Ukraine is teetering on the edge of a funding crisis that could cause its war effort to collapse. The pain for Russia's economy is also growing fast as it slides into stagnation or even stagflation. But the picture for funding the ongoing war looks very different in the two countries.

Both Ukraine and Russia are grappling with huge and growing budget deficits but their ability to fund them is very different: Ukraine is entirely dependent on its western allies to lend it enough money to cover an 18.4% of GDP deficit, whereas Russia can funds its entire 2-3% of GDP deficit from internal resources and will be able to for several years to come.

Ukraine spends an enormous 31% of its GDP – roughly €107bn a year – on the war, compared with Russia’s €140bn war budget or around 8% of GDP, as it has a much larger economy. So far Russia has funded this spending from its own pocket. But Kyiv can cover only half of its deficit from its own resources, through taxes and domestic borrowing, while the rest falls on the shoulders of its allies. “Plan A is to finish the war, Plan B is €107bn,” Zelenskiy said last week.

The war has caused Russia’s economic problems as heavy military spending has stoked sky high inflation that is now crushing growth and threatens to cause a debt crisis. And those problems are getting worse as the military Keynesianism boost is now exhausted. The economy is slowing and the country narrowly avoided a recession in the first quarter of this year and seems doomed to a recession next year if nothing changes. However, there is some light at the end of the tunnel as CBR governor Elvia Nabiullina's unorthodox plan to artificially cool the economy seems to be working and inflation is coming down faster than expected. She has already made 400bp of rates cuts this year and hopes to make 200bp more before December.

After more than three years of fighting, Ukraine is facing the same sort of difficulties but its funding problems are much more accute: like Russia, the last two years has seen a military boost to growth, but GDP growth in Ukraine slowed to 0.8% in the second quarter and is also expected to go into recession by the end of this year. Slowing growth will be a problem for both Russia and Ukraine as they are both heavily dependent on domestic taxes as the main source of funds – and in Russia’s case VAT already brings twice what it earns from oil and gas exports.

For the war to continue, both sides need to find at least $100bn of funding a year to pay for it and that won’t be easy.

External funding

Currently, Ukraine’s only real option for staying in the fight is to raise money from its allies. Ukraine entirely relies on external funds to fund its entire budget deceit of $47.9bn, or 18.4% of GDP. Russia has no external funding possibilities at all.

Asbne IntelliNews reported, Ukraine is on a financial cliff, short $8bn-$19bn of funding for this year, depending on if the war stops, and a funding shortfall of $37.5bn for next year, according to the Finance Ministry. Last week, the IMF said that it had probably underestimated Ukraine’s funding needs by $10bn-$20bn for next year.

Now Ukraine is facing macroeconomic collapse, according to Kyrylo Shevchenko, the former head of the National Bank of Ukraine, as Europe can’t afford to take over the burden of supporting Ukraine itself, as most EU countries are either in recession or approaching a crisis.

If the IMF estimates are borne out then the EU will have to come up with some $60bn next year and every year going forward – close to what it has sent Kyiv over the last three years combined – with Germany bearing the lion’s share of the burden. The need to find such large amounts, and at short notice, are driving the current revival of the idea to tap the central bank of Russia’s $300bn of frozen assets in the form of Reparation Loans that would meet Kyiv’s needs for several years.

Russia used to issue around $5-6bn of Eurobonds before it annexed the Crimea in 2014, but even after the first sanctions regime was imposed that fell to around $3bn that was largely a benchmarking process for corporate issues. However, following the invasion of Ukraine in 2022, MinFin stopped issuing bonds completely. Sanctions have cut Russia’s access to Western capital markets, and existing Eurobonds (about $40bn outstanding) are in default after the US Treasury blocked payments in mid-2022.

Russia is now entirely dependent on internal debt to cover its deficit, but it has a large and liquid banking sector that can meet the MinFin’s borrowing programme comfortably for the time being of RUB4.7-5 trillion ($57-$61bn) a year, or 2-3% of GDP – double the prewar amounts.

In addition, the Kremlin has another RUB2.8 trillion ($36.1bn) in its rainy-day National Wealth Fund as of June 1, which has been cut to quarter of its prewar size but is still sufficient to cover this year’s deficit in full.

All-in-all there is a total of RUB11.7 trillion in the fund including the non-liquid part (which are largely investments made by the RDIF sovereign wealth fund), but some of this can be liquidated. It has already been suggested that shares in the state-owned retail banking giant Sberbank could be sold, one of the investments, should the Kremlin becomes too strapped for cash.

