By Ben Aris, Substack, 5/8/26
How can Europe cover the $100bn the war in Ukraine costs? The EU just signed off on a €90bn loan for Ukraine agreed at a summit on December 19 to get it through the next two years. But the increasingly dysfunctional European economy doesn’t have the cash to make the loan. So, it borrowed it.
Russia is also spending extraordinary amounts – even more than the EU. Russia’s 2025 federal budget allocated about RUB13.5 trillion ($145bn) to “national defence”, according to the official budget. The difference is that Russia does have the money and is spending cash.
Collective debt
When the EU approved its €90bn Ukraine support loan, the announcement was framed in Brussels as a demonstration of resolve — the largest single financial commitment to the war effort since the invasion began. What received less attention was the structural oddity at its heart.
It’s a loan by Europe to Ukraine. but it is a strange loan as Ukraine doesn’t have to repay it until Russia pays Ukraine war reparations – which will never happen. Another oddity is that this is European collective debt, issued by the European Commission, backed by the EU’s own budget, not a loan by the member states.
The EU as a whole is on the hook for the bonds that will be issued to cover the loan and that is unusual. Unlike the US treasury bills that are issued at federal level, literally making the states united, the EU is not a federation and usually borrowing is a sovereign affair. In fact, it has only happened once before. To fund the post-Covid recovery spending, the EU created the so-called €750bn NextGenerationEU facility in 2020 (now €806.9bn) that has just expired – half of it distributed as grants and half as loans – that was also EU-level collective debt backed by the EU budget.
The first of their kind, the bonds made the European Commission one of the world’s largest supranational bond issuers, borrowing on capital markets. By 2026, the EU is expected to have issued around €800bn in long-term bonds and EU-Bills under the scheme, with little left over.
A key feature of the Ukraine loan is in the meantime the borrowing costs are paid by European taxpayers and are accumulating whether or not Ukraine wins. Repayment is scheduled to run until 2058. Interest costs mean the shared EU taxpayer bill is likely to be in the region of €600bn-€800bn over the full period to 2058, with the upper end possible if borrowing costs stay elevated. Spread over roughly 30 years, that would average about €20bn-€27bn a year across the EU budget.
Collective EU debt is a constitutional novelty. The EU is not, and has never claimed to be, a federated state. Big countries like Germany hate the idea, as Berlin doesn’t want to be responsible for debt collectively with the likes of poorer countries like Spain or Portugal. Borrowing money has been, and will remain, a sovereign responsibility for the foreseeable future.
When the US Treasury issues bonds, it does so as the sovereign issuer of the world’s reserve currency, backed by the full faith and credit of a 250-year-old federal government. When the EU issues bonds for Ukraine, it does so as a supranational body whose members remain fragmented sovereign states that are only loosely joined together by trade and selective regulatory authority. It is issuing collective debt on behalf of a bloc that has no unified fiscal authority, no common treasury and no power to tax its citizens directly.
Consequently, the NextGenerationEU collective debt was seen as something of a revolution, described at the time as a “Hamiltonian moment” for Europe, a reference to Alexander Hamilton’s consolidation of American state debts in 1790 that is widely credited with making the US a coherent economic union.
That makes the Ukraine €90bn loan a second revolution. Together, the two instruments have committed the EU to approximately €840bn in collective borrowing — a sum that, while still modest compared with the sovereign debt of individual large member states – represents a qualitative shift in what the EU is. Each bond issued for Ukraine is another small step toward the fiscal union that European federalists have sought for decades — and that northern European governments have consistently resisted.
The decision to adopt a second collective EU debt issue is dripping with irony. The original idea of issuing the Reparation Loan – basically confiscating Russia’s frozen $300bn and giving that to Ukraine as a “loan” – got shot down by Belgium as it remains illegal under the EU’s own rules. But it would have cost Europe nothing.
However, as IntelliNews reported, without more money, and quickly, Ukraine was facing a macroeconomic collapse as soon as April, so the EU went for the next best option: issue more EU collective debt. The third option on the table was even less appealing: each country issues bilateral debt to Ukraine and funds interest payments out of their own taxpayer-funded budgets.
The irony is those countries most resistant to European fiscal integration — including the Netherlands, Germany, the Nordic states — are amongst those that are Ukraine’s strongest supporters and were desperate to find the money to keep Kyiv in the war. They were the ones that pushed the idea of new EU collective debt through.
