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U.S. Sanctions on Rosneft and Lukoil: Pressure on Moscow, Strains on Europe

Posted on December 8, 2025 | Policy Brief

The U.S. sanctions on two Russian oil giants, Rosneft and Lukoil, came into effect on Nov 21, 2025. These sanctions affect not only companies per se but also their counterparties worldwide under the secondary sanctions clause. For the EU, these sanctions highlight a central trade-off: how to exert real pressure on Russia without fracturing political alignment among EU Member States. This brief discusses the consequences of the sanctions, including their immediate impact on the firms and Russia’s budget, the new tensions exposed in Europe’s energy policy, and the broader lessons for the next generation of EU sanctions tools.

The Threat of Secondary Sanctions

On 22 October 2025, the United States imposed sanctions on Russia’s two largest oil companies, Rosneft and Lukoil. At the time, the measures appeared symbolically significant: they were the first sanctions package introduced by the new Trump administration and were coordinated with the EU’s 19th sanctions package, giving the impression of renewed transatlantic alignment after a long period of fragmentation and uncertainty. The announcement reportedly caught Mr Putin off guard. This reaction highlights how unexpected the measures were, given President Trump’s rhetoric and the geopolitical positioning many observers had anticipated he would adopt.

Although, in retrospect, that initial sense of alignment appears more fragile, given other political developments during November, the sanctions that formally came into effect once the wind-down period ended on 21 November are likely to be consequential, both for the target companies and for the Russian federal budget. To understand this impact, it is essential to look at how U.S. sanctions operate in practice, especially the leverage created by secondary sanctions.

When the U.S. Treasury’s Office of Foreign Assets Control (OFAC) designates an entity for sanctions, it warns that any financial institution dealing with that entity may itself become exposed to penalties. In particular, OFAC notes that foreign banks engaging in significant transactions for a sanctioned person risk the imposition of so-called secondary sanctions. In practical terms, OFAC can bar such a bank from accessing the U.S. financial system if it knowingly carries out, or helps carry out, a transaction for someone under U.S. sanctions. Losing this access means losing the ability to use U.S. dollar accounts and payment channels.

This is precisely why OFAC’s sanctions are so widely feared: almost every dollar transaction in the world ultimately passes through a U.S. correspondent bank. Even two foreign banks trading dollars in Asia or Africa must clear their payments through the United States. If OFAC cuts a bank off from that system, it is effectively locked out of the dollar economy, and in the global economy, losing access to dollars is like losing access to oxygen.

The power of secondary sanctions becomes visible in how different actors react to the risk. Swiss trader Gunvor abruptly withdrew, and later publicly denied, its bid to acquire Lukoil’s international business once the sanctions exposure became apparent. In Bulgaria, the government moved to take control of Lukoil’s Burgas refinery because, once sanctions took effect, counterparties were likely to refuse payments to a sanctioned entity, forcing the refinery to shut down. This temporary state takeover has been tacitly tolerated so far, as it was deemed necessary to maintain Bulgaria’s fuel security. The same logic drove Viktor Orbán to rush to Washington to secure guarantees for Hungary’s fuel supplies, resulting in a one-year exemption from U.S. measures. In short, the threat of secondary sanctions is real and shapes major commercial and political decisions alike.

Economic Implications for the Targets

Given the far-reaching implications of OFAC sanctions, the economic impacts are potentially significant. Following the announcement in October, financial markets reacted immediately. Lukoil’s share price fell by around 9.4 percent, while Rosneft’s declined by approximately 7 percent. This asymmetry reflects the companies’ different exposure profiles. Lukoil, as a more private and internationally exposed firm, is significantly more vulnerable than Rosneft, whose operations are more domestically anchored and politically protected.

The sanctions raise the prospect of forced divestments of Lukoil’s foreign assets, likely at significantly reduced valuations due to the limited pool of potential buyers willing to engage with sanctioned entities. Even when divestment is not formally mandated, the measures can make it effectively impossible for the companies to repatriate dividends from their overseas holdings, as financial intermediaries are unlikely to process payments involving sanctioned actors. This constitutes an immediate loss of income, besides the longer-term loss of strategic presence in Europe.

Figure 1. Map of Lukoil’s foreign assets

Source: Bloomberg. The map includes the headquarters of the international marketing and trading arm, LITASCO SA, based in Geneva.

Operationally, both firms face higher costs and greater frictions. Sanctions increase the risk for suppliers, banks, insurers, and logistics partners, who now must factor in secondary sanctions exposure when doing business with Lukoil or Rosneft. This narrows the pool of potential counterparties and scares away buyers.

These dynamics are already visible in the adjustment patterns of major international buyers of Russian oil, notably India and China. There, the adjustment is expected to be sharper for India than for China. This is because India is more dependent on the dollar, given the rupee’s status, while trade with Russia is not as diversified to allow for barter-like arrangements (as Russia reportedly resorted to with China). Several major Indian refiners reportedly began planning to halt or scale back purchases of Russian crude. However, the grace period allowed India to stock up: according to tracking firm Kpler, India’s Russian oil imports reached 1.855 million barrels per day (bpd) in November, a five-month high, reflecting a rush to secure barrels ahead of the sanctions deadline. But for December, the same sources project a drop to 600,000–650,000 bpd, a three-year low in Russian oil shipments to India.

About 40-45 percent of China’s oil imports from Russia are also affected by these sanctions, and Chinese buyers, especially the smaller independent refiners but even some state-owned ones, are being more careful.

