Ukraine, Europe and the new economics of war | Elina Ribakova
By maintaining stability and innovating to hold out against Russia, Kyiv has shown that size matters less in conflict than it used to
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A drone is retrieved by a Ukrainian soldier © Chien-Chi Chang/Magnum Photos
Russia was expected to defeat Ukraine within a matter of weeks. Almost four years on from the full-scale invasion, Ukraine continues to stand its ground.
Despite Russian claims, territorial gains have been limited. Russia controls roughly 19 per cent of Ukraine, including territories occupied in 2014. In 2025, Russia has taken roughly 3,000 sq km, but most gains are scattered, operationally insignificant and achieved at a high human cost.
That, of course, is far from the narrative of inexorable advance that Moscow has been pushing amid a flurry of diplomatic activity in recent weeks. But it does help explain why Ukraine has been resisting US pressure to agree to a peace plan loaded in Russia’s favour.
Ukraine’s experience since February 2022 has upended long-held assumptions about the economics of war — from the belief that size and industrial capacity are a guarantee of victory to misunderstandings about mobilisation, logistics and adaptability.
Russia held advantages in key economic factors. Yet its autocratic regime has struggled to convert these strengths into military power. Western support — including capital, technology and intelligence — shifted the balance towards Ukraine; and Ukraine’s own macroeconomic resilience and innovative approach multiplied that effect.
The lesson is clear. Together, European financing and Ukrainian ingenuity can build an effective deterrent against external threats, even as the US pulls back.
Bigger isn’t stronger
Winning a war depends on the ability to finance, feed and equip. In 2024, Moscow increased military spending to an estimated $149bn, representing 7.1 per cent of its GDP and about 19 per cent of total government spending, double the level in 2015. By contrast, in 2024 Ukraine’s military expenditure reached $65bn, at least 34 per cent of its GDP — the highest military burden of any country globally.
However, what the Kremlin planned as a “Blitzkrieg” instead turned into a war of attrition. For a smaller country such as Ukraine, the strategy of slow retreat while inflicting maximum damage is a viable one. The amount of captured territory does not give a full picture of the war dynamics.
Demographic decline, a shrinking pool of military-age men and resistance to joining the army have forced the Kremlin into expensive mobilisation tactics. The state is draining labour from key sectors, exhausting its police and industrial workforce, and relying on monstrous “human-wave” tactics on the battlefield.
Ukrainians on a military training exercise near Kherson © Chien-Chi Chang/Magnum Photos
A soldier prepares to launch a Shark-M drone © Chien-Chi Chang/Magnum Photos
Instead of a quick conquest, Vladimir Putin has led Russia into a conflict it never planned for, its economy stalling. Ukraine, by contrast, has strengthened its integration with the west and embraced modernisation. This has given it access to global networks, innovation and sustained external support. While Ukrainian GDP collapsed by 29 per cent in 2022 owing to the war, by 2023 growth had returned, supported by public consumption and partial wartime recovery.
Most importantly, Ukrainians are motivated to fight for a modern democratic future, while Russians lack such a unifying purpose.
The key to Ukraine’s resilience
In the early days of the 2022 invasion, both Ukraine and Russia faced risks of financial instability — Russia from sanctions, and Ukraine from the direct effects of Putin’s war of aggression. Yet both managed to steer their economies away from the economic abyss. This was particularly remarkable for the much smaller Ukraine, given that the war was occurring on its territory and its capital Kyiv was under direct military threat.
War is not just about a military attack; it is also about the ability to withstand massive macroeconomic shocks, involving the destruction of infrastructure, collapse of exports, loss of revenue, population displacement, labour market disruptions, decline in foreign investment and extreme uncertainty.
The photography for this article was taken by Chien-Chi Chang. He embedded himself three times with the first battalion of Ukraine’s 40th Brigade in 2024 and 2025, accompanying it on missions to the ‘zero’ line where soldiers engage in direct combat
Had Russia attempted a full-scale invasion in 2014, Ukraine would have almost certainly lost — not only because it lacked a trained army, but also because the authorities would have had to fight a financial crisis at the same time, stretching already limited management capacity. The conditions in 2014 were extremely challenging: Ukraine faced an overvalued exchange rate, depleting reserves, severe fiscal pressures and a profound domestic political crisis.