It’s all Euro debt now vs Russian cash
Nearly all of Ukraine’s funding is now debt. Under the Biden administration the burden was evenly distributed after the West started funding Ukraine in September 2022 to prevent another looming government financial collapse, with the EU always providing slightly more than the US. Former US President Joe Biden was generous, and the larger part of money sent to Kyiv was grants that don’t have to be repaid, whereas the EU has always provided more loans that do have to be repaid (eventually) than grants.
Team Europe overtook the United States as Ukraine’s largest total supporter in 2025, with EU member states providing €65.1bn in military equipment against the US contribution of €64.6bn. The latest €90bn loan brings the committed total to €283bn and counting.
Since US President Donald Trump came to power, the US has sent no money to Ukraine. At the same time, all the money coming from Brussels is now in the form of debt. As a result, Ukraine’s debt-to-GDP ratio has climbed steadily from the mid-30s pre-war and will breach 100% of GDP this year. Kyiv has already suspended payments on its outstanding Eurobonds as it can no longer afford to service them. How it will resume paying investors’ coupons post-war remains an unanswered question.
Russia, on the other hand, raises the bulk of its military spending in cash. Russia’s 2025 federal budget remains overwhelmingly financed by current tax revenue rather than borrowing.
Of the government’s planned RUB40.3 trillion ($433bn) in revenues for 2025, around 73% came from non-oil and gas taxes (including VAT) and duties, while a further 27% is derived from oil and gas income linked to energy exports. Together, these “cash” revenues account for nearly the entire operating budget.
By contrast, debt financing represents a much smaller share of overall funding. Planned domestic borrowing through OFZ bonds and other debt instruments totals roughly RUB5.4 trillion ($58bn), equivalent to about 13% of total federal resources available for spending in 2025, or around 4% of projected GDP.
The sanctions have cut Russia off from the international debt markets. It has no choice but to borrow by issuing its OFZ treasury bills – tapping its own banking sector’s circa RUB20 trillion ($225bn) pool of liquidity, or four-times more than the entire federal deficit. Additional funding from the rainy-day National Wealth Fund and privatisations contributes only a marginal share.
The fly in the ointment is that while Russia’s total debt is only about 18% of GDP – by far the lowest of any major country in the world – war pressures have pushed up yields dramatically making this borrowing very expensive and interest payments are already eating up about 9% of all government spending – about three times more than is normal. However, most of the big heavily indebted countries in Europe are in the same boat. The situation in the US, with over $39 trillion of debt, is even worse.
The difference in Russia’s debt profile and that of the US and Europe is enormous. In dollar terms Russia’s total external debt is roughly $290bn-$320bn. As of early 2026, Russia could pay off every penny of its debt tomorrow just from its international reserves should the war stop. The US and Europe will have to run decades-long austerity programmes and be blessed with strong growth to get their debt back down to, say, the Maastricht maximum recommended level of 60% of GDP.
Russia budget deficit headache
All this is not to say Russia is having an easy time paying for the war. It relies on cash and not debt to fund its war, but thanks to the enormous cost of the war it is still very short of money. (chart)
According to Finance Ministry data released this week, the deficit reached RUB4.6 trillion ($58.8bn) in the first quarter, already eclipsing the RUB3.8 trillion ($48.6bn) gap originally projected for the entire year, The Moscow Times reports.
The shortfall represents a staggering RUB2.6 trillion increase over the deficit recorded during the same period in 2025. CBR governor Elvia Nabiullina’s unorthodox experiment to slow economic growth to bring down persistently high inflation rates is causing a lot of pain as the economy is teetering on the cusp of a recession. That is hitting the tax take. Between January and March, total revenues fell by 8.2% to RUB8.3 trillion, while spending jumped 17% to RUB12.9 trillion.
The pain was felt most acutely in the energy sector, where oil and gas revenues plummeted 45% to RUB1.4 trillion. Non-oil and gas tax revenues offered a modest cushion, rising 7.1% to RUB6.9 trillion, but were insufficient to offset the drop in hydrocarbon income or the accelerating costs of the state’s domestic and military obligations.
War windfall
The war in Iran is about to bring some badly needed relief. Russia is currently running around a RUB1 trillion ($11bn) deficit each month, but the April number should be a lot better. Reuters calculated that Russia’s primary oil tax revenue was set to approximately double to RUB700bn ($9bn) in April as higher oil prices from the Iran war fed through with a one-month lag — which was expected to dramatically improve the monthly budget position.
In other words, the oil and gas tax take in April is now equivalent to the entire budget deficit and the entire oil and gas export revenues (not the same as the tax take) almost doubled to $19bn in April. Russia Inc is not back in profit, but the pressure is off for now.