By and large, though, export volumes are unlikely to decline significantly in the near term, given the extensive circumvention networks and practices already in place. Nevertheless, financial effects are increasingly visible, not least due to another effect of the sanctions – buyers being able to extract deeper discounts, further compressing Russia’s earnings. There are already multiple reports of Urals trading at its steepest discount in a year, sometimes several dollars per barrel below Brent. The discount widened from USD11–12/bbl (before Oct 22 sanctions) to USD19–20/bbl by early November, and reportedly as wide as USD20–23.5/bbl by mid-November.

Figure 2. Urals–Brent discount, widening after sanctions.

Source: TradingEconomics.com.

 

According to CREA’s fossil fuel tracker for October 2025, “Russia’s monthly fossil fuel export revenues saw a 4 percent month-on-month decline to EUR 524 million (mn) per day — the lowest they have been since the full-scale invasion of Ukraine.” This corresponds to a 15 percent year-on-year drop in fossil fuel export revenues and resulted in a 26 percent year-on-year drop in tax revenues from oil and gas exports.

Over the medium to long term, these commercial pressures may accumulate and become consequential. Higher operating costs and lower revenues mean that both companies will have less capital available for investment. Because Russia’s upstream sector is both capital-intensive and dominated by Rosneft and Lukoil, with limited scope for independent or foreign producers to expand under current political and sanctions constraints, any sustained under-investment by these two companies is unlikely to be compensated by market reorganization. This raises the risk of faster production declines and a longer-term weakening of the entire industry.

Implications for the Russian State Budget

Lukoil and Rosneft are the two largest taxpayers in Russia, contributing through a broad range of fiscal streams and payments associated with state-owned infrastructure. In Rosneft’s case, where the state holds a majority stake, dividends are also a source of federal revenue. Any reduction in company profitability, therefore, translates directly into lower tax payments and smaller dividends.

Sanctions-driven increases in shipping, insurance, and compliance costs will further compress margins and reduce the tax base. The loss of foreign assets, or their sale at distressed prices, diminishes both current profit tax liabilities and future dividend streams.

Some taxes, such as the mineral extraction tax (MET), are based on production volumes rather than profitability, which reduces the immediate fiscal impact. But as profitability declines, and especially if the sector’s investment levels fall, the medium-term fiscal losses become more substantial as reduced investment ultimately erodes production volumes.

All in all, Rosneft and Lukoil together produce between 40 and 50 percent of the national oil output. Although the share of oil and gas revenues in the federal budget has decreased from the historical 35–40 percent to 25-30 percent, the potential fiscal impact remains substantial. According to Reuters, projected oil revenues for the current month are roughly 35 percent lower than in the same month of 2024, marking the weakest level in two and a half years.

Uneven Burden-sharing in the EU

These sanctions also carry costs for the EU itself. Their impact is felt unevenly across Member States, largely reflecting differences in pre-war dependence on Russian oil and gas. This is why EU sanctions on Russian energy have consistently included exceptions for highly dependent Member States in Central Europe, notably Hungary and Slovakia (and, before, Czechia). The Council explicitly acknowledged these exemptions were justified on the grounds of security of supply and fairness, recognizing that certain countries faced structural reliance on Russian oil and lacked immediate alternatives (Council Decision (EU) 2022/879 and the EU’s 6th package). At the same time, the financial significance of these exemptions for the EU’s pressure on Russia is very limited. According to CREA’s data for October 2025, Hungary purchased EUR 258 million of Russian fossil fuels that month and Slovakia EUR 210 million. This constitutes less than 4% of Russia’s global fossil-fuel export revenues for that month.

However, these exemptions produced asymmetric outcomes within the EU, complicating EU unity. Countries that retained access to Russian crude, typically priced below global benchmarks and substantially cheaper than LNG-based alternatives, effectively enjoyed a cost advantage over Member States that had already diversified or lost access to Russian supplies. They have avoided abrupt supply disruptions but also benefited from lower-cost inputs, while others absorbed higher market prices and the capital expenditure needed to secure alternative supply chains (including LNG terminals, new interconnectors, or upgrades to refineries).

The sanctions on Rosneft, Lukoil, and their EU subsidiaries offer a good example of how uneven the impact of energy measures can be across Member States. Rosneft holds significant shares in three German refineries, together accounting for around 12 percent of Germany’s refining capacity, but these assets have been under German state trusteeship since 2022 — meaning that Rosneft is still the legal owner, yet it no longer controls day-to-day operations. Lukoil, by contrast, directly owns major refineries in Bulgaria (Neftochim Burgas) and Romania (Petrotel Ploiești), and has a large stake in a Dutch refinery. For years, the countries hosting these assets benefited from cheaper Russian crude and gasoline, slower pressure to diversify, and more lenient implementation of EU sanctions.

As sanctions tighten and divestment of Russian-owned assets in Europe becomes unavoidable, these states now face higher prices and costly adjustments. In this sense, the current phase can be seen as a rebalancing act: the advantages these countries once enjoyed are gradually diminishing as their energy prices converge with those of other member states. At the same time, their exposure to supply disruptions may even be increasing, given the lack of earlier investment in diversifying their energy import sources.

But the politics remain contentious. Hungary’s push for renewed derogations and Slovakia’s threat in March 2025 to block EU support for Ukraine unless gas transit via Ukraine is reopened to Slovakia and Western Europe show how differing energy profiles still shape national positions on sanctions.

In the long term, however, solidarity cannot mean accepting the structurally uneven burden-sharing of sanctions costs. EU solidarity principles (reflected in the Treaties, the Clean Energy Package, and crisis-response mechanisms such as the 2022 gas solidarity regulation) imply that Member States should support one another to withstand shocks, not that some should bear permanent disadvantages. As highlighted in the energy-security literature, especially in the work of Le Coq and Paltseva (2009, 2012, 2022, or 2025), solidarity can be viewed as a mutual insurance mechanism that is most effective when tied to interconnection and diversification, enabling states with asymmetric exposure to external energy suppliers to cope with disruptions without undermining collective action.