Since then, Ukraine has made major improvements in macroeconomic management and strengthened its integration with the west. Reforms carried out between 2014 and 2022, supported by the IMF and international donors, proved crucial in sustaining the war effort by underpinning a resilient macroeconomy and innovation.
One of the most important of these was the transformation of the National Bank of Ukraine (NBU). The bank was fully revamped, with substantial staff changes and the divestment of dubious assets. The NBU successfully implemented fully fledged inflation targeting before the war. It also cleaned up the banking system despite pressure from politically connected oligarchs.
The NBU kept the financial system stable throughout the war, ensured that banks continued operating and kept inflation under control. It is now gradually liberalising the exchange rate, using foreign support to build reserves and conducting effective external financing negotiations.
Ukraine embarked on long-overdue energy reforms by restructuring the state energy company Naftogaz. Energy subsidies had drained the budget, while the sector was rife with corruption.
Ukraine’s rapid shift of its electricity system to Europe at the start of the full-scale invasion was another crucial factor. Despite Russia’s 2014 invasion, Ukraine’s grid had remained synchronised with Russia, a legacy of the Soviet era. The country originally planned to disconnect from Russia and join Europe in 2023; however, the war accelerated the process, and emergency synchronisation — made possible by years of planning — was achieved in March 2022.
Reforms are far from complete. This essay is being published as a massive corruption scandal rocks Ukraine. While Russia’s corruption often dominates headlines, Ukraine has also struggled with strengthening domestic anti-corruption institutions. Ambitious reforms have often been imperfectly executed. Yet the fact that the National Anti-Corruption Bureau of Ukraine (NABU) and the Specialised Anti-Corruption Prosecutor’s Office (SAPO) are now able to tackle the highest levels of power is a sign of progress.
These reforms would not have been possible without a strong culture of civil society participation, investigative journalism and public demand for accountability, as demonstrated by major protests in response to attempts to limit the independence of NABU and SAPO.
Soldiers use digital devices to receive mission co-ordinates © Chien-Chi Chang/Magnum Photos
An engineer welds custom battery packs for drones © Chien-Chi Chang/Magnum Photos
Macroeconomic management, structural reforms and military performance are all interconnected. Ukraine has also managed to harness innovation in ways that Russia has struggled to replicate. While Russia’s larger size and deeper resources give it greater scalability, Ukraine has had to adapt quickly and creatively. Its approach emphasises management skills and agile brigades, using a destruction-centred strategy aimed at inflicting higher losses on the enemy — both in personnel and materiel — than it suffers itself, thereby reducing Russia’s capacity to fight effectively. Assessing the success of this is difficult, however, as neither side is forthcoming about personnel casualties and the range of estimates varies greatly.
Not all allies are equal
For Ukraine, alliances with the west have been decisive. The US, EU and other partners provide advanced weapons, intelligence, financial support, and deep political and economic integration. Western co-operation has reinforced Ukraine’s modernisation and institutional reforms.
Russia, by contrast, relies on a much narrower set of economies — primarily China, Iran and North Korea — which supply drones, ammunition, people, cars and consumer goods but do so at a high political and financial cost. These relationships are transactional, often asymmetrical, and leave Moscow increasingly dependent, while offering few of the technological, financial or institutional advantages that Ukraine gains from its western allies.
According to the Kiel Institute, Ukraine has received more than €300bn in aid from over 40 countries. The EU and its member states have committed roughly €187.3bn in support.
Training near the river, with makeshift waterproofing © Chien-Chi Chang/Magnum Photos
A marine rows to safety after the motor on his boat fails on the Dnipro river. In the distance, smoke rises from a Russian missile or drone strike © Chien-Chi Chang/Magnum Photos
When seen from a broader perspective, Europe today still spends far less on defence than an actual war in Europe could require. In 2024, defence expenditure by EU member states amounted to roughly €343bn, or about 1.9 per cent of GDP — though that is rising, with estimates for 2025 suggesting it could reach around 2.1 per cent of GDP.
