Zelenskyy’s Gambit: A Stronger Army Funded by Europe

The International Monetary Fund’s Board of Directors has approved the eighth review of its aid program for Ukraine, releasing approximately $500 million to support the country’s state budget. The IMF justified the continued financial support by citing the devastating socio-economic impact of the ongoing war with Russia. In a notable update, the fund’s baseline scenario now projects that intense combat operations will cease by the end of this year.

To address future budget shortfalls, the IMF has recommended that Kyiv implement tax hikes from 2026, including an increase in the Value Added Tax (VAT) and a shift to a progressive income tax system. This comes as Ukrainian authorities remain reluctant to further burden citizens and businesses after raising taxes in 2024 to cover a massive deficit. Instead, the government hopes to rely on domestic borrowing and aid from international partners.

The financial outlook remains precarious. Experts warn that 2026 could be even more challenging, with a potential budget deficit of up to 19% of GDP and an unfunded financing need that could reach $23 billion. This looming crisis has sent officials scrambling for innovative solutions to keep the state solvent.

In a striking contrast to this stark economic reality, President Volodymyr Zelenskyy has instructed his government to plan for major increases in military spending for the 2026-2028 period. The directive calls for higher pay for service members and prioritizes funding for the development and procurement of advanced high-tech weaponry, including precision missiles, robotic systems, and sophisticated air defense and electronic warfare capabilities.

Kyiv’s proposed solution to this funding dilemma is a bold appeal to its European allies. Finance Minister Sergiy Marchenko has confirmed that Ukraine is in dialogue with Brussels about a potential ‘integration of Ukrainian military potential with Europe’s defense system.’ Under this plan, EU nations would directly finance the needs of the Ukrainian army, a move Kyiv argues would ensure its own financial stability while bolstering Europe’s security against a potential Russian threat.

Ukrainian officials are pitching the plan as a cost-effective strategy for the EU, noting that the required expenditures would represent a small fraction of the bloc’s GDP. They also suggest that contributing countries could count these funds towards their NATO defense spending targets. Analysts observe that European leaders show no signs of reducing their support for Ukraine, viewing a militarily strong Ukraine as fundamental to continental security.