Following this logic, solidarity should be understood as doing as much as possible to ensure that the Member States most exposed to Russian oil and gas are sufficiently integrated into the EU system—through stronger interconnections, diversified supply routes, and access to alternative sources—so that they can sustain tougher sanctions without requiring permanent derogations. The EU’s challenge, therefore, is to ensure a more even sharing of the sanctions’ burden, preventing any Member State from systematically free-riding by shifting the costs of sanctioning Russia (or other common policies) onto others, while preserving political cohesion.

Conclusion

The analysis of this episode carries important implications for EU policy.

First, it underscores both the strategic potential and the political limits of secondary sanctions as a policy tool. Legally, the EU’s treaties constrain extraterritorial action and anchor the Union in a territorial understanding of jurisdiction; furthermore, this take is consistent with the EU’s long-standing identity as a regulatory—rather than coercive—power. Practically, the Union lacks the federal-level enforcement structures needed to police foreign actors across jurisdictions. Politically, the use of secondary sanctions remains divisive: they raise concerns about infringing third countries’ sovereignty, provoking retaliation against EU trade, constraining diplomatic flexibility, and straining relations with key partners in the Global South. Member States’ exposure to international trade and to specific partners such as China, India, Türkiye, and the Gulf varies widely, making consensus difficult. At the same time, EU firms are deeply embedded in global supply chains, and the euro lacks the dollar’s reach, increasing the risk that aggressive measures, such as secondary sanctions, could accelerate de-euroization.

Within these constraints, the EU has opted for more limited, quasi-extraterritorial tools—most notably the “no-Russia clause”, which requires that EU exporters include a contractual ban on re-exporting their goods to Russia —to approximate the effects of secondary sanctions without formally adopting them. This calibrated approach has so far allowed the Union to signal resolve while limiting geopolitical and economic risks. But as U.S. secondary sanctions increasingly shape global trade patterns in ways that affect the EU, the question of whether this strategy remains sufficient is becoming harder to avoid.

Second, the episode highlights the need to make burden-sharing within common EU policies, including sanctions, more transparent and more equitable. Derogations for highly exposed Member States were justified in the short run on security-of-supply grounds, but their continuation produced persistent asymmetries in costs and benefits across the Union. These disparities have shaped national positions on sanctions, complicated collective decision-making, and, in some cases, been leveraged as political bargaining tools. As sanctions become a more permanent feature of the EU’s external action, clearer mechanisms will be needed to ensure that no Member State can systematically shift the economic or political costs of common measures onto others. This may involve revisiting the design of derogations, considering compensatory financial instruments, or more closely integrating sanctions policy with energy, industrial, and fiscal planning.

Ultimately, the credibility of the EU’s sanctions strategy will depend on its ability to align legal constraints, geopolitical ambition, and fair burden-sharing into a single, coherent framework.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

The Case for a Transport Ban on Russian Oil

Posted on November 24, 2025 | Policy Brief

In this policy brief we discuss the effects that would arise if the EU imposed a full transport ban on Russian oil. The transport ban would imply that any oil tanker transporting Russian oil would be prohibited from any oil trade involving the EU and from entering EU ports. We argue that such a transport ban would achieve the intended objectives of the EU’s oil sanctions: to reduce Russia’s oil income without risking surging oil prices.

Background

In its ambition to protect Ukraine and itself from Russia, the EU has two toolboxes at its disposal: military defense and economic warfare. The purpose of economic warfare is to “reduce the economic strength, hence the war potential, of the enemy relative to [one’s] own“ (Wu, 1952, p.1). It essentially boils down to the dual goal of harming your opponent without harming yourself too much (Snidal, 1991; Spiro, 2023).

Following the full-scale invasion in 2022, the EU and other countries significantly ramped up the oil sanctions against Russia as part of this economic warfare. Among them, the import embargo on Russian oil has been the most consequential; the G7 price cap on Russian oil, while being more politically salient, quickly lost much of its initial efficacy (Kilian et al., 2024; Spiro et al., 2025). Sanctions are like a cat-and-mouse game where Russia has now managed to circumvent the price cap to a high degree. The question for the EU, therefore, is how to revise the price cap sanction or what to replace it with. This policy brief analyzes one option: a full transport ban on Russian oil. To understand why and how such a sanction would work, it is, however, important to understand why the price cap does not.

The Price Cap: In Theory and Practice

Theoretically, the price cap sets a maximum price for Russian oil exports. Initially, the G7 cap was set at $60/bbl, while the EU later lowered it to $47.60/bbl. The practical implementation of the price cap was through the tanker and insurance markets. Any tanker transporting Russian oil at a price above the cap would not be able to get access to Western insurance or services. Since a very large part of the tanker fleet was, at the time of implementation, insured in the UK, this was consequential. Eventually, an additional constraint was added: tankers not following the price cap would not be allowed to access European ports.

The rationale for the price cap, at the time of its implementation, was that the G7 wanted to achieve the dual goal of economic warfare: it wanted to harm Russia by limiting its oil income while minimizing the harm to the global economy by ensuring Russia would not reduce oil exports. It was believed that a price cap set at 60 $/bbl would achieve that dual goal. With a world oil price at $80-100/bbl, the cap would severely reduce Russia’s oil profits; but since Russia’s cost of production is $5-15/bbl, it would have economic incentives to continue exporting oil (Gars et al., 2025; Johnson et al., 2023; Wachtmeister et al., 2022).

