During a visit to Kyiv just after taking over the presidency of the European Council on July 1, Hungarian Prime Minister Viktor Orban met with Ukrainian President Volodymyr Zelenskiy and asked him to call a ceasefire. Zelenskiy flatly refused.

"As for a ceasefire, I have been very clear: we are at war and we cannot talk about a ceasefire just like that," he later clarified in an interview with Bloomberg on July 3. Zelenskiy claimed that Russia could use the truce to accumulate forces and resume military operations.

"This is why it [a ceasefire agreement] can only be reached on a transparent international platform in the presence of countries with trusted leaders," he went on to say, adding that it’s not enough to stop the fighting; a clear plan for what comes next needs to be worked out. And that means bilateral security guarantees for Ukraine. Zelenskiy clearly doesn’t trust Russian President Vladimir Putin as far as he can throw him but, sotto voce, he also doesn’t trust his Western partners to give Kyiv the full support it needs to win and provide for its security.

Orban then outraged the EU elite by flying to Moscow on July 5 to meet with Russian President Vladimir Putin on what he described on social media as: “peace mission continues, second stop – Moscow.”

The recently appointed EU foreign policy chief and Estonian Prime Minister Kaja Kallas angrily tweeted:” In Moscow, Viktor Orban in no way represents the EU or the EU’s positions. He is exploiting the EU presidency position to sow confusion. The EU is united, clearly behind Ukraine and against Russian aggression,” she said, clearly highlighting how the European unity is cracking.

Zelenskiy may not have a choice. Bankova (Ukraine’s equivalent to the Kremlin buildings) is under mounting pressure and is finding it increasingly difficult to fight this war. Zelenskiy may be forced into talks as soon as December.

“By the end of the year it will become clear whether Ukraine is able to survive the winter with the largely destroyed power grid and whether it has managed to stabilise the front line. The last few “silver bullets” at its disposal – F16s, longer-range strikes, harder sanctions – may or may not help it make it through,” says Leonid Ragozin, a bne IntelliNews columnist and independent journalist. “On top of that, [Donald] Trump’s election win will likely become reality. He will have his own peace plan, like it or not.”

Russia’s position is much stronger. Sanctions have comprehensively failed to bring Russia to its knees and the economy is now the fastest growing of all the major developed markets in the world. Rather than collapsing, Russia just overtook Japan to become the fourth largest economy in the world, according to the World Bank, and is also now classed as a high-income country. Moreover, the military Keynesianism bump that has boosted Russia’s growth to 3.6% last year has primed the pump and kicked off a virtuous circle of investment, wage rises, spending and growth. The changes are going from a spending bump and are becoming structural, according to an opinion piece in the Financial Times by Elina Ribakova, non-resident senior fellow at the Peterson Institute for International Economics.

The nature of Putinomics has fundamentally changed from pay down debt and hoard cash to releasing a wave of pent up investment that is aimed not only at the military industrial complex but civilian production too, as Putin laid out in his recent guns and butter speech. Despite Russia’s economic problems like high inflation, a shortage of labour and falling productivity, it has enough money and production capacity to fight this war for years. And Russia has three times the population of Ukraine, giving it a deep pool of potential recruits to draw from.

Long-time critics of the war in Ukraine like Jeffery Sachs and John Mearsheimer have said the war was unwinnable from the start and question US motivations for supporting Ukraine. While these views have been unpopular they are slowly starting to resonate more, The Hill recently reported as the conflict drags into its third year.

Things are not going Ukraine’s way. The fighting is locked into a destructive stalemate, and Ukraine is short of men, money and materiel – all problems that are likely to get worse as the year wears on.

Russia is also under pressure despite having the upper hand on the battlefield. The Kremlin seems prepared to draw a line under the conflict, as despite taking the initiative following the fall of Avdiivka on February 17 and a six-month hiatus in US fiscal and military support, Moscow has been unable to deliver a coup de grace that its superior man- and firepower should afford it. The “cargo 200”, as soldiers’ coffins are known, continue to stream back home in large numbers from the blood-soaked wheatfields of the Donbas.

The West has also made it clear that now supplies have resumed, it will never give Kyiv the most powerful weapons its needs to defeat Russia; Germany has ruled out the transfer of Taurus long-range missiles and the US is reportedly deliberately dragging its heels in training pilots to fly the desperately needed F-16 fighter jets. Permission is also being withheld to use Western weapons to strike targets inside Russia proper. This policy is unlikely to change.

Other frustrations niggle Zelenskiy. It has also been made abundantly clear to Bankova that Ukraine will not be invited to join Nato and that even its EU accession is at least a decade away. Moreover, after Polish imports of Ukrainian grain collapsed the local market last April, restrictions and duties have been reintroduced on Ukrainian agricultural exports to the EU, cutting heavily into Ukraine’s only source of foreign exchange earnings at a time when it is desperate for money.

