Ukraine has been at war for a long time, but its economy has not yet been adapted to the conditions of total war. At first glance, it looks like a paradox: a country that is fighting a tough battle on all fronts leaves its economic mechanisms in a peaceful mode. Military orders are difficult to distribute, the bureaucratic machine is stalled, and businesses face the same difficulties as in peacetime. The budget, infrastructure projects, and state priorities have not yet been adjusted to the military mode, which raises the question: what is slowing down this process? Is it a problem of political will, administrative sabotage, or simply a consequence of unprofessional public administration? At a time when the country needs resources, mobilisation and quick decisions, the economy continues to follow the old pattern, which causes justified indignation and misunderstanding among both the military and business.
Transition to a military economy requires a radical revision
On the Day of Workers of the Defence Industry of Ukraine, President of Ukraine Volodymyr Zelenskyy said that there are currently 500 defence industry enterprises in Ukraine, with almost 300,000 people involved in production. In particular, they produce domestic shells, guns, mortars, armoured vehicles, anti-tank systems, electronic warfare systems and much more. However, it seems that this is not enough. Back in the summer, Deputy Defence Minister Ivan Havryliuk openly stated that our economy had not yet switched to a military orientation. This problem is also a constant concern of Ukrainian economists and the Armed Forces. However, instead of launching a military economy, the government is closing budget gaps with tax pressure, leaving defence infrastructure underfunded. The consequences of this approach became apparent when we saw a shortfall of UAH 500 billion in defence spending – a hole that cannot be filled by taxes. So, despite the obvious need, the country, which is fighting for survival every day, still remains in the peacetime paradigm.
The transition to a military economy requires a radical overhaul, from the budget to the mentality of society. The military economy is the centralisation of finance, investment and human resources for the defence of the country. This means not just redistribution of funds, but a complete transformation of priorities, where there is no room for unnecessary expenditures that are not directly related to defence. When society loses understanding of this need, each loss at the front becomes only a matter of time, and the victory itself becomes more distant.
Let’s look at the main steps that Ukraine has not yet taken to transition its economy to a military mode and what this may cost the country. The state budget is still focused on peacetime. Despite the war, public funds continue to be invested in infrastructure projects, road repairs, cultural events, flower planting, meaningless TV shows, outrageous salaries and pensions for officials, and even the purchase of new luxury cars for officials. Such an approach seems completely inappropriate when the frontline lacks the necessary resources. A true military economy requires that budget funds be used exclusively for defence needs. This means that spending on festivals and other secondary projects should be suspended.
An in-depth analysis of all levels of the budget and redirecting funds to defence would free up billions of hryvnias. Every project that is not critical to survival should be put on hold. This is not an easy or pleasant decision, but the government must understand that without these steps, it is jeopardising the country’s future.
The second urgent measure should be to centralise financial resources for the development of the defence industry. Today, Ukraine needs to invest heavily in the production of ammunition, drones, and military equipment that can not only protect our borders but also strengthen our positions at the front. Instead, due to the imperfect lending structure, funds are often sprayed on non-core projects that have no defence value.
It is important to understand that increased investment in the military-industrial complex (MIC) directly affects the success of our army. Every new drone, every additional piece of equipment is a step towards victory. However, Ukraine cannot afford to postpone investments in the defence sector, so every day lost plays into the hands of the Russian Federation, which has long since switched to a mode of total resource mobilisation.
A military economy involves the maximum mobilisation of all available resources. This applies to both materials and manpower. Today, defence companies have to work in three shifts, producing everything needed for the frontline, and this applies not only to traditional industries but also to attracting new companies in the IT, engineering, and transport sectors. Mobilisation is not only about the army, but also about the economic home front, where every employee must understand that their contribution directly affects the country’s defence capability. In addition, the centralisation of resources means that everything that can be used for the army should be used for its needs. It is time to adapt all economic activity to maximise support for the frontline, regardless of the size of the enterprise. Failure to understand this fact and delay in implementing such measures puts us in a critical position.
At the same time, the mental adaptation of society to martial law is no less important than economic reforms. We need to switch to the mindset of ‘everything for the front, everything for victory’. This means that there should be no ‘paradise islands’ in the rear, where the war reminds us of itself only by air raids. Every citizen must understand their role in this struggle, even if it is to help the army, work at a factory or volunteer.
It should be noted that Russia has long since launched its economy at full capacity to support the war. They operate on a win or die basis, and this has led to significant changes in their military machine. If Ukraine does not change its approach, we may find ourselves helplessly watching the enemy’s positions strengthen, without having enough strength to counter. This is an extremely fine line, and time is playing against us.
What prevents Ukraine from creating a two-circuit model to support the war
Despite the ongoing war, there is still an illusion of stability in some high offices that allows avoiding difficult decisions and keeping the economy on a peaceful track. This is a big mistake that is costing the whole country dearly. Now, more than ever, it is important to focus all efforts on mobilising, centralising financial and human resources and implementing a true military economy that can ensure the required level of defence capability. Only then will we have a chance to withstand the confrontation with a country that has thrown all its strength into conquering our land.
By involving the economy in supporting the war, Russia has implemented a conditional ‘double-circuit’ model, where the civilian economy functions as a source of GDP and taxes, and the military-industrial complex receives funding from revenues from the same civilian sector. This approach creates a constant flow of capital – as in a communicating vessel, where profits from the oil and gas sector are invested in arms production and the military instead of being diverted to Western assets. This model guarantees a steady flow of resources to the defence sector, providing the army not only with weapons but also with cash payments to contractors. The more income the civilian economy generates, the more money goes to the war.