The price cap initially worked as intended: combined with the EU import embargo, it drove significant discounts on Russian oil while export volumes remained steady (Babina et al., 2023; Spiro et al., 2025; Turner & Sappington, 2024). Over time, however, the price cap’s efficacy eroded (Cardoso et al., 2024; Kilian et al., 2024; Spiro et al., 2025). This was for two main reasons: 1) the expansion of the “shadow fleet” of tankers willing to transport Russian oil without Western insurance or services; 2) fraudulent paperwork, allowing some tankers to appear compliant while actually transporting Russian oil at a price above the cap (Hilgenstock et al., 2023).

By early January 2025, only 15% of crude-oil tankers departing Russia used Western insurance (CREA, 2025), with the remainder being part of the shadow fleet. After the implementation of large-scale vessel sanctions later that month by the US Treasury’s Office of Foreign Assets Control (OFAC), the share of tankers using Western insurance increased. This indicates the shadow fleet can be affected by countermeasures. Yet, despite the strengthened sanctions, by October 2025, around 65% of shipments still used the shadow fleet, even as a large portion of that fleet now consisted of sanctioned vessels. A large part of the remaining 35%, while officially compliant, likely circumvented the price cap by use of fraudulent paperwork.

Extensive additional monitoring and enforcement capacity would be required to eliminate such fraud. To restore the full intended function of the price cap, or make a lowering of the cap meaningful, the shadow fleet would also need to be substantially reduced. But given recent estimates putting the shadow fleet at around 18% of global tanker tonnage (The Maritime Executive, 2025) this seems hard to achieve.

Given the challenges involved in re-establishing this system, an alternative approach is to replace the price cap altogether. So, what could serve as an effective replacement?

A Full Transport Ban

We here consider a transport ban on Russian oil.  In practice, under such a transport ban, a European coalition of countries would ban any tanker carrying Russian crude oil or refined products from entering European ports and using European services, either permanently or at least for as long as the ban is in place. Consequently, such tankers would be banned from any European oil trade, including, for instance, oil sold by OPEC countries to the EU, as well as any European maritime services in the future. This restriction would apply regardless of the sale price or whether the shipment formally complied with the G7 price cap.

Notably, in 2022, one of the sanctions planned by the EU and discussed within the G7 was a “service ban” that would be akin to the transport ban proposed here. The EU and G7 eventually decided not to implement it and to introduce the price cap instead, due to fears that such a sanction would come at a great cost to the world economy. Since Russia at the time only had access to a small tanker fleet of its own, a service ban would have resulted in an export reduction and an oil-price spike (Gars et al., 2025). This fear may have been well-founded there and then. However, as argued below, it is not a major concern today.

How a Transport Ban Would Work Today

The economic harm to Russia from a transport ban would come through the tightening of the tanker market that Russia can access. A tanker owner would essentially need to decide whether they want to transport Russian oil (around 10% of all seaborne oil trade) or have access to trade involving the EU countries (around 23% of seaborne oil trade). This, in essence, constitutes a trade-off between the short-run gains from transporting Russian oil and the longer-term consequences of the tanker being permanently sanctioned. Since the transport ban would be aimed at the tanker, it would also reduce the tanker’s value if sold. Plausibly, tanker owners would then only agree to transport Russian oil if they receive a sufficiently large premium compared to the income from transporting other oil. This would translate into higher transport costs for Russia, squeezing its profit margins (Spiro et al., 2025). How much Russian transport costs would increase is hard to say, but it should be noted that even an increase of $5 per barrel in these costs for crude implies Russian losses equal to 0.5% of GDP (Spiro et al., 2025).

Since Russian profit margins are very large, they would likely be willing to pay that premium. Furthermore, given that export reductions would inflict losses on Russia itself and on its key partners (China and India, see Gars et al., 2025), it is unlikely that Russia would reduce its exports as a sort of retaliation. The risk of a Russian supply disruption and an oil-price spike is thus low under a transport ban.  In other words, a transport ban would inflict costs on Russia without risking major costs to the EU.

Other Advantages

Importantly, under the described transport ban, paper fraud would become a non-issue. The sanctioning coalition would only need to monitor whether a tanker has entered a Russian port. Any such vessel would be placed on the banned list, regardless of whether it belongs to the shadow fleet, is Western-owned, or claims compliance with the price-cap regime. Given that a large share of Russian oil exports goes through European waters and chokepoints (e.g., the Danish Straits), it should be possible for the EU to identify such tankers, in particular those transporting Russian oil through the Baltic Sea (46% of all seaborne Russian crude and products).

Furthermore, this EU-led transport ban would not depend on coordination with the United States. The effectiveness of this sanction stems from geography, where a large share of Russian oil transits EU-controlled waters, and from the EU’s position as a large oil importer (13.7 mb/d). That said, if more countries joined the sanctioning coalition, the cost of ending up on the sanctioned list would be higher. Similarly, the premium required by the tanker owners would be higher. Hence, the sanction would be more effective if other major importers, such as Japan and South Korea, or major exporters, such as Canada and Norway, joined the coalition. US participation would, of course, also add weight, but would not be essential for the core mechanism to work.

Potential Problems and Interactions with Other Sanctions

One problem that a transport ban would likely not solve and could even exacerbate is the environmental risks posed by the poor condition and risky operations of the shadow fleet. The cost of being on the sanctioned list would be the loss of future earning potential of the tanker. Tankers closer to being scrapped would more likely choose the short-run premium over the future earning potential. The fleet transporting Russian oil could therefore end up consisting of even older, less safe tankers than today. Furthermore, the value of servicing the tankers would likely decrease, possibly reducing the quality and safety of the tankers further. While it is hard to ascertain the strength of these effects, by our judgment, it is likely small compared to the current situation and condition of the shadow fleet. The transport ban would not increase the amount of Russian oil shipped through European waters. The transport ban would, furthermore, provide another reason to monitor the movements and doings of tankers in European waters (on top of the current monitoring due to environmental risks and sabotage).