The calculation of just how much the monthly balance in April will be is made more complicated by the front-loading of spending in January and February the Ministry of Finance (MinFin) introduced at the start of 2023 to smooth budget balance over the course of the year. The Ministry habitually prepays contracts early in the year to avoid letting them stack up until December when some 20% of the budget spending used to happen. By March the deficit had already shrunk to approximately RUB1.1 trillion and this front-loading effect will fade away in April further improving the Kremlin’s finances.
Taken together, the estimated April total revenue should be around RUB700bn from oil and gas and another RUB2.3. trillion of non-oil revenues, or a total of approximately RUB3 trillion ($33bn). Set against the average spending of RUB3.2-3.5 trillion a month, the deficit is expected to fall to around RUB200-500bn in April – a notable improvement, but still in the red.
Calculating the budget balance
Russia’s oil and gas revenues rebounded sharply in April as surging crude prices linked to conflict in the Middle East boosted export earnings to an estimated $19bn, up from $9.8bn the month before – but that is just a balance of payment number and not the taxes the government earns from the trade.
The Russian government typically collects approximately 60-65% of oil export revenues as taxes through the mineral extraction tax (MET) and related charges. The rest stays with the oil companies as profit. That means the government can expect somewhere around RUB700bn-RUB1 trillion in taxes from the March oil exports, depending on the exchange rate. So, the Reuters’ estimate looks about right, and maybe a little on the low side.
The March result – the first full month of the Iran war – is based on an average price for oil of around $77, but the cost has been rising since then. To go into profit, the Russian budget needs a total additional RUB950bn a month, or only RUB250bn more than the windfall in March. That means the average price of Russia’s Ural blend oil would have to rise to $105 per barrel to close the gap – so Russia is already close to breaking even, but not quite there yet.
Another complicating factor is the size of the discounts Russia offers on its oil over Brent. Since sanctions were imposed this discount can be as large as 30%, but since the Strait of Hormuz were closed at the start of March it has shrunk dramatically, and indeed, Urals has even earned a $20 premium to a barrel of Brent in the last two months.
Suddenly, oil is no longer a commodity; the price of a barrel now also depends on who you are selling it to and how you are going to get it there. On a single day the price of oil has varied between $90 and $174 depending on who the customer is and where it is coming from. The quoted price for a barrel of Urals has risen to over $120 in the last two months, but at the time of writing Urals was trading below $100 again at $98.5. Where the average settles at won’t be clear until the end of the month.
Fiscal claustrophobia
As individual countries, most of Europe is close to running out of fiscal space to expand borrowing to fund Ukraine. Ukraine itself has already found itself at the end of the fiscal space cul-de-sac and with growth slowing thanks to the same chronic labour shortage that Russia is suffering from, that space will only tighten further.
Russia on the other hand has, on paper, acres of fiscal space to continue the war, although the rising cost of borrowing is starting to constrain it as well. That is one of the reasons the spike in oil prices is so important as it creates more wiggle room. And the Kremlin also still has the option of raising taxes further. It remains to be seen how much more room the two-percentage point VAT hike in January will create, that alone accounts for 40% of the government’s income.
Europe’s constricted fiscal space is going to be an issue as funding Ukraine is not the only Russia-related call on its capital. Germany has committed €500bn in defence and infrastructure spending, crossing its constitutional debt brake in the process. Poland is spending 5% of GDP on defence — the highest in Nato. The Baltic states are targeting 5-6%. And European Commission President Ursula von der Leyen has called for €800bn of spending to modernise Europe’s armies as part of the ReArm plan and more recently the efforts to build a Euro Nato.
Then there is the Climate Crisis. Europe needs €584bn in grid investment alone by 2030 to support the energy transition — a figure that predates the rearmament surge and must now compete for fiscal space with defence spending. One top of that, Europe needs to increase its battery investment ten-fold to close the battery gap to complete the green energy transformation. And there is also Europe’s lack of competitive edge crisis. The Draghi Report recommended spending €800bn a year for four years to fix this problem – a call that has since got lost in the noise.
Eleven of the EU’s 27 member states are now running budget deficits above the bloc’s own 3% of GDP Excessive Deficit limit. France is at 5.1%. Romania at 7.9%. Germany has just crossed the threshold it spent a decade enforcing on southern Europe. The EU’s own stability rules — the Stability and Growth Pact — are being strained by the fiscal demands of a war it did not plan for and cannot easily exit.
The IMF stresses that Ukraine’s fiscal and external financing needs are large and that risks are “exceptionally high” due to the duration and intensity of the war. Each additional year of conflict adds to the EU’s borrowed liabilities without adding to its productive capacity.