Unfortunately, Ukraine is not yet able to implement such a model. The situation is complicated by the fact that a significant portion of revenues from the agricultural sector and other raw materials industries does not remain in the country but flows abroad through various schemes. In 2023 alone, according to the NBU, Ukrainian grain traders did not return more than $8 billion worth of foreign exchange earnings to the country. This is a critical indicator that points to a significant flaw in the profit distribution system. Even though the settlement period for some agricultural export transactions has been extended to 120 days, the actual capital outflow continues.
The problem here is deeper than just inefficient regulation. Ukraine needs to create a kind of ‘military circuit’ in its economy – a system where profits from the civilian economy serve not only development but also defence needs. Countries such as the United States and Israel have long used mechanisms to channel civilian income into the defence sector. This allows them not only to maintain a strong army, but also to finance ongoing research and development in the defence industry.
What needs to be done to create a dual-cycle economy in Ukraine
The Ukrainian government should make every effort to build an effective civilian sector whose profits will support defence and have a positive impact on the defence industry. This can be done by introducing new fiscal mechanisms that will make capital work for the country’s army instead of fleeing abroad.
Fiscal control over commodity revenues
The first step is to introduce a mechanism that will allow a certain portion of revenues from the commodity sectors to be used for defence purposes. To do this, the tax legislation governing large exports should be changed. The Ukrainian economy can create an ‘army fund’ from the profits from the export of grain, ore, metals and other raw materials. Such funds have long been practiced in many countries, where part of government revenues is automatically redirected to areas of strategic importance.
Ensuring the return of foreign exchange earnings
Amidst the war, it is unacceptable that foreign exchange earnings from agricultural and other export industries should not be returned to Ukraine. This is not just a matter of regulatory discipline, but also of national security. Creating stricter requirements for the return of proceeds and monitoring each major transaction will prevent massive losses of foreign currency, which is essential for the development of the military-industrial complex.
Civilian economy at the service of the army
It is important to create a public understanding that every citizen and every industry works for the army and victory. This implies a new system of mandatory investments in the military-industrial complex by companies and support for strategic initiatives for defence development. The civilian economy should become the main driver of army funding, rather than relying solely on international partners.
Unlike Ukraine, Russia was able to finance its war on a large scale despite the sanctions, thanks to stable revenues from the civilian sector. While Ukraine’s economy is losing currency abroad, Russia is providing for its defence industry through mobilised resources. Their model allows every ruble earned in the civilian sector to support the army. This creates a long-term reserve for warfare without being limited to external resources. Ukraine must adapt this dual-cycle model if it is to achieve sustainable funding for its military-industrial complex.
‘On the brink of dependence: how Ukraine risks being left without support and without defence’
The Ukrainian government, despite real threats and numerous calls from experts, is still choosing a strategy of economic passivity instead of building a strong military-industrial complex. It should develop its own industrial capacities, but it continues to rely on international financial support. This strategic omission is not only fraught with economic crisis, but could also result in a dangerous defence resource shortfall, leaving the country on the brink of survival.
Currently, defence accounts for almost half of the state budget. However, all expenditures on the civilian sector – from healthcare and education to infrastructure projects and social programmes – are covered almost exclusively by foreign aid. The need for this external financial support is officially estimated at $38 billion in 2024.
According to the Centre for Economic Strategy, August 2024 brought Ukraine a significant inflow of foreign funds: $8.5 billion was provided to support the budget. Of this amount, $4.5 billion came from the European Union, including $1.6 billion in grants, and the rest in soft loans. The United States additionally supported Ukraine with a grant of $3.9 billion. However, even these huge amounts of funding, given the high cost of the war and the lack of a domestic investment base, leave Ukraine’s budget highly dependent and vulnerable.
September 2024 was indicative in this regard: the expected amount of foreign funding that was supposed to meet the critical needs of the state budget has virtually disappeared. As of today, the country has not received anything out of the promised $3.9 billion grant from the United States, which was supposed to arrive by the end of the US fiscal year. This means that vital social and infrastructure programmes have been left with minimal resources, and their further funding is now in question. The Government of Ukraine is waiting for the funds, but every day of delayed revenues puts the stability of public administration at risk.
September was the moment of truth: when the country did not receive the promised support, it meant not just stopping programmes, but also the risk of stopping salaries, pensions, and the provision of state institutions, not to mention the development of defence capabilities. The second case of almost complete absence of foreign funding since the beginning of the war confirmed that the current strategy of the Ukrainian economy is risky and vulnerable. This month, Ukraine received only an $11 million loan from the Council of Europe Development Bank, which is clearly not enough to cover even basic needs.
According to data for January-September 2024, foreign aid covered about 69% of the state budget’s additional financing needs. Such a high level of external dependence amid the war puts Ukraine in an extremely precarious position. If domestic revenues from commodity-based industries, such as agriculture or metallurgy, were invested in the creation of domestic production of weapons and equipment, our dependence would be less. Instead, part of the foreign exchange earnings does not return to the country at all: for example, in 2023, grain traders left more than $8 billion abroad, which was a blow to the state budget. This is not only a financial loss, but also a loss of potential investment in defence.
So, unless Ukraine changes its approach and starts investing in the military-industrial complex and its own economic potential, we will face an even greater dependence on external creditors. But what happens if international aid is again reduced or even stopped due to internal constraints in donor countries or a change in their political stance? This would leave Ukraine’s budget in crisis and unable to support the army defending the country. Only a strong, self-sufficient economy can provide for the army, which in turn guarantees the defence of the state.