The EU today has a list of shadow tankers that are banned from European trade and services (EU Council, 2025). That is a good start, but the list is only partial. It has most likely missed a large share of vessels serving Russia using fraudulent paperwork. The proposed tanker ban would make the list longer and easier to administer. Prohibiting specific tankers from entering European ports and being involved in the European oil trade should be within the EU’s capacity. If secondary sanctions could be imposed consistently, that would give even larger effects, since the costs of breaking the sanction would increase further. That is where coordination with the US would be particularly impactful, as OFAC has a much better capacity for such measures. This said, given the current geopolitical situation, there are strong reasons for the EU to build up its own capacity for secondary sanctions.

While the proposed transport ban would simplify the monitoring compared to the price cap, there could still be potential for evasion. Monitoring whether a tanker has been in a western Russian port should be feasible, but following its movements all the way to the destination may not be. Potentially, Russia could then partly evade the sanctions using ship-to-ship transfers. Here, one tanker could transport the oil from Russia out of European waters, then transfer the oil to another tanker, which would transport the oil to the final destination. If the transfer is not detected, that second tanker could transport the Russian oil part of the way without facing sanctions. We cannot rule out that some such evasion could happen. But due to the risk of detection, the second tanker would also likely demand a higher premium, and Russian transport costs would still increase, albeit by somewhat less. Importantly, the EU should be able to detect and block these ship-to-ship transfers when they occur in European waters.

The US recently implemented sanctions on the two Russian oil companies Rosneft and Lukoil, by which anyone who does business with them is subject to secondary sanctions. In a sense, these US sanctions are similar to a transport ban, as they make it more difficult for Russia to export oil. In another sense, they are more of a complement to it. The US sanctions are targeted at specific firms, opening up for evasion by changing corporate structures and selling off assets, while the transport ban would be targeted at the physical tanker. It cannot be taken for granted that the US will uphold or keep its current sanctions, not least because they are intertwined with other motives (such as a trade war). It is, furthermore, not obvious that OFAC will have the capacity (or be allowed) to sanction entities within China and India. So, while the US sanction has touch points with the transport ban discussed here, the EU may need to construct its sanctioning regime independently.

In Summary

A transport ban implemented by the EU would serve the purpose of its economic warfare and has the potential to fill a gap in the current sanctions regime that has been opened by the eroding efficiency of the price cap. A transport ban would increase Russia’s oil-transport costs with low risks of oil-supply disruptions and price spikes. The requirements of monitoring for upholding a transport ban are much lower than for the price cap. The transport ban is not entirely immune to evasion, but the problems are likely small and would only partially reduce the effect of the sanction. The main concern is the environmental risks, but the sanction is unlikely to meaningfully increase the risks already posed by the current shadow fleet built up in response to the price cap. It is also feasible to implement a transport ban by the EU on its own, although the effect will increase if the sanctioning coalition is enlarged.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Georgia’s SME Digitalization Lags Behind EU Despite IT Growth

Posted on September 26, 2025 | News

Digital transformation is reshaping how businesses worldwide operate, yet SME digitalization in Georgia continues to lag despite strong IT sector growth. Many small and medium-sized firms struggle to adopt key digital tools like ERP, CRM, AI, and e-commerce. This raises questions about whether Georgia’s growing tech industry is truly driving digital progress across the wider economy. A new ISET Policy Institute study tracks SME digitalization from 2020 to 2024, comparing Georgia’s progress with EU benchmarks to reveal key gaps and opportunities for growth.

Why SME Digitalization in Georgia Matters

Across advanced economies, digital technologies fuel productivity and national growth. Investments in ICT, automation, and innovation enhance resilience and efficiency. Studies show that firms using e-commerce, digital payments, and remote work tools recover faster from disruptions and perform better overall. Yet, in both the EU and Georgia, smaller firms lag far behind large enterprises in adopting advanced technologies such as ERP, CRM, and AI. Bridging this divide is central to both the EU’s 2030 Digital Decade goals and Georgia’s economic modernization efforts.

How Georgia Compares to the EU

While EU SMEs steadily embrace digital tools, Georgia trails in both basic and advanced tech.

  • Only 50% of Georgian SMEs have broadband speeds of at least 30 Mbps, compared to 89% in the EU.
  • Just 7% of Georgian SMEs have websites with advanced features, versus 78% of EU firms.
  • Adoption of ERP, CRM, and AI systems remains minimal among Georgian SMEs.

Key Findings from the ISET Study

  • In 2024, only 6–7% of small firms used ERP and 3% used CRM, compared to 68% and 41% among large firms.
  • AI use was just 2% for small firms versus 20% for large ones.
  • Georgian SMEs lag EU peers in ERP (7% vs 42%), social media (30% vs 56%), and AI (2% vs 13%).
  • Only 3% of Georgian SMEs sell online, compared with 20% in the EU.

Economic Implications for Georgia

The SME digitalization gap threatens long-term productivity and export potential. Still, progress is visible. Fast broadband access for small firms rose from 33% in 2020 to 49% in 2024. Local e-transactions jumped 135% from 2020 to 2023, signaling growing online demand. Targeted support for digital skills, financing ERP/AI adoption, and simple e-commerce onboarding programs could help Georgian SMEs catch up with EU counterparts.

Meet the Researchers

  • Ana Burduli: ISET Policy Institute. 
  • Zizi Galustashvili: ISET Policy Institute. 
  • Giorgi Papava: ISET Policy Institute.

Read the Full Report

Read the full report on the ISET Policy Institute websiteto explore the complete findings. Explore more policy briefs on economic growth and development on the FREE Network website.

