Ukraine is running out of money fast. It recently received a $1.5bn first tranche from the International Monetary Fund (IMF) $8.1bn Extended Fund Facility (EFF) that will tide it over for a few weeks. The Nordic countries are also suggesting a €30bn bilateral loan that will cover Ukraine’s budget needs until September, but this has also not been agreed yet.

Now Ukraine’s budget faces new risks in European sovereign debt markets that are going to come under pressure from the inflation shock caused by the war in Iran, as reported on March 25, citing the Institute for Economic Development of Ukraine.

The escalation of conflict in the Middle East has contributed to a global rise in inflation, driven by supply chain disruptions and higher energy and food prices, which has increased the likelihood of a European recession to 36.9%, according to the institute.

“Amid the collapse of the European sovereign bond market, the European Central Bank must choose between sovereign defaults by member states and printing more money,” the Institute for Economic Development of Ukraine said.

The impact on Ukraine’s fiscal position

Analysts expect policymakers in Frankfurt to favour further monetary expansion. Such a move could trigger a renewed surge in inflation across the eurozone, potentially exceeding the peak of 10% recorded in 2022. Ukraine’s domestic economic indicators are already showing strain. The hryvnia has weakened sharply, reflecting declining purchasing power and broader pressures on the economy amid sustained fiscal demands and external shocks.

Ukraine’s budget deficit is currently running at approximately 20% of GDP, almost entirely funded by external partners. The EU alone has committed over €50bn in macro-financial assistance since 2022, but disbursements are increasingly contingent on structural reforms that Kyiv has struggled to implement under wartime conditions.

The country’s central bank has limited room for manoeuvre. Foreign exchange reserves, while bolstered by international support, remain vulnerable to capital outflows if investor confidence deteriorates further. The hryvnia has held relatively steady against the dollar, but this stability comes at the cost of substantial intervention from the National Bank of Ukraine.