Ukraine risks losing up to €2bn in European Union financial support after missing four EU chapter reform targets required under the Ukraine Facility programme in the first quarter of the year, UBN reported on May 27. Kyiv has 12 months to rectify the omission after which the money will be lost if the reports are not made.

The threat of losing funding associated with Ukraine’s EU bid comes as Ukraine is also about to lose considerably more money indirectly earned from trading with the EU after exemptions to import duties and quotas to the EU market are due to expire on June 5.

The EU accession reform delays threaten both the timing and total amount of the next disbursement, which will make funding a long war against Russia much harder.

The European Commission is tightening the conditions surrounding its funding of Ukraine and has introduced a new tranche-based system where each reform indicator is linked to defined monetary reward. As a result, failure to meet specific conditions triggers automatic penalties and a reduction in the amount of funds distributed. If Ukraine does not resolve the outstanding issues with the missing reforms, it may receive only €2.5bn of the planned €4.5bn tranche.

“If the non-fulfilment of obligations is officially acknowledged, Ukraine will be granted an additional 12 months to meet the indicators; otherwise, any unused resources will be lost,” UBN reports.

The Ukraine Facility and the European Union’s Extraordinary Revenue Acceleration (ERA) mechanism, backed by profits from Russia’s $300bn in frozen central bank funds, have collectively disbursed €4.26bn to Ukraine so far. Of this, €3.1bn has been transferred under the Ukraine Facility, while €1bn has been channelled through the ERA. In parallel, the World Bank has provided a $50mn loan under the THRIVE initiative to support Ukraine’s recovery efforts.

The delayed compliance with required benchmarks has already affected the timeline for future disbursements under the Ukraine Facility. Analysts have warned that prolonged delays may compound fiscal pressures on Ukraine’s government, which is reliant on external aid to finance public services and maintain macroeconomic stability.

Ukraine is expecting international donors to provide circa $38bn this year, on a par with previous years, but the Ministry of Finance (MinFin) is expecting international aid to more than halve as soon as next year.

“Each of these indicators now has a monetary equivalent,” said a person briefed on the Commission’s revised disbursement rules. “Consequently, not meeting specific conditions leads to an automatic decrease in funds that are issued.”

The Ukraine Facility programme, launched in 2023, forms a central part of the EU’s long-term financial commitment to support Ukraine’s reconstruction and reform agenda.

EU accession veto

Ukraine’s bid to join the EU is plagued with problems, due to Hungary’s stringent objections to its membership. Hungarian Prime Minister Viktor Orban has mounted a vigorous campaign to block Ukraine’s accession, saying the EU “cannot afford” to admit Ukraine.

In theory all 27 EU member states have to approve Ukraine’s bid and pass each of the chapters as they are fulfilled by Ukraine. However, EU foreign policy chief and former Estonian Prime Minister Kaja Kallas said earlier this month that the EC has a “plan B” to avoid the need for unitary approval and Hungary’s de facto veto.

In effect, Kallas is proposing to launch the negotiations and approve those parts that don’t need unitary approval, while dodging the EU approval process for those that do by conducting bilateral negotiations with all 26 member states and Ukraine. While the latter does not lead to agreements that have any legal weight, the hope is progress can be made in the negotiations that will isolate Hungary and increase the political pressure on Budapest to eventually approve the process formally within the EU structures. Orban faces elections in 2026, which he will probably win, according to current polls, and then again four years after that.

The first cluster of Ukraine's EU accession negotiations is due to open this summer. One of the sticking points is Hungary’s concerns about the rights of a large Hungarian minority that lives in the west of Ukraine close to its EU border.

Before the EU Council on Foreign Affairs meeting, European Commissioner for Enlargement Marta Kos said last week: "Ukraine has done its homework, therefore it is ready to open the first cluster of fundamental provisions. Now the Council has all the elements to make a decision."

She reported that last week the EC submitted two additional screenings on the second and sixth clusters for Ukraine and Moldova to the EU Council.

"If we continue at the same speed as before, we will be able to conduct all screenings by autumn," said the European Commissioner.

Regarding Hungary's blockage of the opening of negotiations due to its issues with treatment of national minorities, she stressed that the protection of minorities is a fundamental and important aspect for the EU.

"This is a very important part of the negotiations. That's why, in my opinion, it would be very good if we could open the first cluster, which would give Hungary the opportunity to solve the problems it has regarding its minority in Ukraine," Kos explained.

Trade deal in confusion

Ukraine’s trade relations are also in a mess. Following the start of the war with Russia in 2022, the EU temporarily suspended all duties and quotas laid out in the Deep and Comprehensive Free Trade Areas (DCFTA) that had been signed previously. However, that exemption is due to expire on June 5 and should mean a return to the extremely restrictive conditions on Ukraine trade – most agricultural products – with the EU.

While European Commission President Ursula von der Leyen last year proposed a temporary trade regime be put in place on June 6, no work on the regime has been done. With only a week to go before the deadline, Ukraine’s producers still have no idea what the new trade regime will look like.

The problem is that to pass a resolution on a temporary trade regime, Poland’s vote is needed and Poland is in the midst of a very tight run race to choose a new president. Agricultural workers make up a decisive constituency and farm workers and truck drivers have protested against the open border trade policies of the EU, which they claim are wrecking their sectors. Polish protesters have mounted numerous protests and blocked the Ukraine-Polish border crossings on many occasions.

Polish Prime Minister Donald Tusk, who is currently also the chairman of the European Council until July, has been outspoken on the issue, saying that Warsaw supports Ukraine politically in its struggle with Russia, but “not at the expense of the Polish agricultural workers.” Poland is pushing for the DCFTA restrictions to be reimposed after chap Ukrainian grain exports wrecked the Polish grain market last year.

The political tensions have paralysed the Polish government, which is reluctant to tackle the issue of revising Ukraine’s trade deal until after the elections pass; the deciding second round vote for president will happen on June 1.

A lot is at stake. Currently only seven products are still subject to EU restrictions, but that will be increased to 30 – most of Ukraine’s best money-makers – if the trade agreement reverts to its previous pre-war DCFTA rules.

The European Commission has adopted a list of transitional measures for Ukrainian exports to the EU, said EC spokesman Balazs Ujvari, but no details have been released. The transitional arrangements will remain in place as long as necessary to adjust the DCFTA, which has been in effect between Ukraine and the EU since 2016, Ujvari noted.

Currently, the existing autonomous trade measures need to be renewed annually. "Instead, we are looking for more long-term solutions. Negotiations on this are ongoing – how to revise and modernize this agreement, make it more modern," he added.

In the meantime, starting in June, the EU will reinstate quotas for Ukrainian agricultural imports and begin a new round of negotiations to draw up a new exemption deal after the Polish elections are over. However, the reimposition of duties will badly affect Ukraine’s export revenues at a time when it is already running a €20bn trade deficit with the EU, while its corn exports, the biggest export category, are under pressure due to lower US corn prices.

Both Kyiv and Brussels hope to conclude the negotiations on balanced trade conditions by the end of July, but confusion will rein in the interim period.