This marks a dramatic shift in priorities as the country’s borrowing burden approaches 100% of GDP.

According to Finance Ministry data analyzed by Economic Pravda, the government will spend 475.84 billion hryvnias ($11.5 billion) on debt interest payments alone in 2025, while allocating just 421.43 ($10.16) billion hryvnias to pensions and social programs combined.

This represents a fundamental reversal from before Russia’s full-scale invasion, when social spending dominated government expenditures.

Still, the mounting debt burden threatens the sustainability of the country’s war effort and post-conflict recovery.

The national debt has nearly doubled from $95.4 billion in February 2022 to $184.8 billion by July 2025, pushing the debt-to-GDP ratio to 97%—dangerously close to the psychologically critical 100% threshold.

War financing reshapes government priorities

The shift in budget priorities reveals how three and a half years of conflict have fundamentally restructured Ukraine’s finances. Defense spending now consumes half of all government expenditures—equivalent to the country’s entire tax revenue—while debt servicing has displaced social welfare as the second-largest budget category.

Total debt servicing and repayment will cost approximately 1.1 trillion hryvnias ($26.6 billion) in 2025, representing 42% of all domestic budget revenues from Ukraine’s economy.

“Further accumulation of even concessional debt over an extended period could increase the debt burden to levels that hinder economic development. But in an existential war, it’s better to have high debt than face a funding shortage,” Dragon Capital analyst Olena Bilan told Economic Pravda.

The International Monetary Fund projects Ukraine’s debt will reach 110% of GDP by the end of 2025, putting it in the range of heavily indebted developed nations like Italy (144% debt-to-GDP) or Portugal (116%).

While such levels are not unprecedented—Japan operates with debt exceeding 260% of GDP—Ukraine faces the additional burden of being an active war zone requiring massive defense expenditures while keeping the country functioning and rebuilding damaged infrastructure.

All at the same time.

European Union is the largest creditor

The European Union is Ukraine’s dominant creditor, holding $61.16 billion of the country’s debt—roughly one-third of the total burden. This includes financing backed by frozen Russian assets through the G7 loans program called Extraordinary Revenue Acceleration for Ukraine, or ERA, where repayment will come from income generated by those confiscated funds rather than Ukrainian taxpayers.

At the same time, the war has fundamentally altered Ukraine’s creditor structure.

If the hryvnia weakens to 43.5 per dollar, the debt burden could reach 102% of GDP by year’s end, according to Bilan, quoted in the Economic Pravda analysis. If the National Bank manages to keep the hryvnia at 41.5 per dollar, the debt burden will stay at the current level—98% of GDP.

In 2024, Ukraine successfully restructured its private commercial debt, writing off $9 billion owed to Eurobond holders. However, most of its current debt consists of government-to-government loans that cannot be restructured through conventional means.

Economic stability masks underlying pressure

Despite the mounting debt burden, Ukraine’s economy shows surprising resilience. The National Bank reported that GDP grew approximately 1% each quarter in the first half of 2025, while inflation declined from slightly higher levels earlier in the year to 14.1% in July.

The government expects to receive a record $54 billion in external assistance during 2025, creating what officials describe as a “safety cushion” for the following year.

However, structural challenges persist. According to UN data cited in the National Bank report, approximately 5.6 million Ukrainians remain abroad as of July 2025, creating labor shortages that constrain production capacity and economic growth potential.

Limited options for debt reduction

According to the Economic Pravda analysis, Ukraine has three potential paths to managing its growing debt burden.

Firstly, economic growth could gradually reduce the debt-to-GDP ratio, as occurred between 2016 and 2021, when Ukraine lowered its debt burden from 81% to 45.2% of GDP. However, the war has destroyed key industrial assets and energy infrastructure that previously generated much of the country’s economic output.

Debt restructuring offers another option, but the predominance of official creditor loans limits this approach.

European integration represents the third pathway, potentially improving Ukraine’s creditworthiness and borrowing terms as the country moves toward EU membership. However, this process requires years of institutional reforms while Ukraine simultaneously fights for survival.

The mounting debt burden increasingly constrains Ukraine’s fiscal flexibility, leaving less budget space for reconstruction programs and economic development initiatives that could help the country transition to a sustainable post-war economy.

According to preliminary data from the Finance Ministry cited by The Moscow Times, the deficit increased by 1.2 trillion rubles ($15 billion) in July alone, and expenditures jumped to 3.9 trillion rubles ($49 billion).

This data shows Russia’s war machine consuming the state itself. Unlike previous conflicts, Moscow can’t fund this war indefinitely — and Western allies now have concrete proof that sustained pressure works.

Russia’s budget meltdown by the numbers

The new figures reveal a grim picture of stagnation, overspending, and war-at-all-costs priorities. According to Reuters, government spending rose more than 20% in the first seven months of 2025, while revenues grew just 2.8%. That gap is mainly driven by ballooning military costs.

So far this year, Russia has spent 25.2 trillion rubles ($320 billion) — a staggering increase from pre-war spending levels when the annual federal budget totaled around $220 billion in 2021.

Why do civilian sectors collapse first?

As Bloomberg reports, signs of crisis are now visible across different sectors, as coal mining companies suffer losses, oil, gas, and metallurgy companies see a decline in profits. The automotive industry significantly cuts production due to weak demand.

Productivity in civilian sectors is falling fast. The Moscow Times reported in July that Russian car makers have all shifted to a four-day work week to preserve existing jobs due to diminishing demand, high interest rates, and a lack of affordable financing tools for buyers.

Russia’s aviation industry, once a symbol of national pride, has delivered just one of 15 promised passenger aircraft this year.

Sanctions, oil price caps, and labor shortages are eroding Russia’s economic foundation — yet Moscow shows no intention of scaling back its invasion. A recession with consequences far beyond Russia’s borders now looms.

What this means for Ukraine’s war strategy

The signs are clear: Western sanctions, shifting energy markets, and export controls are having an impact. But they’re not enough on their own. The Kremlin is willing to sacrifice every civilian sector to keep the war machine running.

That’s why Ukraine’s battlefield resilience — and sustained Western support — remain essential. Economic pressure may hurt Russia, but it won’t stop the war on its own.

For Western policymakers, these numbers prove that economic pressure is working, but they also show why military aid remains crucial to finish what sanctions started. Russia’s budget crisis gives Ukraine a strategic window, but only if allies simultaneously maintain economic and military pressure.

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