The IMF and Ukraine: reforming a country while she is fighting for her life
By Matthew Parish
Sunday 25 October 2026
There is something inherently peculiar about demanding economic reform from a country in the middle of a war for national survival. Ukraine is being asked simultaneously to repel one of the world’s largest armies, repair electricity infrastructure repeatedly destroyed by Russian missiles, maintain pensions and public services, finance an expanding domestic defence industry and transform itself into something resembling a modern European market economy. The International Monetary Fund nevertheless insists that the last of these objectives cannot simply be postponed until the first has been achieved.
That position is more reasonable than it may initially sound. Ukraine is dependent upon external financing on a scale that would have been almost unimaginable before February 2022. Her military expenditure is enormous, much of her productive economy has been damaged or displaced and substantial parts of the population have either left the country or are serving in the Armed Forces. Foreign governments and international institutions are therefore providing the money that allows the Ukrainian civilian state to continue functioning while domestic revenues are concentrated upon the war effort. The IMF sits close to the centre of this extraordinary financial architecture.
In February 2026, the IMF approved a new four-year Extended Fund Facility arrangement worth approximately US$8.1 billion. The Fund’s importance, however, cannot be measured merely by the amount of money it lends. An IMF programme operates as a certificate of macroeconomic credibility. If the Fund believes that Ukraine’s public finances remain sustainable and that Kyiv is implementing the reforms it has promised, this reassures the European Union, governments, development institutions and private investors. If the relationship between Kyiv and the IMF were seriously to deteriorate, the consequences could therefore extend considerably beyond the loss of IMF money itself.
The IMF’s demands consequently deserve closer attention because they tell us something about the Ukraine that its international partners expect eventually to emerge from the war. That Ukraine is not merely supposed to be independent of Russia; it is supposed to be a substantially different state from the one that existed before the full-scale invasion. In this sense, IMF conditionality is not merely about balancing budgets. It is part of a much larger project of institutional transformation.
The problem of money
The most immediate IMF concern is prosaic: somebody has to pay the bills. Ukraine cannot indefinitely maintain wartime levels of public expenditure through foreign assistance, borrowing and monetary expedients. The Fund therefore wants Kyiv progressively to increase the proportion of government expenditure financed from sustainable domestic revenues. This is not simply a matter of satisfying accountants in Washington; it is ultimately a question of whether the Ukrainian state can become financially self-sustaining.
This explains some apparently rather mundane demands. The IMF wants Ukraine to improve tax and customs administration, restrict opportunities for tax avoidance, reduce abuse of the simplified taxation system and bring a greater proportion of economic activity out of the shadows. It has also pressed for reforms to international transfer-pricing rules and for institutional improvements in the Economic Security Bureau and State Customs Service. These measures rarely attract international headlines, but collectively they determine whether the Ukrainian state can reliably collect the revenues upon which all its other ambitions depend.
Some of these measures are politically awkward precisely because they attack arrangements that Ukrainians have become accustomed to treating as normal. The simplified taxation regime, for example, has played an important role in encouraging entrepreneurship and keeping small businesses alive in a country where conventional bureaucracy has historically been burdensome. Yet simplified taxation can also be manipulated. Businesses can be artificially divided into smaller entities, employees can be disguised as independent entrepreneurs and companies can move between tax regimes principally to minimise their liabilities.
The IMF therefore sees Ukraine’s enormous informal economy simultaneously as a weakness and an opportunity. Bringing economic activity into the formal sector increases government revenue without necessarily requiring dramatic increases in headline tax rates. It also makes Ukrainian businesses more compatible with the regulatory environment they will encounter if Ukraine joins the European Union. The transition is uncomfortable, but the alternative is a state permanently unable to finance the public institutions expected of a modern European country.
This principle explains the seemingly obscure controversy about imported parcels. Legislation imposing VAT upon foreign parcels forms part of a broader package connected with IMF and European conditionality, while also addressing the advantage enjoyed by foreign e-commerce suppliers over Ukrainian businesses paying domestic taxes. Nobody will erect a statue to the politician who introduces VAT on parcels from abroad, but states are ultimately constructed from precisely such unglamorous arrangements. A European state capable of financing itself requires a broad tax base, functioning customs administration and citizens and companies who cannot routinely organise their affairs around the assumption that taxes are optional.
