“A crisis is drawing ever closer. It will break in Ukraine, but it won’t begin on the frontlines, where the country’s battle-weary brigades continue to impose a brutal cost on the Russian invader. The coming crisis is brewing in the West, where the US pullback and European hesitation now threaten a financial disaster,” Timothy Ash, the senior sovereign strategist at BlueBay Asset Management in London wrote in a note for Center for European Policy Analysis (CEPA) on September 16.

As bne IntelliNews reported, Ukraine faces the risk of falling off a financial cliff this year. The problem is that the government is short $8bn-$19bn to cover the projected deficit this year. The Finance Ministry has been warning for over a year that it needs more help from its Western allies to pay for the war. It is running a deficit of about $50bn a year and the projected unfunded short fall for 2026 is $37.5bn, but the International Monetary Fund (IMF) team in Kyiv this week for funding talks, said that it thinks Kyiv needs an additional $10bn-$20bn next year: Ukraine spent $97bn in 2025, but is on track to spend $120bn in 2026.

Where will this money come from? Raising it from Ukraine’s allies has become next to impossible now that the US has essentially withdrawn all support for Ukraine. As bne IntelliNews reported, Europe can’t afford to take over the burden of supporting Ukraine entirely on its own, as most EU countries are either in recession or approaching a crisis. The rising debt amongst the G7 countries has already caused a bond market storm and France’s government collapsed last week under the weight of an intractable 5.7% of GDP budget deficit. And both the UK and France are close to debt crises of their own that may end in a Greek-style IMF bailout. Coming up with an additional $58bn next year for Ukraine from EU coffers is no longer possible.

“IMF messaging suggests that its prior conclusions that Ukraine’s gross budget and balance of payments financing needs over the four-year duration of the program were just $150bn were way too optimistic,” says Ash. “The financing currently available is inadequate to meet Ukraine’s impending needs. A swift change of course is needed if a financial cataclysm is to be averted.”

Europe has committed just under $170bn to Ukraine since the start of the war – more than the US, which has spent just under $100bn, according to Ukrainian President Volodymyr Zelenskiy. On paper it is more. US President Donald Trump claimed earlier this year the US has committed over $350bn, but after Bankova checked the numbers the official allocations by Congress amounted to $196bn, but at least $100bn of that never arrived, Zelenskiy said in March. And since he took office, the Trump administration has sent next to nothing.

“Underpinning the Fund’s macro and financing framework was the assumption that the war would begin to wind down this year, and hence, Ukraine’s financing needs would also significantly reduce,” says Ash.

No end to the war in sight

That is clearly not going to happen. The ceasefire talks that kicked off in Riyadh on February 18 have gone nowhere after Russian President Vladimir Putin made impossible claims and Trump has flip flopped on the shape of the possible peace deal. As bne IntelliNews opined, there are two sets of talks going one: the Trump administration has threatened Russia with extreme secondary sanctions but at the same time kept the door open to sanctions relief and business deals to tap Russia’s mineral riches.

Since the full-scale invasion, Ukraine has been running budget deficits equivalent to $3bn-$4bn a month, most of which has been covered by IMF and Western financing. Assuming that the war would essentially end in 2025, the Fund had presumed the budget deficit and financing needs would more or less halve in 2026, and then fall to a fraction of this in 2027. “It was a heroic assumption, and it was wrong,” says Ash.

This problem has been apparent for a while, yet the IMF has yet to recalibrate its model that sets the agenda for the size of its funding programme.

It is becoming increasingly obvious that the Kremlin has no interest in peace talks, as it continues to make steady, albeit slow, progress on the battlefield. At the same time, after three years of heavy investment, its military production is now producing more materiel than it needs so that the process of restocking has begun as Russia starts to rebuild its military capacity. The peace talk efforts came to a definite end last week when presidential spokesman Dmitry Peskov officially put ceasefire talks on hold on September 12.

The expectations are now moving towards a long war, which implies much higher long-run financing needs, says Ash. On September 11, EU foreign affairs chief Kaja Kallas said that she expected the war to continue for at least another two years. Others have speculated that Putin will simply continue until Ukraine collapses completely or Zelenskiy capitulates, however long that takes. Time is on his side.

A lot of attention has been paid to Russia’s economic problems, which are getting worse, but with inflation falling much faster than expected – the core macro problem – thanks to CBR governor Elvia Nabiullina’s unorthodox plan to artificially cool the economy, growth will slow this year before it starts to recover next year, according to the CBR’s latest outlook.

The Kremlin is also short of money. This year’s budget deficit is ballooning, but the government has already started a discussion on raising VAT and it also has some RUB20 trillion in banking sector liquidity to tap to cover a deficit of up to RUB5 trillion now expected for this year. In short, the Kremlin has access to enough money to keep the war up for several more years.

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IMF’s blinkered approach

The IMF has acknowledged that its previous estimate was wrong. It now says that an anticipated additional $10bn-$20bn will be needed by its Extended Fund Facility (EFF) by the end of 2027. Ukraine’s Finance Ministry put the number at $37bn. “Both could prove significant underestimates,” says Ash.

Ash argues that both the government and IMF take a “blinkered” approach to estimating Ukraine’s financing needs. They focus only on budget and balance of payments requirements. That excludes the broader, but essential, military support. Using the data from the Kiel Institute of the World Economy, Ash estimates that the annual cost of the war to the West of supporting Ukraine has been nearer to $100bn annually— more than double IMF estimates.