Dozens of foreign policy experts on Wednesday, 3 July called on Nato members to avoid advancing towards Ukrainian membership at the summit, according to a letter sent to the Whitehouse, seen by Politico. “The closer Nato comes to promising that Ukraine will join the alliance once the war ends, the greater the incentive for Russia to keep fighting the war,” reads the letter. “The challenges Russia poses can be managed without bringing Ukraine into Nato.”

“US doesn't see Ukraine in Nato today,” Zelenskiy said in a recent interview. "It is so-called 'one step forward, two steps back' policy. I do not think that this is the policy of world leaders."

The sword of Damocles that hangs over the conflict is the increasingly likely return of Donald Trump as president in November; he has promised to “end the war on my first day in office.”

Two key Trump advisers presented a plan to end the war in June that boiled down to telling Zelenskiy to negotiate or else the White House would cut off all support, and telling Putin to negotiate or the US would arm Ukraine to the teeth.

Analysts say this is an asymmetrical dilemma, as to cut Ukraine off would almost certainly lead to Ukraine’s rapid collapse and probably a change in government, whereas to increase arms supplies to Ukraine would see Putin respond in kind with a general mobilisation and it could even bring China into the conflict as Russia’s defeat is as big a problem for Beijing as Ukraine’s defeat is for Europe.

Nato is also likely to be weakened under Trump as his team is suggesting a two-tier Nato system where the US will withhold the Article 5 support for an attacked country if they haven’t met the spending 2% of GDP on defence requirement, which defangs to some extent the threat to increase Nato support for Ukraine.

And Ukraine is going to run out of money soon. There is already a $5bn hole in Ukraine’s budget funding plans for this year that is forcing some cuts and tax hikes, and analysts widely believe that the most recent US and EU multi-billion dollar support packages could the last. The Rada budget committee is also forecasting that essential Western aid will fall from around $38bn this year to only $19bn in 2027, giving Ukraine a two-year window to resolve the conflict before it goes bust.

Still, starting talks will be extremely difficult, as Ukrainian legislation, sponsored by Zelenskiy, explicitly prohibits negotiations with Russia, and Zelenskiy signed a decree prohibiting any direct talks between himself with Putin personally. The Russians have also ruled out Zelenskiy as a counterparty, as they claim he has no legitimacy since his five-year term in office expired on May 20, and that actually the speaker of parliament Ruslan Stefanchuk is now the legitimate head of state.

Talk of talks

Hard as it seems, the talk of possible talks is growing louder. Zelenskiy has come closest to admitting that talks need to start in an interview last weekend with the Philadelphia Inquirer, where he said that the war “can’t go on for years.” Zelenskiy said there can't be direct negotiations between Ukraine and Russia but floated the idea for the first time that there could be indirect negotiations through a third party similar to the Istanbul talks and the negotiations to thrash out the tripartite Black Sea Grain Initiative in the first year of the war.

In particular, he said, Kyiv is preparing "three detailed plans" in the fields of energy, food security and prisoner exchange that will be ready “by the end of the year” and will be presented to partners and also Russia. These are parts of Zelenskiy’s own 10-point peace plan that he presented to the G20 summit in November 2022 that was also discussed at the recent Swiss peace summit held on June 16-17.

Putin has also offered to revive talks on the basis of the Istanbul peace deal on several occasions that could have ended the war in April 2022, but was shot down after former UK British Prime Minister Boris Johnson refused to extend Western security guarantees that are a core part of the agreement.

On the day before the Swiss peace summit Putin again offered a ceasefire that freezes the conflict along the current lines but on the harshest of terms that take into account “the realities on the ground.” In effect,t he called for Ukraine’s capitulation and to concede of all the territory Russia has taken in the last two years and more.

His terms include pulling out Ukrainian troops from the four regions Russian annexed last year, which it doesn’t even completely control. He also demanded that Kyiv drop its bid for Nato membership reaffirm its commitment to neutrality, a non-aligned and non-nuclear status that should be enshrined in the Constitution.

Putin repeated the suggestion during the Shanghai Cooperation Organization (SCO) in Almaty on July 4. "The Istanbul agreements remain on the table and can be used as a basis for the continuation of these [ceasefire] negotiations."

But the two men are probably talking at cross-purposes. Zelenskiy is referring to the fact that Ukraine didn’t negotiate directly with Russia in Istanbul, but via intermediaries such as Turkey and the UN, whereas Putin is simply demanding Ukraine’s surrender.