Deficit Funding (Ukraine vs Russia, USD terms)
Metric	Ukraine 2025 (trn UAH / $bn)	Ukraine 2026 (Draft, trn UAH / $bn)	Russia 2025 (trn RUB / $bn)	Russia 2026 (Draft, trn RUB / $bn)
Deficit (% GDP)	1.97 / 48 (22%)	1.974 / 48 (18.4%)	3.2 / 39 (1.4%)	2.181 / 26 (0.9%)
External Financing	2.1 / 51 (grants/loans)	2.079 / 51	Minimal / 0	— / 0
Domestic Borrowing (Bonds)	0.76 / 19 (OVDP)	0.42 / 10	4.8 / 58 (OFZ)	5.1 / 61
Other (Reserves/Aid)	0.1 / 2 (grants)	0.3 / 7	0.45 / 5 (NWF)	4 / 48 (NWF)
Source: MinFins, bne IntelliNews estimates

Banking sector: bonds and liquidity

Both Ukraine and Russia borrow heavily from issuing domestic bonds (OVDP and OFZ, respectively) to fund budget deficits, tapping the liquidity in their banking sectors to cover their budget deficits. But in Ukraine’s case this provides a quarter of the money it needs and in Russia’s case its banks have enough to fund the deficit ten-times over.

Ukraine's banking sector is much smaller, strained by war, and simply doesn’t have enough money to cover the huge deficits the government is running. Ukraine's deficit in 2026 will be UAH1.9 trillion ($47.9bn) but the available liquidity of the banking sector is UAH300-500bn ($7bn-$12bn) – a quarter of what is needed to cover the deficit.

Russia is in a much more comfortable position. Its deficit is forecast to be RUB2.2 trillion ($26bn), but the banking sector currently has some RUB20 trillion ($241bn) in liquidity.

Ukraine’s domestic bond market provides a very useful $5bn-$10bn of excess liquidity that helps short-term, but full deficit needs far exceed domestic capacity—relying on external aid for some UAH2.1 trillion or $51bn. In addition, retail investors have bought another UAH100bn worth of war bonds that adds another small buffer, but overall, bonds cover only about 10% of the government’s funding needs.

Of course, the MinFin can’t take up all of the banking sector’s liquidity, but with a RUB5-9 trillion surplus, banks can easily absorb MinFin’s RUB4.8 trillion OFZ plan issuance plan for next year (including rollovers) and cover the entire deficit and more. The depth of the domestic liquidity pool in the sector -- banks hold about 70% of approximately RUB20 trillion of outstanding OFZs – ensures the deficit is negligible vs. liquidity in the sector. This means the Kremlin can fund the war for years to come on the basis of the liquidity in the banking sector alone.

Banking and bond key metrics
Metric	Ukraine	Russia	Comment
Total Banking Assets	3 trillion UAH ($73bn) (est. Aug 2025; deposits 2.79 trillion UAH, loans 1.23 trillion UAH)	192 trillion RUB ($2.3 trillion) (Mar 2025; up from 134 trillion RUB end-2024)	Russia's sector is 30x larger, giving vast scale for OFZ absorption. Ukraine's assets recovered post-war but remain 20% below 2021 peaks.
Excess Liquidity	High but limited (200-400bn UAH or $5-10bn est.; ample ratios, but tied to NBU CDs)	Surplus 5-9 trillion RUB ($60-110bn; structural surplus, but risks deficit by end-2025)	Ukraine's excess supports current OVDP but erodes with lending growth. Russia's surplus (from high rates/deposits) easily covers borrowing plans.
Current Sovereign Bond Holdings by Banks	38% of assets in gov't debt (1.14 trillion UAH or $28bn; OVDP outstanding 1.8 trillion UAH total, banks 60-70%)	50% of domestic debt (13 trillion RUB or $157bn; OFZ outstanding 26.8 trillion RUB total)	Both heavy exposure, but Ukraine's is near limits (risks concentration); Russia's is sustainable given size.
2025 Domestic Bond Issuance Plan	759bn UAH ($18.5bn OVDP net)	4.8 trillion RUB ($58bn OFZ)	Ukraine's plan 3% of assets; Russia's 2.5%, but with larger base/excess.
2025 Budget Deficit	1.97 trillion UAH ($48bn; 18.4% GDP)	2.18 trillion RUB ($26bn; 0.9% GDP)	Ukraine's deficit 65% of assets (domestic covers 40%, rest external); Russia's 1% of assets (domestic covers 100%+).
Source: National Bank of Ukraine (NBU), Central Bank of Russia (CBR), MinFins, bne IntelliNews estimates

Budget outlooks – revenue

Both Russia and Ukraine are drawing up 2026 budgets now and face similar difficulties funding the projected shortfalls, but with some stark differences: Ukraine's is aid-dependent with a massive deficit (18.4% GDP), focused on survival and reconstruction; while Russia's is more self-reliant with a modest deficit (2-3% GDP) and looking at normalising its economy, continuing military expansion but while ensuring social stability.

Kyiv is pushing hard for more external financial support, but at the same time persuading its partners to increase the pressure on Russia with more sanctions to eat into some of the fiscal buffers it has built up. Under less pressure, Russia is fine tuning its tax system, making long-overdue deep structural reforms, increasing efficiency, and finding a delicate balance between the use of the multifaceted resources at its disposal to keep as much power dry as it can.

