kyiv now requires riskier, more innovative tools—but the Union’s machinery isn’t built for fast, bold moves.
The Geopolitical Cost of Delay
The holdup over the reparations loan is more than a budgetary dispute—it’s a strategic signal. The delay carries several broader consequences for global security and Western cohesion.
First, it amplifies uncertainty across Eastern Europe. For the Baltics, Poland, Finland, and the Czech Republic, Ukraine’s fiscal stability is not just an economic issue—it’s a security one. A financial shock in Kyiv in 2025 could ripple through the region’s entire deterrence posture against Russia. Defense white papers in these capitals explicitly describe Ukraine’s solvency as a cornerstone of their national security.
Second, it shifts the power balance between Washington and Brussels. With the U.S. scaling back direct grants and tying new support to trade and tariff mechanisms that require domestic political approval, Europe has, by default, become Ukraine’s primary patron. That realignment pushes strategic decision-making from Washington to Brussels—exposing Europe’s internal divisions to the global stage.
Third, it elevates the IMF’s role as the arbiter of Ukraine’s economic viability. If the reparations loan stalls, the Fund may recalibrate the EFF program—potentially conditioning further aid on new austerity measures. That would almost certainly cut into Ukraine’s already strained social budget, testing public patience and political stability.
Fourth, it sends a message about Europe’s collective credibility. From Beijing to New Delhi to Riyadh, observers are watching to see whether the EU can act as a strategic bloc—or remains a forum for endless negotiation. Prolonged hesitation would read as structural weakness, eroding Europe’s leverage in global diplomacy and its claim to strategic autonomy.
Structural Consequences for Ukraine’s Financial System
For Ukraine, the question of a reparations-backed loan is not a technical issue—it’s a systemic one. It determines the state’s ability to:
– sustain social payments in wartime;
– maintain its armed forces and defense industry;
– finance reconstruction;
– and carry out the reforms required by the IMF.
By late 2024, Ukraine’s budget was already running a deficit masked by external funding. But by 2026–2027, that gap is expected to widen dramatically as reconstruction costs soar, defense spending remains high, grant-based aid declines in favor of loans, and demographic pressures drive up social expenditures.
The Verkhovna Rada projects the peak shortfall in 2027—precisely when donor commitments and available support programs are most uncertain.
Scenario Analysis: Strategic Paths for 2025–2027
Scenario modeling offers a glimpse into the macro-financial and geopolitical outcomes facing Ukraine and the EU, depending on the fate of the reparations loan. Three scenarios—optimal, inertia, and crisis—sketch the range of possible trajectories.
Scenario 1. The Reparations Loan Is Approved and Launched (Optimal Trajectory)
In this best-case scenario, EU members reach a legal compromise on shared guarantees, Belgium secures protection against potential lawsuits, and a €140 billion reparations credit becomes a long-term financial anchor for Ukraine.
Financial Dynamics
– Ukraine receives up to €40 billion to cover its budget deficit.
– €100 billion goes toward defense, easing strain on domestic spending.
– The IMF confirms the sustainability of Ukraine’s fiscal model and releases new tranches without delay.
– Social payments and humanitarian programs stabilize.
European Context
– The EU demonstrates genuine collective action, reinforcing its institutional credibility.
– Euroclear remains insulated from contagion risks in financial markets.
– Shared risk allocation defuses political tensions within member states.
Geopolitical Dimension
– Eastern European allies read the move as proof of Western resolve.
– Ukraine maintains full operational capacity without slashing social budgets.
– Russia faces prolonged financial isolation and the permanent loss of control over a major share of its reserves.
Probability: Moderate. The main uncertainty lies in finding a watertight legal framework—a process that could drag on.
Scenario 2. The Compromise: No Reparations Loan, but Alternative Mechanisms (Inertia Trajectory)
In this middle-ground scenario, the EU fails to reach unanimity on the reparations loan but cobbles together a patchwork of partial measures—joint EU borrowing, larger national contributions, and an expanded ERA program funded by asset profits.
This approach doesn’t solve the problem, but it keeps Ukraine financially afloat for the next 12–18 months.
Financial Dynamics
– Ukraine receives only part of the funds it needs.