The war against the shadow state
The more important IMF demands concern governance. Here the Fund is confronting one of the fundamental problems of post-Soviet Ukraine: the difference between the formal state described in legislation and the informal state produced by networks of political influence, business interests and personal relationships. The distinction is critical because institutions that appear perfectly respectable on paper may function quite differently when informal influence determines appointments, contracts and regulatory decisions.
Ukraine has made remarkable progress since 2014 in constructing institutions intended to constrain corruption. Nevertheless the IMF remains concerned about governance, anti-corruption institutions, asset declarations, state-owned enterprises and state-owned banks. It has repeatedly called for stronger governance, improvements in the rule of law, reduced corruption vulnerabilities and further reform of state enterprises. The implication is clear: creating institutions is not enough if their independence and effectiveness cannot be guaranteed.
This is not merely moralising by foreign bureaucrats. Corruption is an economic problem because it changes the allocation of capital. Investors are reluctant to place hundreds of millions of dollars into factories, infrastructure or energy projects if commercial success ultimately depends upon political connections, unofficial payments or the goodwill of officials whose decisions cannot reliably be challenged before independent institutions. Corruption therefore functions as a tax upon investment, except that unlike an ordinary tax its rate is unpredictable and its proceeds do not finance public services.
The issue becomes vastly more important when contemplating reconstruction. Post-war Ukraine may require investment on a scale unprecedented in modern European history. Governments can provide part of that money, but they will not provide all of it; private capital will have to participate. International investors will therefore want predictable courts, competent regulators, transparent procurement, reliable corporate governance and institutions capable of protecting property rights. Reconstruction and institutional reform are consequently not separate projects but mutually dependent ones.
This is why apparently technical IMF demands concerning supervisory boards and management appointments matter. State-owned companies remain immensely important in the Ukrainian economy. If their managers can be appointed principally through political influence, then control over those companies becomes a form of political patronage. If independent supervisory boards actually exercise authority, the opportunity for political extraction diminishes and the distinction between the state as regulator and the state as proprietor becomes clearer.
The same logic applies to asset declarations. Their purpose is not that every Ukrainian official should spend his life completing forms; it is that public office should cease to be an unexplained route to private wealth. Transparency mechanisms cannot abolish corruption by themselves, but they can make corruption more difficult to conceal and therefore more expensive to practise.
Energy and the uncomfortable question of prices
Perhaps the most politically dangerous reforms concern energy. Ukrainian governments have historically used regulated household energy prices as an instrument of social policy. During wartime the arguments for doing so become exceptionally powerful. Millions of Ukrainians have suffered declining incomes, displacement and destruction of their homes while Russia has deliberately attacked the country’s electricity and heating infrastructure. Asking those same households to pay more for energy can therefore appear politically and morally perverse.
The IMF nevertheless argues that the existing system imposes substantial financial burdens upon state-owned energy companies and reduces the resources available for repairs and investment. Its preferred destination is gradual market liberalisation, accompanied by targeted assistance for vulnerable households rather than permanently suppressed prices for everybody. The underlying principle is that the energy system must eventually generate sufficient revenue to maintain itself rather than depending indefinitely upon subsidies from a state already facing extraordinary financial demands.
Economically, the argument is compelling. Social policy conducted through artificially cheap commodities is generally inefficient because wealthy consumers receive the subsidy alongside poor ones. Targeted welfare payments allow prices to reflect costs while concentrating government assistance upon people who actually need it. Yet the elegance of this argument in economic theory does not remove the political difficulty of implementing it in wartime.
Telling Ukrainians who have endured blackouts, missile attacks and years of war that their electricity or heating bills must rise in the interests of economic efficiency is unlikely to produce spontaneous applause. The IMF appears to understand this, and its programme envisages sequencing liberalisation with stronger social protection rather than simply removing controls overnight. That distinction matters because economic reform that destroys political consent can ultimately defeat itself.