The timing is important, as it appears that Zelenskiy is buying time to see where Ukraine stands by the autumn. A freezing cold and dark winter looms for the Ukrainian population and it is still waiting for the weapons promised by the new US $61bn aid package to arrive; and of course for the wild card of a Trump presidency to be played. If any or all of these go wrong Zelenskiy’s hand may be forced.

In addition to Trump’s animus towards Ukraine is now the growing pro-Russia block forming in the EU that is also pushing for an end to the conflict.

The anti-Russia EU elite was bolstered by the re-appointment of Ursula von der Leyen as European Commission President for another five years and Estonian president and ultra Russia-hawk Kaja Kallas as the head of EU foreign policy, but the lurch to the right in the European Parliament has boosted the Russia-appeasers block.

Orban is famously friendly with Putin, being the only EU leader to have met him personally since the war started over two years ago. But this month he has created a more formal block by allying with leaders in Czechia, Slovakia and Austria, and the new right-wing MEPs about to join parliament are also typically softer on Moscow.

The pro-Putin block in the EU is on course to gain another advocate that will further undermine European support for Ukraine after the French overwhelming voted for far-right politician Marine Le Pen’s National Rally in the first round of the French general elections on June 31, which Putin must see as a victory for Russia.

Le Pen’s political career has been part funded by Russian money and her party only paid back a €6mn 2014 Kremlin loan last autumn ahead of the European elections. Le Pen had advocated for close ties with Russia, although she has distanced herself from Putin since the invasion of Ukraine in 2022.

 

 

The lack of materiel

The politics are starting to stack up against Zelenskiy, but he has serious practical problems too. Ukraine faces the problem of three Ms: the chronic lack of men, money and material. None of these problems can be easily solved.

On the battlefield the fighting has reached a stalemate again, despite Russia taking the initiative this spring after it intensified its missile barrage in March, when Ukraine ran out of air defence ammunition. Ammunition is starting arrive again, but a huge amount of damage has been done in the meantime, raising the question of whether Ukraine can get through the coming winter.

The World Bank said this month that Ukraine can expect dark and freezing winters for at least the next two years, as it will be impossible to repair enough power stations before the heating season starts in November. The country is already blighted with rolling blackouts and could face up to 20 hours of power outages a day this winter, according to the most pessimistic forecasts.

On the battlefield Russia has innovated and taken the lead in the drone war, but more recently has gone a step further with the introduction of massive FAB glide bombs that are wreaking havoc on Ukraine’s defences.

Drones typically carry between 5-50kg of explosive and can take out tanks and troops, but the first FAB glide bombs were essentially large Soviet-era gravity bombs with wings strapped onto them carrying 250kg of explosive. Only a few months later and Russia has just introduced massive 3,000kg of explosive glide bombs that are almost impossible to shoot down. Zelenskiy said on July 1 that Russia has fired over 800 of the FAB glide bombs in just the last month, which fortunately only have a 50-100km range and so their use is limited to the front line. The bombs are a low-tech solution, but they give Russia a decisive advantage, as it has thousands of them in Soviet-era stockpiles.

During the pause between Ukraine’s highly successful Kharkiv counter-offensive in the autumn of 2022 and Kyiv’s failed counter-offensive in the summer of 2023, Russia invested heavily in building strong defences. However, in the last nine months Ukraine has failed to follow suit and has constructed weak defences, say experts, that offer little protection against the FAB glide bombs.

The only reason Russia has made such slow progress on the battlefield is because Ukraine has been mass producing the deadly First Person View (FPV) drones that have made the no-man’s land on the front line a kill-zone that prevents Russian troops from infantry assaults and which have gone a long way to make up for Ukraine’s lack of artillery shells.

The only effective defence against the glide bombs is to shoot down the Russian jets that launch them, but without the promised F-16 jet fighters Ukraine has lost control of the skies. And despite repeated promises the F-16s are only expected to arrive in 2025 in any numbers, if then.

Ukraine’s biggest challenge is that the West doesn’t have any concrete war goals. Zelenskiy has very clear war goals: to defeat Russia and expel it from all Ukraine’s territory – including the Crimea. But despite the oft repeated nebulous rhetoric of a Ukrainian “victory”, the only concrete comment the Biden administration has made is to “put Ukraine into the strongest possible position for the inevitable negotiations.”

That point has already passed. The successful Kharkiv counter-offensive in 2022 was an opportunity to start talks that was not taken. Since then, Ukraine’s position has deteriorated and since the start of this year that deterioration has accelerated. Western support for Ukraine has gone from putting Ukraine into a stronger position to simply avoiding a humiliating defeat.

Part of Zelenskiy’s calculation for his new peace plan this autumn must be an assessment of how far the energy sector repairs have progressed before the first snows fall.

