Unless Gandalf casts a spell, peace prospects look dim
Two key questions are on the agenda: what U.S. President-elect Donald Trump will propose as a peace deal, and what the response will be if the proposed solution sacrifices Ukraine’s sovereignty. Any plan requiring Ukraine to recognize Russian-occupied territories or to compromise its sovereignty would be unacceptable, prompting continued resistance. While Ukraine has financial resources, including $50 billion secured under the 2025-2026 ERA arrangement, and a mobilization reserve, sustaining a prolonged war will require better organizational capacity, maintenance of public resilience, and preservation of the Army’s fighting spirit.
Though the Trump peace proposal is a big mystery, we see a boost of irrational optimism among parts of the Ukrainian establishment about the possibility of a ceasefire, or a fair deal. But without forcing Moscow to the table—something Western powers have shown reluctance to pursue—or surrendering Ukraine's sovereignty, the likelihood of such a deal remains slim.
We are witnessing increased attention to potential elections, accompanied by widespread discussion about the declining approval ratings of President Volodymyr Zelenskiy. After three years of war and numerous missteps by the Ukrainian leadership, it is unsurprising that public admiration for Zelenskiy has diminished. However, measuring public sentiment in a traumatized, disoriented and war-weary society is inherently unreliable. In the absence of a clear end to the war, society remains consolidated around its leader in the face of existential threats. The outcome of any future elections, whenever they might occur, will depend heavily upon the results of the war—an outcome that remains highly uncertain.
Inflation continues to strengthen, with CPI reaching 11.2% y/y in November, driven by a weak harvest (down approximately 8.9% y/y) and rising energy costs due to ongoing missile and drone strikes targeting energy infrastructure. The trade balance improved in 2024, supported by stronger food exports and declining imports of services, primarily due to reduced spending by refugees abroad. However, external accounts are expected to worsen in 2025, reflecting weaker agro-exports following the poor 2024 harvest.
The budget remains in sound shape, buoyed by domestic fiscal consolidation and substantial external support. With €12 billion committed for 2025 under the Ukraine Facility and $50 billion secured under the ERA arrangement for 2025-2026, the economy appears stable and resilient. The currency is depreciating gradually, but the process remains firmly under the control of the NBU, which holds significant gross reserves ($39.9 billion, or 5 months of future imports, as of the end of November) to ensure a smooth and orderly adjustment.
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