The big difference between them is Russia's revenues are energy-heavy (oil/gas 22% target) but declining due to sanctions and falling prices for oil due to an oversupplied market thanks to this year’s OPEC production increases; Ukraine's are tax-dominant (>99% non-energy), boosted by tax hikes (e.g., military levy to 5%) and administration gains, but the war-eroded tax base has limited the scale of tax revenues.

While Ukraine’s budget deficit is in double digits, Russia’s budget deficit is expanding rapidly but smaller: at the start of the year the 2025 forecast for the end of year deficit was 0.8% of GDP, but was subsequently tripled to 1.7% and over the first eight months that target has already been missed. The deficit is currently 2.2% of GDP and may go higher.

Russia, Ukraine: break down tax revenues
Category	Ukraine 2025 (Revised, trillion UAH / $bn)	Ukraine 2026 (Draft, trillion UAH / $bn)	Russia 2025 (Revised, trillion RUB / $bn)	Russia 2026 (Draft, trillion RUB / $bn)
Total Revenues	2.33 / 57	2.826 / 69	38.5 / 464	41.841 / 505
Oil & Gas	0.001 / 0.02	0.001 / 0.02	8.3 / 100	9.2 / 111
Non-Oil & Gas	2.329 / 57	2.825 / 69	30.2 / 364	32.6 / 393
- VAT	0.778 / 19	0.943 / 23	13.5 / 163	14.5 / 175
- Personal Income Tax	0.65 / 16	0.744 / 18	5.5 / 66	6.0 / 72
- Corporate Profit Tax	0.20 / 5	0.23 / 6	7.5 / 90	8.0 / 96
- Excises/Other Taxes	0.25 / 6	0.277 / 7	2.0 / 24	2.2 / 27
- Non-Tax	0.45 / 11	0.63 / 15	1.7 / 20	1.9 / 23
Source: MinFins,bne IntelliNews estimates

Tax collection in both countries has been boosted by the strong growth of the last two years (Ukraine 5.3%, 3.3%; Russia 4.3%, 4.3%), but both economies have slowed sharply this year.

Ukraine’s revenues surged by nearly a quarter (22%) in 2025 thanks to growth and tax hikes, and Russia’s non-oil revenues were up a whopping 78% in the same year off setting a 28% decline in oil and gas revenues.

Both countries are predicting another 9-18% gain in tax revenues in 2026, but Kyiv is assuming an unrealistic 4.5% of growth in that year, whereas Russia is predicting a far more modest and realistic 1% of growth.

Note that Russia has long since become far more dependent on VAT as its biggest source of tax revenues, which was double that of oil and gas in the last years, but still is at least half as much again now and going forward. As the budget is being squeezed this year by slowing growth and falling oil prices – Russia’s MinFin is now assuming oil will fall to $59/bbl for Urals in 2026 – in the last weeks talk has begun of raising VAT to 22% from 20%, after it was already hiked from 19% during the last World Cup.

The targeted oil and gas revenue share is now 22% of the total, way down from the 40% share it used to be and positions the price just below the $60/bbl budget rule cut-off that will now be reduced by $1/year to $55/bbl by 2030 says the ever prudent Russian Finance Minister Anton Siluanov.

Budget outlooks – expenditure

Both countries are running war budgets: all-in-all 60% of Ukraine's spending goes on defence, whereas Russia spends 32% on defence, with protected social spending on things like pensions and welfare making up another 35%.

Both countries are slowly starting to start reconstruction work, but military spending still takes the lion’s share: Ukraine's 12% growth in spending emphasizes reconstruction (education +34%, healthcare +17%); Russia's +6% trims defence slightly (-5%) but boosts social (+8%) for stability. Both protect non-military spending but Ukraine's per capita spend on this ($2,500) dwarfs Russia's ($3,600) in relative terms.

Russia, Ukraine: break down expenditure
Category	Ukraine 2025 (trillion UAH / $bn)	Ukraine 2026 (Draft, trillion UAH / $bn)	Russia 2025 (trillion RUB / $bn)	Russia 2026 (Draft, trillion RUB / $bn)
Total Expenditures	4.3 / 105	4.8 / 117	41.7 / 502	44.022 / 531
Defence (total)	2.6 / 63	2.8 / 68	13.5 / 163	12.8 / 154
- Soldiers’ salaries	300 / 7	344 / 8	4.0 / 48	4.3 / 52
- Other defence	2.3 / 56	44.3 / 1 (domestic arms)	9.5 / 115	8.5 / 102
National Security	0.3 / 7	0.35 / 9	3.2 / 39	3.5 / 42
Healthcare	220 / 5	258 / 6	1.8 / 22	1.9 / 23
Pensions	0.90 / 22	1.027 / 25	8.5 / 102	8.8 / 106
Social Sector	422 / 10	467.1 / 11	6.0 / 72	6.5 / 78
Education	198 / 5	265.4 / 6	1.5 / 18	1.6 / 19
Science Support	14.5 / 0.4	19.9 / 0.5	0.24 / 3	0.276 / 3
Other	0.7 / 17	780 / 19	6.9 / 83	6.476 / 78
Source: MinFins,bne IntelliNews estimates