And the efforts to rebuild the destroyed power generation capacity – which remains under constant attack by Russia – have already become snarled up in bureaucracy that is preventing allocation of funding for important projects, Ekonomichna Pravda reported on July 4, citing sources familiar with the situation. Ukraine's government has not distributed €150mn worth of funding for four months due to snafus and its building only 20% of the declared 1 GW of energy capacity needed for the winter. Currently, about 150 cogeneration plants are being constructed, which generate a mere 1.5 MW each. Another 100 projects are sitting idle.

And Zelenskiy’s course of action also depends on how Ukraine’s AFU is holding up against the FAB glide bombs from ongoing Russian onslaught. The good news that might keep him in the game is that the outlook for Ukraine’s resupply of arms and ammo in 2025 is already considerably brighter. As bne IntelliNews reported at the start of this year, 2024 was always going to be extremely difficult thanks to the growing ammo crisis, but Europe and America has finally started to invest into beefing up their arms production capacities and these new facilities are expected to start coming online next year. The caveat is whether the West will agree to send Ukraine the more powerful weapons it has been calling for or continue to follow its de facto policy of arming Ukraine not to lose, not arming it to win.

Nevertheless, that must be set against Russia's rapidly and extensively expanding its own arms production, putting Ukraine at a serious and ever-growing munitions disadvantage. Russia is currently producing more arms than all of Europe combined after Moscow managed to ramp up the production of key weapons – artillery rounds, cruise missiles, ballistic missiles and drones – to fuel its war against Ukraine, according to a new report by a London-based think-tank, with just the key artillery shell production having gone from 1.7mn a year pre-war to 2.2mn last year. It will be over 4mn at the end of this year, according to Putin.

The lack of men

Zelenskiy said during a trip to Lunenburg to celebrate the formal start of the EU accession negotiations that the Armed Forces of Ukraine (AFU) was killing six Russians for every dead Ukrainian solder. If this is true – and casualty figures are a closely guarded secret for both armies – then Ukraine is winning the war as Russia has three-times as many people, not six.

But even if Ukraine’s kill-ratio is that high, the other factor in this calculus of death is how many new recruits each side can raise to replenish losses at the front. Putin said in a speech earlier this year that Russia now has 700,000 servicemen and has creditably claimed it is raising some 30,000 new recruits a month as volunteers by offering sky-high wages – a claim backed up by an independent study into the rapidly rising retail banking deposits, statistics of which are still reported by the Central Bank of Russia (CBR).

Russian mortality data suggest over 64,000 troops killed fighting in Ukraine, according to a report by independent Russian media outlets Meduza and Mediazona on June 28, but this estimate is based on published official mortality data and the true number must be at least two or three times higher. Nevertheless, the size of Russia’s army appears to be stable, or even growing slowly. However, there is no clarity on how Ukraine’s push to recruit more men is going, but the AFU is clearly desperate for new personnel.

Kyiv needs to call up about 200,000 people to address troop shortages, Germany’s Die Welt newspaper reported in July. According to the paper, hundreds of thousands of Ukrainian servicemen have been killed or wounded since February 2022; however, Die Welt does not provide the exact figure.

To keep the army’s size stable, Kyiv needs to recruit at least 50,000 people per quarter, but is missing this target, Western intelligence agencies told the newspaper. A new mobilisation bill passed on May 18 saw 2,800 convicts being sent to the combat zone in the past two months, but that is far short of what is needed.

From the estimated 6mn Ukrainian refugees that fled to EU countries, approximately 600,000 are men of military age. However, Kyiv’s efforts to exert pressure on EU countries to rescind their temporary residency permits and send them home have been rebuffed by the EU member states, who are keen to retain this pool of cheap labour that has in many cases boosted economic growth. Kyiv even ordered its consulates in EU countries to stop renewing expired passports in an effort to force the men to go home, but countries such as Poland ruled that these men could remain without valid documents.

Anecdotal evidence of press gangs operating all around Ukraine, snatching military-aged men from the streets, suggests that the campaign is not going well. While Russia has enough fresh meat for the grinder to sustain a kill ratio of six to one, if Ukraine’s recruitment is failing to add many new soldiers than that one soldier it loses, according to Zelenskiy, it will see the size of its army slowly shrink.

The strength of the AFU and the outlook for replenishing the ranks in 2025 will be another important factor going into Zelenskiy’s autumn calculation.

The lack of money

The final factor is money. The war is costing about $100bn a year to perpetrate, the bulk of which is supplied by Ukraine’s donors, who are becoming increasingly reluctant to underwrite the bill.

There are four major funding packages in place – US’ $61bn support package, EU’s four-year €50bn support package, $50bn loan deal serviced by the profits from the CBR’s frozen assets and a $40bn Nato-backed facility – but all of them have some problems.

