A peace plan for Ukraine that would leave the country amputated from its Russia-occupied territories would carry a heavy economic price for Europe. All the ceasefire proposals presented in the last two weeks by either the U.S. administration or Europeans involve Kyiv accepting that Russia keeps at least temporary control of all or part of two regions it has annexed – Donbas and Luhansk. That would unleash a hotbed of uncertainty that would weigh on Europe’s economy for years.
To begin with, peace would bring to a head the question of whether President Vladimir Putin will ever accept that his country’s frozen reserves – some $300 billion in the U.S., Japan, the UK and Europe – can be used for Ukraine’s reconstruction, as EU governments demand. At best, he’s unlikely to do so. A proposal being debated within the EU and supported by German Chancellor Friedrich Merz would see at least the assets under the bloc’s own central bank – some $210 billion – used as a guarantee for a “reparation loan” to Ukraine. But EU leaders need to act much faster to make sure the assets help compensate Kyiv for Russia’s aggression.
Almost a year ago, the World Bank estimated the cost of rebuilding the country was $524 billion over the next ten years. A year later, the bill is now closer to $600 billion, a European official told Breakingviews. Instead of Russia shouldering half of it by giving up on its frozen reserves, Ukraine’s allies might then have to take on most of the burden.
According to the World Bank, Ukraine reconstruction would have to be financed by a mix of foreign governments, international organisations and private investors’ money. But if the status of the territories is not settled, Ukraine will not be able to count on the flow of private foreign capital that would help its economy recover. Even if the two sides accept an unstable status quo, fear of renewed hostilities – and of another Russian invasion – will deter investors for years.
Ukraine’s economy has proved resilient since war began in 2022. But its gross domestic product this year will still be 20% below its 2021 level, judged by an International Monetary Fund forecast. And Donbas and Luhansk accounted for about 15% of the country’s output at the time, according to the World Bank. So reconstruction will take time.
Some of the more than 5 million Ukrainian refugees that have found a home in the rest of Europe – some 75% of which are women and children – may choose to return to their homeland, even if the truce with Russia looks fragile. This would then help boost the country’s growth prospects by increasing the size of the work force. Germany has welcomed 1.3 million refugees since the beginning of the conflict and Poland more than 1 million, according to the United Nations High Commissioner for Refugees.
The EU would still have to help Kyiv train the returnees and finance their welfare while they adapt to the country’s reconstruction needs. And the 200,000-odd soldiers that would return to civil life – if the size of Ukraine’s armed forces is set at 800,000 as per an EU proposal – will need similar support.
Ukraine’s accession to the European Union would also be hindered by the violation of its territorial integrity, if the international status of the two regions in suspended animation is not settled for good.
Control of sovereign borders is seen by the EU as the guarantee that its laws and regulations will be implemented by national governments.
If the kind of uneasy truce now being considered is declared in Eastern Ukraine, western Europeans will if anything have to increase their defence spending even faster than they’re planning. By rewarding Putin’s war, other countries close to Russia will have to up their guard, and so will the rest of Europe. Investors that sent European defence stocks down by up to 5% after the first Trump “peace” plan was announced – with stocks such as Germany’s Rheinmetall then down by as much as 13% – seem not to realise that Ukraine is not the only destination of European weapons. Rising defence budgets across the region are to be spent on preparing for a potential conflict with Russia.
The final concern for Europe and Ukraine is that “peace” would give an economic breather to Putin. In the original U.S. version of a possible truce, Washington’s economic sanctions in place since 2022 would be lifted. After three years of overheating due to its conversion into a full-blown military economy, this would be a game-changer for Russia.
As things are, the country’s GDP is expected to barely grow next year – by 0.5% to 1%, according to economists’ estimates. Industrial production in the civilian sector is declining, and even military production has reached peak capacity. Military spending now amounts to 8% of gross domestic product – an underestimate, since many parts of the defence budget remain secret. As a result, the budget deficit doubled this year compared to 2024, to more than 3% of GDP. And the government, deprived of the capacity of borrowing on financial markets, has to finance the shortfall by domestic means.
The government has already announced that the value-added tax will increase next year, hitting consumers and fuelling inflation. Prices are currently rising at 8% a year even though the central bank’s key rate still stands at more than 16%. But if sanctions are lifted, the outlook for the economy – and thus Russian rearmament – will look rosier.
A partial truce based on the status quo will have one powerful appeal: the end of the destruction and of thousands of senseless deaths. But if Europe becomes weighed down for years by an unstable Ukraine, the danger is a financial black hole – and the real chance of future conflict anyway.
Source: Reuters