EU Adopts 18th Sanctions Package Against Russia to Cut War Funding

Posted on August 18, 2025 | News

The European Union has adopted its 18th sanctions package against Russia, marking one of the toughest measures since the start of the war in Ukraine. The new package targets Russia’s oil revenues, banking system, and trade routes that have been used to bypass earlier restrictions. Slovakia had initially blocked the move but lifted its veto after negotiations. The authors of the package described it as crucial to closing loopholes and weakening Russia’s wartime economy.

Why the EU Tightened Sanctions?

Russia has repeatedly adapted to previous sanctions by finding new trade partners and exploiting loopholes. As a result, the EU introduced the 18th sanctions package against Russia to strengthen enforcement rather than create entirely new bans. Sanctions are part of a constant economic battle, with the EU closing gaps as Russia discovers new ways to evade them.

What are the Main Goals of the New Package?

The 18th sanctions package focuses on reducing Russia’s energy income and financial resources. It aims to block the shadow fleet of tankers, target Russian banks, and restrict access to military technology.

What are the New Measures of the 18th Sanctions Package?

  • The oil price cap has been lowered to about $47.6 per barrel, with dynamic adjustments.
  • Imports of refined oil made from Russian crude in third countries are now banned.
  • Twenty-two more Russian banks face transaction bans, including those linked to Nord Stream projects.
  • Over 105 new vessels were blacklisted, bringing the “shadow fleet” count to more than 400.
  • Export restrictions on military-use technology have been tightened.
  • Sanctions now extend to third-country actors helping Russia evade restrictions.
  • New limits on liquefied natural gas (LNG) aim to reduce Russia’s long-term energy revenues.

Why These Measures Matter?

The 18th sanctions package against Russia is not just about new bans; it is about ensuring old rules work. Energy is still Russia’s biggest source of money, and cutting this income weakens its ability to fund the war. However, Russia has proven resilient by redirecting oil exports to Asia, relying on smuggling networks, and depleting its National Wealth Fund to cover deficits.

To learn more about the 18th sanctions package, how Russia is adapting, what tools the EU has left, how well the EU is responding to Russian countermeasures, and how long Russia can hold out, visit the Sanctions Hub—a website that collects data and insights on sanctions against Russia and its economic retaliation (read more).

To learn more about Western sanctions and Russia’s countermeasures, visit the Sanctions Timeline. And for details on sanctions imposed on Russia and their effects, see the Evidence Base section of the sanctions portal.

European Security Needs Ukraine’s Lessons to Deter Russia

Posted on July 14, 2025 | News

German army soldiers boarding military helicopters during field operations, highlighting their role in strengthening European security.

Russia’s full-scale invasion of Ukraine has shattered Europe’s long-held belief in lasting peace. The continent now faces its most serious security crisis since World War II. In response, Ukraine’s battlefield-tested innovations offer a powerful blueprint for a stronger and more resilient European defense system.

In their latest report, “Rethinking European Security in the Face of the Russian Threat,” authors from the KSE Institute, Olena Bilousova, Pavlo Shkurenko, Kateryna Olkhovyk, Elina Ribakova, and Lucas Risinger, outline how Europe can integrate Ukraine into its defense strategy to build lasting protection and deterrence against future aggression.

Europe’s Wake-Up Call on Security

For decades, Europe’s defense relied heavily on U.S. military power. But with Washington’s commitment increasingly uncertain, European nations must prepare to defend themselves. Years of underinvestment have left defense industries underdeveloped and ammunition stockpiles dangerously low.

Meanwhile, Russia continues to expand its military capabilities well beyond the war in Ukraine. This shifting landscape makes Ukraine’s role, both as a frontline defender and a hub of defense innovation, indispensable to Europe’s long-term security.

How Ukraine Became a Model for European Defense

For over three years, Ukraine has resisted a larger, nuclear-armed aggressor through speed, adaptability, and rapid technological innovation. From AI-driven battlefield systems to anti-drone warfare, Ukraine demonstrates how creativity and decentralization can offset limited resources.

Europe can learn from Ukraine’s experience to modernize its own defense systems and close existing capability gaps.

Key Research Insights

  • Combat-tested technologies: Ukraine’s AI-based DELTA systems and digital command tools provide models for next-generation European defense.
  • Cost-effective innovation: Interceptor drones and low-cost countermeasures can neutralize expensive Russian weapons at scale.
  • Decentralized procurement: Streamlined processes speed up the delivery of critical battlefield tools and reduce bureaucratic delays.
  • Strategic integration: Including Ukraine in European defense programs enhances deterrence and joint security across the continent.

Building a Future-Ready European Defense

The report calls for full integration of Ukraine into Europe’s defense ecosystem — from procurement and research to industrial planning. This includes:

  • Granting Ukraine access to EU defense funds
  • Embedding Ukrainian military expertise in European training programs
  • Co-producing weapons and defense technologies

Such integration would not only bolster European security but also make rearmament faster, more affordable, and more coordinated across the EU and its partners.

Meet the Researchers

  • Olena Bilousova: KSE Institute
  • Pavlo Shkurenko: KSE Institute
  • Kateryna Olkhovyk: KSE Institute
  • Elina Ribakova: KSE Institute
  • Lucas Risinger: KSE Institute

Read the Full Report

Explore the complete findings and recommendations in the full report on the KSE Institute website. You can also explore more policy briefs covering conflict and sanctions in the FREE Network’s policy briefs section.

Inequality in Europe: The Role of EU Enlargement

Posted on July 7, 2025 | News

European Union flag outside the European Parliament building, symbolizing political and economic unity amid ongoing discussions about inequality in Europe.