Ukraine remains desperately short of money and the last two support tranches from the US and EU are widely seen as the last two big packages Ukraine will receive.

Funding the budget: The talk of “stand with Ukraine” is big, but when it comes to transferring money to Kyiv, the West walks slowly. Ukraine received “minimal military assistance” from its partners in the first quarter of this year, receiving only 10% of what was planned, according to Kyiv School of Economics (KSE) latest macroeconomic digest.

That left the budget with a $5.2bn deficit as international grants received in the period fell to $0.9bn compared to $3.7bn received in the first quarter a year earlier. That left MinFin rooting around for extra money and tapping both the banking sector’s profits and the National Bank of Ukraine (NBU) for cash, as well as making some cuts or delaying payments.

Structure of Ukraine’s budget revenues in 1Q24 2023-2024 $bn

Structure of Ukraine’s budget expenditure in 1Q24 2023-2024 $bn

Ukraine budget $bn 1Q23, 1Q24

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The state budget has received $20.2bn in revenue so far this year, mostly from international partners ($13.8bn) and domestic state loan bond (OVDP) issuance ($6.4bn). The largest donors were: EU with $8.5bn, Japan with $2.1bn, Canada with $1.5bn and the IMF with $881mn. Since the beginning of the full-scale invasion Ukraine has received more than $87.4bn in international aid and generated more than $29bn from the issuance of high-yielding OVDPs.

But even with all these billions in aid, MinFin is struggling to cover its budgetary needs – and that aid is almost bound to fall after this year.

For the second year in a row, the country's government faces a record deficit of a whopping $43.9bn and is counting on covering the bulk of it with help from Western partners. However, this year it is only expecting just under $38bn in funding from its international partners. The difference is going to be made up through tax hikes and spending cuts.

Ukraine is burning through around $40bn a year to fight Russia. In the first five months of this year the country spent $18bn on military needs, which amounted to almost 60% of all budget expenditures. The international support packages look big, but most of the $61bn US package will go to replenishing its own arsenal or arms makers at home to make more weapons for Ukraine’s use. Only $8bn of America’s recent package will go directly to Kyiv to fund Ukraine’s budget. The same is true of the EU €50bn money, which is spread over four years, and a lot of that is earmarked for weapons.

And the amount coming from donors is expected to fall drastically in the next few years. According to Rada budget committee member Yaroslav Zheleznyak’s Telegram channel, the Ukraine expects to receive from the West $37.8bn in 2025 as grants and credits, $25.7bn in 2026, but only $19.4bn in 2027.

If Trump wins re-election in November, he will very likely end the US support for Ukraine. Pledges already made are probably enough to get through 2024 and cover most of 2025, but after that where the funding will come from remains very unclear.

Ukraine can muddle through for the meantime. The international reserves were a healthy $42.4bn at the end of April – more than the minimum three months of import cover needed to keep the currency stable – but had fallen to $39bn at the end of May, after the volume of international aid decreased compared to March.

The IMF published in July a pessimistic scenario for Ukraine's economy as the war becomes protracted. It assumes a shock will start in the third quarter of 2024 that will affect business and household sentiment and the pace of migrant returns, accelerated by further damage to energy infrastructure from Russian attacks.

These factors would lead to a sharp decline in real GDP of 1.7% in 2024 in the pessimistic scenario against 2.5-3.5% in the baseline scenario, and a 1% drop in 2025.

High defence spending needs and a decrease in economic activity will increase the budget deficit. Foreign exchange imbalances will resurface and persist for longer, given the deterioration in export performance, leading to higher devaluation in the coming years. The subsequent recovery will be more subdued than in the baseline scenario, given even greater damage to fixed assets, and output will remain below pre-war levels.

Funding package problems: the West has promised a lot of money, but there are problems with almost all the packages. The most obvious example was the difficulty in getting the US $61bn package through Congress earlier this year, but the more recent EU four-year €50bn aid package that was approved in February has also faced problems, as Hungary, for one, refuses to participate, and now the pro-Russia block in the EU is growing, this package could encounter further difficulties.

Another $50bn loan deal, agreed on June 13, where the interest payments will be serviced by the profits made on the CBR’s frozen assets, was a landmark agreement, but the deal is being dogged by the details.

At the moment the loan is backed by the US, Canada and Japan, but Europe is refusing to participate, as it objects that most of the money will be spent on US-made arms, so benefiting the US economy, whereas the obligation to repay the loan if Ukraine defaults will fall on Europe, as that is where the bulk of the frozen CBR assets are housed. Washington still has not decided on how much it will contribute to this $50bn loan deal as the allies bicker over how to divide the burden up.

The US authorities must also obtain Congressional approval for such a big loan, which is also hesitant about throwing good money after bad. Opposition from both Republicans and Democrats in the US Congress could drag out the process until the end of 2024.