The independence of institutions
Another recurring IMF theme is institutional independence, particularly that of the National Bank of Ukraine. The Fund wants monetary policy governed by macroeconomic considerations rather than the immediate financing needs of politicians. It also supports greater exchange-rate flexibility, cautious foreign-exchange liberalisation and stronger financial-sector supervision. These may sound like subjects principally of interest to central bankers, but in fact they concern one of the oldest questions in political economy: whether governments can bind themselves.
Politicians invariably have short-term incentives. Spending money is popular; raising taxes is not. Cheap credit is attractive; monetary restraint is painful. Governments fighting wars have particularly powerful reasons to subordinate every institution to immediate political necessity. The temptation to finance expenditure by monetary expansion becomes especially strong when the alternatives involve politically painful taxation or dependence upon foreign creditors.
Yet modern economies depend upon institutions whose credibility derives precisely from their ability occasionally to say no. A central bank that investors believe will print whatever quantity of money the government requires cannot easily maintain confidence in its currency. A regulator whose leadership changes whenever it inconveniences a powerful businessman is not really a regulator. A state company whose board merely follows instructions from a ministry is not genuinely governed by its board.
The IMF’s reform programme is therefore partly an exercise in constructing constraints upon Ukrainian political power. This can sound undemocratic, but the paradox of modern democratic government is that some of its most important institutions work precisely because governments voluntarily surrender their ability to manipulate them. Institutional independence is consequently not necessarily a limitation upon democracy; properly designed, it is one of the mechanisms by which democratic states protect themselves against their own short-term temptations.
The IMF is not always right
None of this means that IMF conditionality should be treated as scripture. The Fund has made substantial mistakes in other countries and its institutional instincts naturally favour fiscal consolidation, market pricing and technocratic administration. Economic policies that look immaculate in a spreadsheet may produce quite different consequences when imposed upon complicated societies. The history of international financial intervention contains sufficient failures to justify scepticism towards anyone who claims that economic reform is merely a technical exercise.
Ukraine presents an especially extreme case. Conventional economic policy cannot simply be transplanted into a country where factories are occasionally destroyed by cruise missiles, millions of workers have emigrated, large areas of agricultural land are mined and a significant proportion of government expenditure is devoted to fighting an invading army. Economic efficiency cannot be the sole measure of public policy when national survival itself remains uncertain.
There is also a legitimate question about democratic sovereignty. Ukrainian citizens elect their parliament and president; they do not elect the IMF Executive Board. When external financing becomes indispensable, the distinction between voluntary reform and externally imposed conditionality inevitably becomes blurred. A government desperately requiring billions of dollars may technically remain free to reject the conditions attached to that money, but this is freedom in a rather attenuated sense.
Yet this objection has another side. Ukraine’s international partners are themselves accountable to taxpayers, and they are entitled to ask whether billions of dollars supplied to Kyiv are supporting sustainable institutions. Conditionality is the mechanism through which these two forms of accountability are reconciled. The resulting relationship will always contain tension because the interests of borrowers and creditors are never perfectly identical.
More importantly, many of the reforms demanded by the IMF are reforms Ukraine ought to undertake irrespective of the IMF. Reducing corruption, professionalising customs, improving tax administration, strengthening corporate governance, protecting central-bank independence and creating competitive energy markets are not eccentric obsessions invented in Washington. They are characteristics of the prosperous European political economy Ukraine says it wishes to join. The IMF and European reform agendas consequently overlap because both are directed towards creating institutions recognisable within the political and economic architecture of the European Union.
Reform fatigue
The greater danger is therefore not excessive reform but reform fatigue. The IMF’s assessments have been increasingly candid about the slowing pace of structural reforms, delays in important legislation and resistance from vested interests, even while Ukraine has continued to satisfy many quantitative programme requirements despite extraordinarily difficult wartime circumstances. This tension is hardly surprising. Reform is easiest when the political system is united by crisis and considerably harder once competing interests begin to reassert themselves.
