In April, KSE Institute published the Ukraine Macroeconomic Handbook (Q2 2026), analyzing Ukraine’s economic outlook during the remainder of the full-scale war as well as the post-war reconstruction and recovery period through 2029. The forecast maintains the core assumption that the full-scale war will come to an end in late 2026, but the risk of a longer war is rising as Russia benefits from the Iran war.

Ukraine’s macroeconomic situation and risk landscape have been negatively affected by Russian attacks on critical civilian infrastructure, while soaring energy prices due to the Iran war simultaneously impose costs on Ukraine, alleviate pressure on Russia’s economy and budget, and constrain military, financial, and diplomatic resources of Ukraine’s partners. The likelihood of the war extending beyond 2026 is rising, and risk perceptions are already weighing on future investments and recovery prospects.

Due to these challenges, KSE Institute projects lower growth (2.3% in 2026 instead of 3.2%), higher inflation (9.4% on average instead of 7.4%), tighter monetary policy (policy rate held at 15% instead of gradual easing), a larger trade deficit ($67.7 billion instead of $62.5 billion), and a somewhat weaker exchange rate (44.2 UAH/USD instead of 43.3) than it did in Q1. The winter energy crisis and the Iran war have increased costs, narrowed profit margins, and caused serious supply-side disruptions. The fiscal picture, however, has not deteriorated — budget deficits remain largely financed through 2029 despite high spending.

Significant foreign financial support totaling $170 billion over 2026–29, including from the EU’s Ukraine Support Loan, will ensure macroeconomic stability and fulfill Ukraine’s defense needs. Risks from external imbalances and high wartime spending on defense and social support are mitigated as long as foreign support arrives without delays stemming from stalled reforms at home or political disagreement abroad.

Real GDP growth in 2026 is projected to be 2.3%. If firms continue adapting through decentralized energy solutions and logistical adjustments, the negative macroeconomic impact may remain relatively contained — at 0.1–0.2% of GDP, compensated by defense production growth amid the Ukraine Support Loan disbursement; however, prolonged or widespread disruptions could generate output losses of up to 2–3% of GDP. Over the medium term, growth is projected to accelerate toward 5–6% per year as the economy shifts toward an investment-led model anchored in large-scale reconstruction.

Foreign support is driven primarily by the €90 billion EU Ukraine Support Loan, a new ~$8.1 billion IMF program, and significant prospective funding under the EU’s Multiannual Financial Framework for 2028–34. Budget needs over 2026–29 amount to $132.3 billion, with committed and likely sources covering $131.9 billion — from partners and through external and domestic borrowing — leaving a financing gap of just $0.4 billion. Defense and security expenditures are projected to peak in 2026 at $102.9 billion and will need to remain elevated after the end of the full-scale war as the threat from Russia persists.

Ukraine’s trade deficit widened sharply to $51.3 billion in 2025 (+56% y-o-y) due to soaring imports and is projected to grow further in 2026, driven by high energy prices, defense procurement under the EU Support Loan, and disruptions to domestic production. The current account deficit is expected to reach ~$60 billion in 2026–27, fully covered by official inflows from partners — allowing Ukraine to grow reserves and maintain a level above 7.5 months of imports for most of the forecast period. Foreign investment will start alleviating external pressure after the war.

Ukraine’s state debt has risen sharply since the full-scale invasion, reaching $213.1 billion — roughly 100% of GDP — by February 2026. But mechanisms, such as the zero-interest Ukraine Support Loan, whose repayments are conditional on the reparations from Russia, and the ERA, which is serviced using proceeds from immobilized Russian assets, significantly limit the near-term debt service burden. The debt-to-GDP ratio excluding these instruments is projected to decline — from 81% in 2025 to below 70% by 2029. 

The Iran war has reversed the disinflation trend. After easing from a peak of 15.9% in May 2025 to 7.4% in January 2026, inflation has picked up again: domestic fuel prices rose 23.4% y-o-y in March 2026, pushing headline inflation to 7.8%. Second-round effects through logistics, agriculture, and manufacturing costs will add further upward pressure on prices. Inflation is expected to remain in the 7–9% range over 2027–29. For now, monetary policy will remain tighter than previously expected, with the NBU’s policy rate likely held at 15% through 2026. After the war, the NBU will likely tolerate somewhat elevated inflation to support the recovery.

The hryvnia remained broadly stable in 2025, averaging 43.3 UAH/USD in Q1 2026. However, depreciation pressures have been building and are contained by significant NBU interventions. The sustainability of this framework is dependent on the timely provision of foreign financial support.

Ukraine’s labor market remains tight, with 60% of businesses reporting labor shortages in Q1 2026. Average wages rose above UAH 28,000, but nominal growth is being constrained by compressed firm margins as the energy crisis during the winter and the Iran war’s price shock limit space for further increases. Real wage growth will also be affected by higher inflation, before recovering toward ~8% annually in 2027–29 as labor demand intensifies after the war.

The Q2 2026 edition of the Ukraine Macroeconomic Handbook provides a comprehensive assessment of economic activity, the external sector, state and local budgets, public debt, inflation, monetary policy, exchange rate dynamics, and the labor market. Beyond the baseline forecast, the issue includes three special features: the impact of the Iran war on Ukraine, a comprehensive assessment of key risks facing Ukraine, and an analysis of Ukraine’s structural credit gap.