What did Ukraine’s economy look like in 2025, and what lies ahead in 2026? The picture is complex—but the trends are becoming clearer. Growth is slowing, wartime pressures remain intense, yet the economy has shown a surprising capacity to adapt to conditions that once seemed unsustainable. As Ukraine heads into the new year, two trends stand out: a booming defence industry and the stabilising effect of long-term EU funding.
One local saying captures the contrast between Ukraine and its adversary: “Russia is a barracks; Ukraine is a chaos.” The saying reflects more than cultural differences. It points to two opposing models of economic and wartime organisation—one centralised and command-driven, the other fragmented, decentralised, and flexible.
That “chaos,” however, has proven to be a feature rather than a flaw. Ukraine’s wartime economy has relied heavily on decentralised decision-making, private initiative, and a relatively restrained role for the state. This approach has allowed businesses and institutions to adapt quickly to shocks—from energy attacks to financing uncertainty—while avoiding the rigidities typical of fully mobilised command economies.
The state, of course, remains indispensable. As Adam Smith argued in The Wealth of Nations, government must provide security, justice, and the protection of property rights. But beyond these core functions, Ukraine’s experience in 2025 suggests that limiting state intervention has helped preserve economic dynamism even under wartime conditions—an approach that will shape policy debates heading into 2026.
As the fourth year of the full-scale war comes to an end, one conclusion stands out: Ukraine’s economy has learned to function under extreme pressure. Large-scale attacks on energy infrastructure, persistent uncertainty over external financing, and constant threats from Moscow have become part of the daily operating environment for Ukrainian businesses. Crucially, the government has avoided shifting the direct cost of war onto citizens. Over the course of the full-scale invasion, there has been only one significant tax increase—introduced in early 2025.
At the same time, the drivers that fuelled the post-collapse rebound after 2022 are clearly fading. That year, Ukraine’s GDP contracted by 29%. In December, the National Bank forecast real GDP growth of just 1.9% for 2025—the weakest performance since the initial shock of the invasion. For comparison, growth reached 5.3% in 2023 and 2.9% in 2024. The economy has effectively exhausted the “bounce-back” effect that supported recovery after the first year of the war.
Without a late-year pickup, the 2025 outcome could have been significantly worse. Growth accelerated in the third and fourth quarters, driven by expanded budgetary stimulus and stronger private consumption. A decisive factor was the surge in capital spending, which by year’s end had reached one of its highest levels since the start of the full-scale invasion.
The National Bank expects that a wave of infrastructure reconstruction projects will continue to support GDP growth in the months ahead. Ukraine’s state budget for 2026 projects GDP growth of 2.4%. Without Russia’s ongoing campaign to destroy the country’s energy infrastructure, that figure could have been higher. The World Bank, for example, recently downgraded its forecast for 2026 from 5.4% to 2.2%. Analysts at GMK Center warn that “the economic outlook for 2026 is significantly worse than at the start of 2025, due to the complete absence of new growth drivers.” At the same time, growth could at least double if the active phase of hostilities were to end.
Inflation fell to 9.3% by the end of 2025, though it fluctuated between 10% and 14% over the course of the year. In 2026, it is expected to average around 7%, dropping to 6.6% by year-end. At that point, the National Bank may consider cutting its key policy rate; for now, its high level (15.5%) continues to keep borrowing costs elevated.
The most notable development in December came from the EU. European leaders agreed to grant Ukraine an interest-free €90 billion loan for 2026–2027. German Chancellor Friedrich Merz clarified that “Ukraine will only have to repay the loan after Russia pays reparations,” effectively making these funds free for now. The package is expected to cover the budget deficit for the next two years, allowing Kyiv to focus on the war effort without drawing additional resources from its citizens. Observers are watching closely to see if the IMF’s proposed 20% value-added tax for sole proprietors remains just a paper proposal.
In 2025, Ukraine’s defence-industrial complex emerged as the real engine of the economy. The sector expanded to $35 billion, up from just $1 billion in 2022, while the number of arms manufacturers rose to 900, more than 800 of them private. Defence’s share of GDP increased to roughly 17%, approaching the traditionally dominant agricultural sector, which accounted for up to 20% in 2025.
Looking ahead to 2026, the sector could nearly double in size, reaching $60 billion. The long-range weapons segment alone—missiles and feedback-enabled drones—could grow to $35 billion. Mass production of new high-tech systems, including ground-based robotic complexes, is also expected to begin.
Several factors are driving this rapid growth. Foreign partners are investing directly in Ukrainian plants under the so-called “Danish model” of financing. The state has also shifted to predictable long-term contracts lasting three to five years, which has boosted business confidence. In addition, major foreign companies such as Rheinmetall, BAE Systems, and Baykar have established production facilities in Ukraine.
In 2026, authorisation to export weapons is expected to provide a further boost. It would allow manufacturers to use idle capacity by attracting new customers—right now, the state is their sole buyer and can be slow to adjust to market changes. Exports would also generate additional revenue for the state through export duties, with only surplus production beyond state orders eligible for sale.
With sustained external support, Ukraine is moving toward a “soft” transition to a wartime economy. The defence-industrial complex is expanding quickly as a share of GDP, without crowding out other sectors—a model far more resilient than Russia’s, where the state is footing most of the war bill. That said, a sudden halt to external aid remains a constant risk, one that could trigger a full-blown economic crisis. For now, the probability of such a scenario is low.
Heading into 2026, Ukraine’s economic outlook is still shadowed by familiar threats. The biggest is the continuation of active hostilities. Businesses have adapted to wartime conditions, but the possibility of a frontline breakthrough and further territorial losses remains ever-present. Any such event would immediately shrink the country’s economic potential, as it did in 2022. Energy shortages also remain a pressing concern. Rapid repairs and imports are mitigating the problem for now, but Russia is expected to intensify daily missile and drone strikes.
Labour shortages are another bottleneck. According to the Institute for Economic Research and Policy Consulting (IER), 60% of Ukrainian businesses are struggling to fill positions. Logistics are under strain as well, with continued strikes on ports and rail infrastructure and attacks on civilian vessels driving up operational risks.
Even with the war ongoing, Ukraine’s economy is poised to grow in 2026—provided the front line remains stable. The strongest argument against doomsday scenarios is the EU’s guaranteed financial support. The most promising development for the year ahead is the continued expansion of Ukraine’s defence-industrial complex, unfolding alongside hundreds of billions of euros in investment in Europe’s own defence sector.
Other upside factors include the launch and funding of new programmes for business recovery and development, infrastructure reconstruction, and protective measures for energy facilities. After the agricultural sector posted lower yields in 2025 due to adverse weather, an improvement is expected this year—though another bout of unfavourable conditions cannot be ruled out.
Taken together, 2025’s economic performance and the 2026 outlook suggest that claims about Ukraine’s “exhausted” economy are largely a myth propagated by Russian media. Kyiv’s key challenge will be to leverage this resilience without draining the country’s defence capabilities. Economic indicators matter only when they translate into success on the battlefield.