That difficulty will grow as the war continues. At the beginning of the full-scale invasion there was an extraordinary concentration of political purpose. Survival overwhelmed virtually every other consideration. After years of war, ordinary politics inevitably returns. Business groups defend privileges, politicians contemplate elections that will eventually take place, bureaucracies resist changes that diminish their authority and citizens become tired of sacrifices whose end cannot be seen. Structural reform becomes most difficult precisely when its original sense of urgency begins to fade.
This is also the moment when reform becomes most important. Wartime solidarity can temporarily conceal institutional weaknesses because citizens and officials accept extraordinary measures in the interests of survival. A post-war state cannot depend indefinitely upon patriotic mobilisation. It requires institutions capable of functioning under the much less heroic conditions of ordinary political life, when people once again argue about taxes, salaries, contracts, appointments and private interests.
The IMF’s role in Ukraine should therefore not principally be understood as that of an accountant standing over Kyiv with a red pen. The Fund is attempting to use Ukraine’s dependence upon international financing to accelerate an institutional transformation that Ukrainian reformers themselves have pursued, with varying degrees of success, for more than a decade. This creates legitimate tensions, but it also gives domestic reformers an external source of leverage against interests that might otherwise defeat them.
There are dangers in this process. Reforms introduced too rapidly may impose intolerable social costs, while excessive taxation can suffocate precisely the entrepreneurial economy Ukraine needs to encourage. Energy liberalisation without effective social protection could impoverish vulnerable households. Anti-corruption institutions themselves require checks and balances lest they become politically unaccountable centres of power. Foreign officials should also retain sufficient humility to recognise that Ukrainians understand aspects of their own economy better than economists visiting from Washington.
Nevertheless the broad direction is difficult to dispute. The ultimate objective is a Ukraine in which businesses compete rather than cultivate patrons; officials cannot easily convert public authority into private fortunes; taxes are comprehensible and actually collected; state companies are professionally managed; energy markets can finance their own infrastructure; courts protect investments; regulators regulate; and the central bank does not function as the government’s printing press. Taken together, these changes would amount to something far more consequential than a collection of technical economic reforms.
They would represent the final dismantling of much of the post-Soviet political economy. That process began long before the full-scale invasion and will continue long after the war ends, because Ukraine’s struggle to separate itself from Russia has always been institutional as well as geopolitical. The question is not merely where Ukraine’s borders lie but what kind of state exists within them.
Russia’s war against Ukraine is partly a war about precisely this question. Moscow’s political model depends upon the fusion of political authority, state corporations, security institutions and privileged private wealth. Ukraine has spent the years since the Revolution of Dignity moving, inconsistently but unmistakably, in the opposite direction. IMF conditionality accelerates that movement because Ukraine now needs Western money and Western institutions demand Western-style rules in return.
There is therefore an irony at the heart of the IMF’s demands. Vladimir Putin began his full-scale invasion in part to prevent Ukraine’s permanent absorption into the Western political and economic world. The financial necessities created by his invasion have instead made Ukraine’s integration into Western institutions substantially harder to reverse. Every reform adopted because Kyiv needs international financing may also move the country another incremental distance away from the political and economic system Russia sought to preserve.
The IMF’s spreadsheets, structural benchmarks, tax reforms and supervisory boards may appear rather remote from the trenches outside Pokrovsk or Kramatorsk. In the longer history of this war, however, they are intimately connected. Ukrainian soldiers are determining whether Ukraine survives as an independent country, while the less dramatic battle over institutions will determine what sort of country survives. The first struggle is fought with artillery and drones; the second with legislation, appointments, budgets and bureaucratic rules.
The second battle may continue long after the shooting stops. If Ukraine wins it, the achievement will not merely be that the country has satisfied the IMF or qualified for another tranche of international financing. It will be that the Ukrainian state has finally completed the transformation that independence in 1991 began, the Revolution of Dignity accelerated and Russia’s invasion made existential: the transformation from a post-Soviet republic situated geographically in Europe into a genuinely European state.