Finding new IMF funding for Ukraine will have to clear several hurdles. It will need to get reassurance that it can be financed to get a sign off from shareholders.

“In other words, that the numbers add up. Even to meet the IMF’s narrow focus on budget financing needs, the West will have to come up with $20bn-$37bn in new funding, just to take the country to the end of the program in March 2027,” says Ash, and that means calculating on spending $100bn for at least another three years.

The Biden administration used to cover about 40% of Ukraine’s financing needs, but with the Trump administration now out of the game, this very considerable annual funding requirement will fall squarely on Europe.

“Europe cannot and will not pick up this bill,” says Ash. “The harsh political, social, and economic reality across the continent means there is no realistic possibility of Ukraine receiving such a long-term financing commitment. Europe is struggling with rising budget deficits, subdued growth, competing demands for defence and social needs, and a populist tide demanding spending at home. The situation is now serious.”

Ash speculates that the IMF shareholders might nix any proposal to even increase funding by another $20bn in the short-term, which would quickly precipitate a crisis. And would immediately raise doubts about Ukraine’s ability to continue its defence against Russian attacks.

“Europe needs a plan B, but in truth, that’s really now actually Plan A. For more than three years, Europe has ignored the very obvious solution to its problem,” says Ash.

CBR money

Ash, and many others, have been advocating for several years to seize the $300bn of frozen Central Bank of Russia (CBR) assets and use them to pay for the war. The idea came up again most recently at a meeting of EU foreign ministers in Copenhagen on September 1, but was ultimately rejected. European Commission President Ursula von der Leyen also brought it up during her EU State of the Union address (video, transcript) on September 10, but said the idea was now off the table.

The problem is that the money is frozen, but technically it still belongs to the Bank of Russia. Confiscating it – taking ownership and spending it – as opposed to just freezing it, would undermine confidence in both the euro and the European banking system, say critics – something that central bankers in Europe are not prepared to do. In the meantime, von der Leyen has suggested that the money can be used more “creatively” and invested into some sort of “victory bonds” to generate more revenues. The profits from the assets have already been used to underpin a $50bn G7 loan for Ukraine, the Extraordinary Revenue Acceleration (ERA) scheme, but that loan is already nearly fully distributed.

While the EU leaders are very unhappy about seizing the CBR’s money, faced with the prospect of a Russian military victory in Ukraine, the pressure to grab those funds will clearly build steadily.

“All roads lead back to the issue of freezing, seizing, and using the $330bn in Central Bank of Russia CBR) assets in Western jurisdictions,” says Ash. “This money would amply finance Ukraine’s defence needs for a long war and send a powerful signal that Ukraine can ride out Putin’s long-war scenario and his own failing economy. This would increase the Kremlin’s risk in continuing its war of aggression, and quite possibly force it to the negotiating table.”

“Opponents of the need to seize Russia’s CBR assets have an armory of excuses, although none is very persuasive. Such arguments are, anyway, less effective the worse Ukraine’s financing dilemma becomes,” Ash argues, highlighting the dilemma that Europe is now facing. “And while these critics aim to explain what they think won’t work, there are no suggestions about what will.”

A crisis is coming

A crisis is drawing nearer. Relying on European taxpayer support is no longer sustainable. The political fallout from the drain on Europe’s economies and the ballooning deficits and debt is already visible, fuelling a popular backlash and the rise of the far-right parties in Europe. Germany’s AfD (Alternative für Deutschland) just tripled its share of the vote in a German regional election this weekend, taking 15% of the vote in North Rhine-Westphalia, German Chancellor Friedrich Merz’s home state. The AfD are now leading in the national polls. Similar things are happening in the rest of the EU.

“And yet the alternative of Ukrainian bankruptcy and defeat is a terrifying spectre for the continent,” says Ash. “If that happens, Europe would be faced by many, many millions of Ukrainians moving West, further straining its social, economic, and political fabric. The consequences get worse the more closely they are examined.”

Ash goes on to paint a grim picture of what Europe would look like if Ukraine loses: Europe’s two largest military industrial complexes would fall into the Kremlin’s hands; European defence spending would need to immediately rise to the 5% of GDP; budget deficits and borrowing needs would soar; interest rates across Europe would rise; and real GDP growth would slow.

“The opponents of seizing CBR assets, particularly Belgium, Euroclear, and the European Central Bank (ECB), need to detail their exact plan for the defence of Europe if Russia’s billions are left unused,” says Ash. For now, all we can see is blank faces — they have no plan.”

The flaw with this argument is that it assumes the only solution is to fund Ukraine to continue the war in the equally vain hope that the Russian economy will eventually collapse or that Trump will get back into the game and impose such tough sanctions on Russia, Putin will be forced to the negotiating table – an equally unlikely scenario.

In the short-term the only immediately available scenario that will end the war is that Zelenskiy accepts the terms that the Kremlin has laid out at the various rounds of talks this year along the lines of the failed 2022 Istanbul peace deal. It is effectively the Finlandisation of Ukraine where it gives up 20% of its territory, returns to neutrality, and promises never to join Nato. There are some tough choices ahead, and none of the alternatives are particularly palatable.