The EU candidates are also hesitating over approving the loan. European Council President Charles Michel told a EC conference on June 28 that only five of the eight EU candidate countries had signed off on the deal. Serbia, Georgia and, surprisingly, Moldova, all refused to sign. The EC insists that all candidate countries approve all EC sanctions measures. Serbia has been refusing to support sanctions on Russia from the start, and Georgia has rapidly drifted towards Russia in the last few years, thanks to booming mutual trade. But Moldova was a surprise, as it usually supports the EC; however, Moldova signed a new gas supply deal with Russia last year and may have its hands tied.

Finally, in the most recent sign that funding will get harder in the future, Nato members were wrangling over who should contribute how much to a multi-year €40bn funding deal on July 3 proposed by Nato Secretary General Jens Stoltenberg earlier this year.

The deal was already a cut down version of the original €100bn proposal put forward by Stoltenberg to “Trump-proof” Ukraine’s funding, but that was too rich and was immediately reduced to the less ambitious €40bn. But even that amount seems to be too much for the members. DPA reported that Nato members only agreed to provide approximately €40mn in aid to Kyiv for 2025 alone and want to reassess it each year. Nato members concurred that GDP would be factored into the calculations, but a consensus on individual contributions was also not reached at the July 3 meeting.

Trade deficit problems: Most of the money Ukraine is spending is coming from donors or domestic bond issues, but there is a third source: the export of grain and metals.

Ukraine is an agricultural powerhouse and a major metals producer, but Russia’s naval blockade has hobbled exports, and it is also cut off from the Russian market, formerly its biggest trade partner.

The export problems have been made worse by an acrimonious dispute with Poland, which accused Ukraine of dumping grain and wrecking the Polish grain market last April. Warsaw responded by banning the transit of all Ukrainian agriculture goods, thus cutting Kyiv off from one of its major sources of foreign exchange.

Since then, a deal has been thrashed out that introduces an “emergency brake” mechanism that will limit trade if the volumes get too big, but the reduction in trade is a major blow to Ukraine’s budget.

That dispute was only made worse when Polish truckers took it on themselves to block the border and prevent Ukrainian trucks from transiting Poland to EU market, saying the Ukrainian haulers were undercutting them and driving small and medium-sized Polish truck companies out of business.

Ukraine's exports to the EU plunged by almost 10% in January-June this year. Ukraine exported $10.97bn worth of goods to the EU, which is 9.7% less than the same period last year, according to the Ministry of Economy. Trade with Ukraine’s immediate neighbours and biggest trade partners has fallen even more precipitously: Poland, by 25.7%; Slovakia, by 21.3%; Hungary, by 67.2%, and Romania, by 50.2% in the same period.

Ukraine has been running a current account deficit of anything between $100mn and $2bn a month for most of 2023 that has to be funded somehow. (chart)

By contrast, Russia’s exports are booming. It posted a $260bn current account surplus in 2022, twice more than its previous all-time high of $120bn set in 2021. That fell to $51bn in 2023 when the oil sanctions kicked in, but this year it is on course to top the $120bn pre-war record again, thanks to booming grain and oil exports.

Debt and default problems: Ukraine’s finances could take a sharp turn for the worse in just the next few weeks. The state debt is mounting slowly as increasingly the money it is given is in the form of repayable loans, but more worryingly, its bond restructuring deal is about to expire and it is looking default in the face.

Only a quarter of the money Ukraine received last year was in the form of grants that don’t need to be repaid, down from three quarters before. Increasingly, fresh money is loans that do. The state debt-to-GDP ratio was a healthy 49% before the war, but has crept up to 94% of GDP now and could breach 100% of GDP before the end of this year. The state debt of Ukraine grew by almost $2.6bn in May alone, to a total of $151bn.

For the past two years Ukraine’s private bondholders have agreed to suspend debt-service payments, but that deal ends on August 1. Institutional bondholders have agreed to suspend payments until 2027. The let-off – from both government and private lenders – is worth 15% of GDP a year.

If these payments had still been in force, they would have been the state’s second-biggest expenditure, behind defence.

MinFin is in talks with its creditors and has asked for a 60% write-off, but the Eurobond holders committee is digging its heels in and will not agree to more than a 25% write-off. Last week, MinFin dropped its offer to a 40% haircut, but no agreement has been reached and the clock is ticking.

The last thing that MinFin wants to do is ruin its credit profile through a default that would mean it can’t raise money post-war, but resumption of coupon payments will only put added pressure on the state’s finances. MinFin would struggle to make the coupon payments even with a 40% write-down, say experts. An agreement on the terms of the restructuring is anticipated by August 1 but a default is looking increasingly likely.