– Budget pressure inside the EU mounts, with annual interest payments of roughly €5.6 billion.
– The IMF demands budget adjustments, forcing Kyiv to trim social spending.
European Context
– Lack of consensus erodes internal EU cohesion.
– High-contributing states ramp up political pressure on more reluctant partners.
Geopolitical Dimension
– Ukraine remains solvent but financially constrained.
– Russia exploits the narrative of “European fatigue,” portraying the West as divided and exhausted.
Probability: High. Given the EU’s multi-layered governance and veto structure, this is the most plausible path in the near term.
Scenario 3. Financial Destabilization (Crisis Trajectory)
In the worst-case scenario, the reparations loan collapses, no alternatives emerge, U.S. support remains limited, and the IMF suspends new disbursements.
Financial Dynamics
– By early 2026, Ukraine faces a liquidity crunch.
– Social programs are scaled back; pensions and humanitarian payments are delayed.
– Defense spending consumes redirected social funds, fueling domestic instability.
European Context
– The EU suffers a reputational hit for failing to stabilize its key partner.
– Political pressure mounts from eastern member states demanding emergency action.
– Confidence in the EU’s ability to manage neighborhood macro-financial stability erodes among global lenders.
Geopolitical Dimension
– Russia gains a strategic opening.
– The risk of regional destabilization in Eastern Europe grows.
– NATO and the EU see their credibility weakened along the eastern flank.
Probability: Low—but impact, catastrophic. Analysts view this as a systemic-level threat comparable to a regional financial crisis, with potential spillover far beyond Ukraine’s borders.
Strategic Consequences for Europe and the Global Political Order
The debate over Ukraine’s financing reaches far beyond regional politics. It now intersects with three broader global transformations—each reshaping the rules of power, law, and reconstruction in the postwar world.
1. The Transformation of Europe’s Global Role
The EU’s ability to sustain a partner at war will determine whether it can act as a genuine strategic player rather than merely an economic bloc. The proposed reparations-backed loan has become a litmus test of Europe’s evolution—from a marketplace to a geopolitical actor. Success would mark the Union’s coming of age; failure would reinforce its image as a cautious technocracy incapable of power politics.
2. The Rewriting of International Financial Law
Using a sovereign central bank’s assets as collateral for a third-party loan would represent an unprecedented legal innovation. It would effectively create a new category in international law, redefining how sovereign assets function during conflicts. What began as a temporary sanctions measure could become the blueprint for a future system of global financial accountability.
3. The Evolution of Postwar Reconstruction Models
Ukraine’s experience is poised to shape the next generation of global recovery mechanisms. Programs like ERA—and the potential reparations loan—signal the emergence of a new financial architecture for rebuilding states devastated by war, balancing moral responsibility, risk-sharing, and economic pragmatism.
Conclusions
Taken together, the macro-financial, legal, and geopolitical dynamics point to one overarching reality: Ukraine’s stability between 2025 and 2027 depends on whether Europe and its partners can build a predictable, rules-based financing system.
Ukraine’s annual wartime costs approach $120 billion, half of which must come from abroad. Any delay in the reparations credit risks triggering a fiscal shock that would undermine both social spending and defense capacity.
For the European Union, the frozen-assets debate has become a test of institutional maturity. Europe’s ability to navigate legal constraints, share risk, and act collectively will determine its global standing. If it fails, the EU could see its strategic influence erode just as the world’s power centers are being redrawn.
Strategic Recommendations
For the European Union:
– Establish a legally sound mechanism for shared guarantees in the use of frozen assets;
– Expand the mandate of supranational institutions to manage external financial operations;
– Strengthen coordination between defense and financial assistance programs for Ukraine.
For Ukraine:
– Diversify external borrowing sources to reduce overreliance on any single channel;
– Build long-term social payment systems insulated from short-term aid volatility;
– Deepen cooperation with the IMF to ensure predictable budget planning and debt management.
For International Institutions:
– Develop a legal framework for the conditional use of sovereign assets during international conflicts;
– Create a multilateral guarantee fund to distribute financial risk among donors and strengthen global recovery capacity.
In the end, the fate of Ukraine’s economy—and Europe’s credibility—are now bound together. The question is no longer whether the West can afford to help Ukraine, but whether it can afford not to.