Bolstering defences: Ukraine needs a 'victory first' aid strategy

Since Russia’s full-scale invasion in February 2022, Ukraine has received $145 billion in international financial assistance. While this support, generously provided by partner countries and other donors, has been immensely valuable, it has come with strings attached. The most significant restriction is that these funds can be used only for non-military purposes, such as health care, education, and public servants’ salaries.

Consider the World Bank-managed Public Expenditures for Administrative Capacity Endurance (PEACE) Fund, which provides financing for government salaries, including ministry staff, teachers, first responders, and health-care workers, as well as pensions and other social services, through the state budget. With this civilian-focused approach, Ukraine’s Western allies have sought to avoid the Kremlin’s ire. But deploying aid this way encourages Russia, while also creating distortions that undermine Ukraine’s war effort and generate waste.

For example, in September 2024, the Ukrainian parliament was forced to increase the state budget by around 12%, or 495 billion hryvnia ($12 billion), to cover military expenditures. In July, the Ukrainian government further raised defence spending by around 400 billion hryvnia, and on October 21, it allocated more than 300 billion hryvnia in additional financing for the defence ministry.

At the same time, the Ukrainian government recently allocated more money to school meals and other social programs. And since October 2024, it has spent four billion hryvnia on a rebate program for domestic products – a project with an unclear economic impact. While this money constitutes a small portion of overall expenses, it could finance around 276,000 basic FPV drones, a weapon which now accounts for 80% of Russian losses.

These budgetary developments illustrate how the constraints of the current foreign-aid structure create perverse incentives. To make international assistance for Ukraine more efficient, we must recognise two facts. First, defence is the most important spending item, because all other considerations – from social programs to reconstruction – depend on the continued existence of the Ukrainian state. Second, the war-ravaged Ukrainian economy cannot keep pace with Russian military expenditures, which totalled $149 billion in 2024, compared to Ukraine’s significantly smaller $65 billion.

Given this, Ukraine’s partners must support military spending, rather than social programs. After all, bolstering Ukrainian defences protects Europe’s security, and the Ukrainian army imposes the most forceful “sanctions” on Russia.

Ensuring the effectiveness of foreign aid is particularly important now, as European leaders discuss using frozen Russian assets to provide a “reparations loan” to Ukraine. While these funds could help sustain Ukraine’s people and economy, it is more important to fund their defence (as German Chancellor Friedrich Merz has proposed) – in other words, to tackle the existential challenge posed by Russia’s invasion.

Ukraine’s allies should be laser-focused on winning the war, which is the sole precondition for peace, Ukraine’s reconstruction, and European Union integration. This implies placing more emphasis on helping Ukraine repel Russian aggression than on designing security guarantees for “when the war stops” or preparing a European defence plan to be ready by 2030.

Various reports suggest that Ukraine uses only one-third of its drone-production capacity, owing to limited funding. With direct financial support from foreign donors, Ukraine could quickly increase its drone output, thereby blunting Russia’s assaults. It would also send the signal that Ukraine’s will to fight is backed by a robust financial lifeline from the West. These measures would make the war more costly for the Kremlin and may even motivate Russia to engage in genuine peace talks.

This “victory first” mindset should also guide the conditionality that Ukraine’s partners attach to their financial assistance. At this point, any reforms should support Ukraine’s current, not future, defence capacity. For example, reforms of tax administration can create fiscal space and should be welcomed, whereas stronger environmental regulations that impose additional costs on businesses should be deferred (especially because Russian aggression is significantly more harmful to the environment than Ukrainian industry is). But climate policies that build resilience – such as constructing decentralised “green” power plants – should be implemented immediately.

International donors should also fund defence because it will force the Ukrainian government to finance social programs with tax revenues. This will incentivise the Ukrainian authorities to improve the effectiveness of tax collection and address other long-standing issues related to tax administration and customs enforcement.

Foreign aid to Ukraine should reflect the reality on the ground. Above all, the country must protect its territorial integrity and sovereignty. Efforts to close funding gaps in areas other than defence – no matter how worthy – distract attention from this primary goal and create waste. Even with international support, Ukraine has far fewer resources than Russia. The efficiency of every penny must be maximised.

Fedyk is Assistant Professor of Finance at the University of California, Berkeley; Gorodnichenko is Professor of Economics at the University of California, Berkeley; Sologoub is Editor of VoxUkraine

Project Syndicate