In the face of all these problems, the government is already planning to cut crucial spending on the war, Yaroslav Zheleznyak, member of the Ukrainian parliament, said on his Telegram channel. Military spending in 2025 will amount to UAH2.2 trillion ($54.5bn). However, in 2026 and 2027 military spending will decrease to UAH1.6 trillion ($39.6bn) and UAH1.5 trillion ($37.2bn) respectively.

A funding crunch is coming that will change the calculus on seizing the CBR’s circa $300bn of frozen assets.

“Seizing the CBR’s money is off the table for the moment, as everyone worries that will undermine the euro and the Western banking system,” a senior advisor to the German government told bne IntelliNews on the condition of anonymity, as they were not authorised to speak about sensitive topics. “However, when the money runs out, probably in 2025, that will change the calculus completely and the attitude to confiscating that money. There aren’t any other options.”

Polls show support is fading

Ukraine fatigue is growing amongst countries’ populations as well, but the sentiment is very varied depending on the country and political proclivities.

Russia: Unsurprisingly, support for the war remains strongest in Russia. Patriotism is at an all-time high and Putin’s propaganda has been effective. He has also managed to shield the average Russian from any effects of the war and rising incomes and a booming economy have helped.

Still, a June poll by the independent pollster Levada found that 71% of Russian respondents would back ending the war if Putin called it off, although only 30% would support ending the war if that included returning the annexed territories.

Ukraine: That contrasts sharply with 33% of Ukrainians that think Ukraine moving in the “right direction”. 47% disagree and say it’s going in the “wrong direction”, according to a survey by the Razumkov Center published on June 26.

More tellingly, a new poll from the Carnegie Endowment for International Peace suggests that the share of Ukrainians open to a negotiated settlement has dramatically risen over the past year to June, and, if present trends hold, will become a majority-held view before the end of this year.

Polls from the earliest days of the war showed nearly unanimous Ukrainian support for the government and its handling of the war effort in the first year, but are starting to weaken now. Support has fallen from a 2022 high of 70% following a successful counter-offensive to 48% in the summer of 2023 following the failure of the second counter-offensive, according to Gallup. The share of Ukrainians that say ceasefire talks should start now has also risen to 44% as of June.

The majority of respondents still believe Zelenskiy should stay on as president and he retains the people’s trust, but his popularity ratings are also falling slowly as the war and destruction drag on.

Bankova watches the mood of the people closely and in the last week Ukrainian Political analyst Volodymyr Fesenko is said to have been sounding out public reaction to talks on behalf of Zelenskiy’s administration. He floated a trial balloon, a new “formula of victory,” which accepts that Ukraine would agree to losing territory, at least temporarily, in exchange for strong security guarantees. “If taken on board, this formula would replace Zelenskiy’s maximalist ‘formula of peace’,” says Ragozin.

Picking up on the recent softening in Bankova’s rhetoric, Fesenko told Politika Strany: “The change in the government’s rhetoric reflects a change in public opinion, which the presidential office has always researched very thoroughly. With their toolbox, they observed that the preparedness of Ukrainians to accept talks with Russia is higher than one could observe in the polls that have been publicised.”

Europe: Europeans are clearly tiring of the war, although they continue side with Ukraine. A negotiated outcome with Russia, as opposed to an outright Ukrainian military victory, is now also seen as the most likely outcome by most Europeans, according to a poll of 15 countries by the European Council of Foreign Relations (ECFR) think-tank in the first half of May.

ECRF found support for war and victory is strong amongst Ukrainians, despite weakening morale. A total of 34% of Ukrainians currently say they trust the Ukrainian president, Zelenskiy, “a great deal” and 31% trust him “quite a lot”. More than half (58%) of Ukrainians foresee a Ukrainian victory, 30% say it will end in a settlement, and only 1% expect Russia to emerge victorious. But tellingly, a majority preferred ceding territory rather than abandoning sovereignty, defined by the right to join Nato and the EU.

Inside 14 European countries ECFR surveyed, only in Estonia was there a prevailing view (38%) that Ukraine would win the war outright.

Majorities in Sweden and Poland wanted Europe to help Ukraine fight until all its territory is regained. Majorities in Italy, Greece and Bulgaria opposed this, saying it was a bad idea to increase the supply of weapons to Ukraine further.

Italy emerged as the largest major European power that is least supportive of Ukraine. But in most European countries, large majorities still back sending more arms to Ukraine, even if it is just to strengthen Ukraine’s negotiating hand.

A middle group of countries, including Czech Republic, France, Germany, the Netherlands, Spain and Switzerland, lack a national consensus on the war and the EU’s role.

In no country, even the most hawkish, was there any support for sending European troops to Ukraine.