For the EU as a whole, increasing defence spending modestly while supporting Ukraine proved far more cost-effective than pre-emptively building large standing military structures. From that standpoint, Ukraine’s aid requirements — while large relative to its own economy — are modest relative to Europe’s fiscal capacity, representing a comparatively cheap insurance premium against a serious security threat. A “reparations loan” worth up to €210bn, currently under discussion, would go a long way towards financing Ukraine’s defence and Europe’s collective security in the coming years.
Defending Europe: lessons from Ukraine
Rebuilding Europe’s defence — especially in the context of a retreating US — is a massive challenge. This has been underfinanced for decades, with the defence-industrial base hollowed out and military capacities in critical areas sorely inadequate. Most importantly, Europe will have to develop intelligence capabilities that can replace what the US currently provides, and reduce its dependence on both American and Chinese equipment.
Yet Europe has a strategic asset: Ukraine itself. With help from its partners, the country has resisted a nuclear-armed adversary with superior manpower and financial resources for nearly four years. Ukraine achieved this by building a defence model driven by speed, ingenuity and efficiency, underpinned by a decentralised and innovation-friendly institutional framework that supports rapid development, scaling and deployment of defence technologies.
Ukraine shows that modern war is as much about sustaining industrial output and financing as it is about battlefield assets. Deterrence requires economic strength, industrial depth and long-term fiscal planning. Europe needs fiscal space for a prolonged conflict, mechanisms to rapidly increase production of ammunition, explosives, electronics and repair capacity, and long-term tools — such as contracts, guarantees, and advance purchases — to stabilise supply chains and scale up critical inputs.[1]
Rebuilding manufacturing capacity, investing in dual-use tech ecosystems, strengthening energy and cyber resilience and ensuring workforce availability are all part of credible deterrence. Supporting Ukraine’s budget and using proceeds from frozen Russian assets for joint defence projects are also, in practice, acts of European defence.
Innovation and decentralisation are strategic advantages that Ukraine has leveraged — and which Europe can replicate. Ukraine’s defence ecosystem shows that speed, experimentation and distributed decision-making can outperform traditional, slow procurement systems. By opening markets to SMEs, simplifying contracting, and directly wiring frontline feedback into R&D, Ukraine reduced lead times from years to months, driving rapid advances in drones, electronic warfare and battlefield technology.[2]
The core lesson of this for Europe is that innovation wins wars when bureaucratic friction is minimised. While maintaining centralised standards, Europe should accommodate budgets and purchasing authority closer to military units, enabling commanders to acquire what works rather than waiting for multiyear tenders or getting bogged down in disputes among member states.[3]
A soldier advances through reeds on a training exercise near the ‘zero’ line © Chien-Chi Chang/Magnum Photos
Waiting for the command to launch rockets towards Russian positions across the Dnipro © Chien-Chi Chang/Magnum Photos
Digital, cyber and logistics capabilities are frontline defence assets, not support functions. Ukraine’s survival has depended on cloud-based state infrastructure, rapid expansion of cyber defence, and highly adaptable logistics networks blending military, civilian and volunteer capacity. These are not secondary capabilities — they are core to fighting and sustaining high-intensity conflict. Europe must treat cyber infrastructure, energy security, repair networks and resilient transport corridors as integral defence investments.
Europe’s path to security
In the modern economics of war, size matters — but far less than conventional wisdom suggests. Ukraine has shown that with preparation and allied support, a smaller nation can hold off a much larger aggressor. Allied assistance has been crucial, in fostering reform and innovation, financing military aid and limiting Russia through sanctions, which raised costs for its military-industrial complex.
The US has already scaled back much of its practical involvement. It has cut intelligence sharing with Ukraine in the past, even though this imposes minimal costs on Washington — the US possesses the necessary capabilities, collects this information regardless, and Ukraine provides valuable insights on Russian systems in return.
Ukraine’s resilience stems first and foremost from its macroeconomic stability and ingenuity. For Europe, what this shows is that defence does not require overspending. How to spend is as important as how much. By learning from Ukraine and boosting productivity, Europe can build a credible deterrent.
Elina Ribakova is a non-resident senior fellow at the Peterson Institute for International Economics, a non-resident fellow at Brussels think-tank Bruegel and vice-president for foreign policy at the Kyiv School of Economics