A new study reveals that the 2004 enlargement of the European Union helped narrow inequality in Europe. Using data from the World Inequality Database, researchers found that Eastern European countries joining the EU saw strong income growth across all income groups. This growth reduced inequality across the bloc, even though some countries experienced rising gaps internally. The study was conducted by Jesper Roine of the Stockholm School of Economics and Svante Strömberg of Uppsala University.

The Divide Before Enlargement

Before 2004, inequality in Europe reflected a clear divide between richer northern and poorer southern nations. Eastern European countries outside the EU were still adjusting to the post-communist era, facing both rapid economic changes and widening income gaps.

How Enlargement Shifted the Balance

The 2004 expansion brought ten mainly Eastern European states into the EU. These countries experienced rapid income growth that reached both rich and poor households. In contrast, many older member states—especially in Southern Europe—saw stagnating or shrinking incomes for lower- and middle-income earners.

Key Research Findings

  • New Eastern European members saw faster income growth than older EU states across all income levels.
  • The poorest 50% of the EU population enjoyed annual growth three times higher than the top 10%.
  • Many income groups in Southern Europe lost ground in the EU-wide income rankings.
  • Overall inequality in Europe fell after enlargement, despite mixed trends within individual countries.

Implications for Future Growth

The findings suggest that future EU expansions—such as the possible accession of Ukraine, Moldova, and Georgia—could also reduce inequality in Europe if new members experience inclusive growth. However, continued stagnation in older members could deepen political divides.

Read the Full Peer-Reviewed Research Paper 

Explore the complete findings and analysis by reading the full report in the International Tax and Public Finance journal.

A Potential Broadening of the Excise Tax on Food Products High in Sugar and Salt: The Case of Latvia

Posted on June 9, 2025 | Policy Brief

Woman holding a burger with fried chicken, donuts, and sugary foods – concept image for excise tax on sugar and salt.

Overweight and obesity are significant public health issues, contributing to various chronic diseases such as cardiovascular diseases, diabetes, and certain cancers. Latvia’s second-highest share of overweight adults in the EU is a compelling reason for public health measures. These should aim to discourage excessive consumption of high-calorie foods and beverages. Excise tax is one of the tools in a complex approach to encourage a balanced diet and promote positive health outcomes. Motivated by evidence from Hungary, currently the only country in Europe imposing a tax on pre-packaged food products high in sugar and salt, we simulate the short-term impact of the introduction of a differentiated broad-based tax on food products in Latvia. We conclude that to influence consumer behaviour, price increases should be at least 10 percent, which implies introducing tax rates that are at least 1.5 times higher than those in Hungary.

Extremely High Overweight and Obesity Rates in Latvia

Overweight and obesity are serious public health challenges across Europe. Together with an unbalanced diet and low physical activity they contribute to many non-communicable diseases (NCDs), including heart diseases, diabetes and certain cancers (WHO, 2022). For many individuals, being overweight is also linked to psychological problems.

Overweight and obesity rates are extremely high in all EU countries. In 2022, more than half of all adults in the EU (51.3 percent) were overweight (including pre-obese and obese). Latvia has the 2nd highest rate of overweight adults in the EU (60.4 percent). This puts significant pressure on Latvia’s health care system and social resources.

Recognizing that overweight and obesity has multifactorial causes, a comprehensive approach is required to effectively tackle this problem, involving experts from various fields and addressing the issue from multiple angles.

One potential tool in a complex approach is an excise tax on foods and drinks high in sugar and salt since excessive consumption of such foods and drinks represents a major risk factor for NCDs (WHO, 2015a). Such a tax could help to reduce excessive consumption, encourage healthier eating, and improve public health outcomes.

The Intake of Added Sugars

According to data from the EFSA Panel on Nutrition, Novel Foods and Food Alergens (EFSA, 2022), the main source of added sugar intake in almost all European countries is sugar and confectionery. The numbers for adults (18–64 years) range from 20 percent in Austria to 57 percent in Italy (48 percent in Latvia). For children aged 1–18 years, sugar and confectionary contribute to 36 – 44 percent of added sugar intake in Latvia.

In Latvia, other key sources of added sugar are fine bakery wares, processed fruits, and vegetables. The contribution of sweetened soft and fruit drinks to total added sugar intake is only 8 percent for adults (18–64 years) and 3–7 percent for children (1–18 years).

Excise Tax on Soft Drinks

As of 2024, 14 European countries have implemented taxes on sugar-sweetened soft drinks. In Latvia, the tax was introduced in 1999 and was mainly motivated by the financial needs of the state budget.

The evidence from international case studies (WHO, 2023) shows that taxes on sugar-sweetened soft drinks can be effective in reducing consumption in the short term, particularly when the tax leads to significant price increases that reduce affordability. However, the overall evidence on whether these taxes successfully reduce sugar intake is inconclusive. In a review by the New Zealand Institute of Economic Research (NZIER, 2017), the authors conclude that methodologically robust studies  show only small reductions in sugar intake, too small to produce significant health benefits, and easily offset if consumers switch to other high-calorie products. On the other hand, studies reporting a meaningful change in sugar intake often assume no compensatory substitution. At the same time, experience from Hungary suggests that a sugar tax imposed on a wide range of products is effective in reducing the overall consumption of products subject to the tax, and in encouraging healthier consumption habits. The impact assessment conducted 3 years after the introduction of the tax in Hungary showed that consumers of unhealthy food products responded to the tax by choosing a cheaper, often healthier product (7–16 percent of those surveyed), consuming less of the unhealthy product (5–16 percent), switching to another brand of the product (5–11 percent), or substituting it with another food item – often a healthier alternative (WHO, 2015b).