A second recent poll from the US pollster Pew found that confidence in Ukrainian President Zelenskiy has also faded and is now mixed across the 35 countries surveyed, and is falling slowly.

A median of 40% have confidence in him to do the right thing regarding world affairs, while 46% do not, Pew reports. “Confidence in Zelenskiy has declined significantly over the past year in some countries where trend data is available.”

The views of Zelenskiy are mixed globally but overall support has declined

The share of people with confidence in Zelenskiy differs considerably across countries in Europe and North America. Confidence is highest in Sweden, where eight in ten have confidence in him. About two-thirds or more in Canada, the Netherlands and the UK also express confidence. However, six in ten or more in Greece, Hungary and Italy do not have confidence in Ukraine’s president.

Poland showed the most drastic decline in opinion towards Zelenskiy and Ukraine. Poles are torn between their antipathy towards Russia and its growing economic rivalry with Ukrainian goods transiting to the EU markets.

“Among Poles, 48% have confidence in Zelenskiy, down from 70% in 2023 (-22 points),” Pew said.

Confidence in him has also decreased by double digits in South Korea (-15) and South Africa (-12). Decreases are smaller but still statistically significant in Australia, France, Germany, the Netherlands, Spain, Sweden and the US.

Ironically, in Germany, which has led the European support for Ukraine, confidence in Putin is on the rise, up by 9 points, and favourable views towards Russia have increased by 5 points since 2023, according to Pew.

This may be connected to the rise of the right in Europe, as right-wingers are more likely to support Putin and dismiss Zelenskiy, the survey found. In Germany, supporters of Alternative for Germany (AfD) are about half as likely as those who do not support AfD to express confidence in the Ukrainian leader (31% vs. 61%).

US: Nearly a quarter of Americans believe that the United States is not providing enough military assistance to Ukraine, a sentiment that has grown since late last year, according to Pew.

A quarter (24%) of Americans now think that US support for Ukraine is insufficient, up from 18% in November 2023. However, nearly a third (31%) of Americans feel that the US is providing too much assistance to Ukraine, while 25% believe the current level of aid is adequate.

The United States stands out as the only country with significant ideological divides on this issue. Among right-wing Americans, 51% believe the US provides too much support to Ukraine, compared to just 13% of left-wing respondents.

Global South: At a country level support is faltering too and Putin has made big inroads in selling his cause to the Global South. The Swiss peace summit was a failure, as not only did few from the Global South attend, but out of the 100 participants only 78 signed off on a very vague final communiqué. And several countries quietly removed their signatures later after coming under pressure from Russia.

That contrasts sharply with the first March 2, 2022 United Nations General Assembly (UNGA) vote following the invasion, when fully 141 countries voted to condemn Russia, 34 abstained and only five voted against the motion. Subsequent votes saw the number of condemnations fall somewhat, but if the Swiss summit was designed to set a new benchmark of international support for Ukraine and isolate Russia further it had the opposite effect: it only highlighted the increasingly polarity of the West and Global South divide.

Getting to the table

The pressure on Zelenskiy to do some sort of deal with Russia is mounting but getting everyone around a table will be extremely difficult. On balance the decision falls squarely on Zelenskiy’s shoulders.

Both Putin and Zelenskiy have backed themselves into a corner with their maximalist positions. Beijing has put forward an alternative Chinese peace plan and proposed, jointly with Brazil, a second peace summit this autumn, this time one that would include Russia, but most remain sceptical that the meeting will happen.

In another sign of Bankova’s softening stance, on July 4 Zelenskiy said that he was not against attending another peace summit together with Putin. However, in his opinion, Putin is unlikely to come, as he is "too scared" to sit at the negotiating table, but the participation of the US and China “as joint mediators” might make a difference, he said.

Turkish President Recep Tayyip Erdogan has also put himself up as a potential mediator in peace talks with Ukraine. Putin and Erdogan discussed the war issue at the Shanghai Cooperation Organization (SCO) summit in Kazakhstan on July 3, but the Kremlin has said it has rejected the offer for now.

Putin and Zelenskiy maximalist positions mean currently there is no common ground for talks to begin, making the chances for an early end of the war low.

Serbian President and Russia supporter Aleksandar Vucic summed up the scepticism that a deal could be done in the near future in an interview at the end of June: “The termination of the Ukrainian conflict is impossible at the moment, even by means of using China’s latest initiative. I don't see a scenario of ending the war in Ukraine for now. I have studied the Chinese initiative. It is good. It is really good. I welcome this six-point proposal. I believe that over 100 countries have already supported it, which is crucial, because it envisages an immediate ceasefire. Only when a ceasefire has been achieved and when no more people lose their lives the negotiations should begin, but I do not see a chance for this to happen," Vucic said.