The Short-term Effect of a Broad-Based Excise Tax in Latvia

Approach

Motivated by the evidence from Hungary, we simulate the short-term impact of the introduction of a similar differentiated broad-based tax on food products high in sugar and salt using the approach applied in Pļuta et. al (2020). First, we use AC Nielsen monthly data from 2019 to 2023 on sales volume and prices of pre-packaged food products of selected categories in the modern trade retail market to estimate the price elasticity of demand for these products. The selected product categories included:

  • Pre-packaged sweetened products (e.g., breakfast cereals, cacao, chocolate bars, soft and hard candies, sweet biscuits, etc.)
  • Sweetened dairy products (e.g., ice cream, yoghurt, condensed milk, curd countlines, etc.)
  • Salted snacks (salted nuts, salted biscuits, etc.)
  • Ready-to-eat and instant foods (e.g., pizza cooled and frozen, frozen dumplings, vegetables and canned beans, etc.)
  • Condiments (e.g., dehydrated instant and cooking culinary, dehydrated sauces and seasonings, dressings, ketchup, mayonnaise, etc.)

Second, we simulate different scenarios to assess the increase in price, reduction in sales and budgetary effect using the estimated elasticities and assuming different degrees of tax pass-through rate to retail prices (100 and 50 percent, respectively). Our results represent a short-term or direct fiscal effect, meaning we do not account for any second-round effects that may arise due to changes in domestic production and employment, which could in turn generate additional tax revenues.

The Tax Object and Rates

In defining the scenarios to be considered when modelling the potential broadening of the tax base, we use the Hungarian Public Health Product Tax (PHPT) as a practice example. As a basis, we use the list of product categories under taxation by the PHPT, the two-tier tax system and the PHPT rates as of 2024. In addition, we are also looking at other product categories (such as sugar sweetened dairy products, sweetened cereals and vegetables and beans containered), expanding the tax base even more. In total, we simulated four scenarios for taxing the food products high in sugar and salt. The scenarios consider a two-tier tax system, meaning products with lower sugar or salt content are taxed at a lower rate, while those with higher content face a higher tax. For condiments, only a high rate is applied due to the, usually high, salt content. A differentiated tax rate is expected to stimulate the industry to drive down sugar and salt content in their products, i.e., offering sugar and salt-reduced options. The scenarios differ from each other in the applicable rates.

  • Scenario 1: Uses the same tax rates as Latvia’s excise tax on non-alcoholic beverages (as of March 2024) – EUR 7.40 per 100 kg (low rate) and EUR 17.50 per 100 kg (high rate).
  • Scenario 2: Uses Hungary’s PHPT rates – in the general case, the low rate is EUR 17 per 100 kg, and the high rate is EUR 54 per 100 kg.
  • Scenario 3: Sets rates 1.5 times higher than Hungary’s rates.
  • Scenario 4: Doubles Hungary’s rates.

Assumptions

Unfortunately, the retail price and sales time series used in the analysis are not disaggregated into groups according to the sugar and salt content in the product. As a result, we apply assumptions to estimate the potential range of tax impacts.

To calculate the lower bound of the expected impact, we assume that 100 percent of sales in each product category are subject to the new sugar and salt tax, but all products have low sugar and salt content and therefore qualify for the lower tax rate.

To calculate the upper bound, we assume that 25 percent of the sales volume is taxed at the lower rate (due to low sugar and salt content), while the remaining 75 percent of sales are taxed at the higher rate, reflecting higher sugar and salt levels in those products.

Results

According to our estimations, the application of an excise tax on food products high in sugar and salt could lead to a price increase and sales decrease of taxed food products. The magnitude would depend on the type of food product (i.e., average retail price in the country) and scenario assumed (i.e., tax rates). Within each single scenario, the largest impact is expected for condiments. This is because we simulate only the high tax rate applied to them (not a two-tier system), as is the case in Hungary. The tax makes up a larger share of their price, and due to high price sensitivity, the decrease in sales is also greater.

Based on previous research, we conclude that price increases need to reach at least 10 percent to meaningfully influence consumer behaviour. This level of change is achieved in Scenario 3, which assumes tax rates 1.5 times higher than those used in Hungary.

Below we present the obtained estimations under Scenario 3.  The estimates for Scenarios 1 and 2 are not included here because the price increase caused by the tax does not reach 10 percent for several product categories. Under Scenario 4 the price changes could exceed 10 percent but this scenario may also provide stronger incentives for manufacturers to reformulate their products (and in this case, the average price increase within a given product category will be lower). The results for Scenario 4 are available in a recent BICEPS report (Pļuta et al., 2024).

Under Scenario 3, with full tax pass-through (100 percent), the estimated reduction in sales volume is:

  • 3.0–8.1 percent for pre-packaged sweetened products;
  • 3.6–17.1 percent for sweetened dairy products;
  • 0.9–4.7 percent for salted snacks;
  • 10.4–54.1 percent for ready-to-eat and instant foods;
  • 11.0–11.8 percent for condiments.

If only 50 percent of the tax is passed through to retail prices, the sales reductions would be approximately half as big.

The estimated revenue from the excise tax in this scenario would range between EUR 15.0 million and EUR 54.9 million. The resulting change in VAT revenue would range from a loss of EUR 0.7 million to a gain of EUR 1.1 million.

Conclusion

Although overweight and obesity rates are extremely high in all EU countries, Latvia, in 2022, had the second highest rate in the EU. In this brief, we explore the use of the excise tax as one of the tools in a complex approach to discourage excessive consumption of foods and beverages high in sugar and salt and encourage a balanced diet and promote positive health outcomes. Based on findings from previous studies, a price increase of at least 10 percent is needed to influence consumer behaviour. In Latvia, this would require tax rates approximately 1.5 times higher than those applied in Hungary, i.e. in the general case equal to EUR 25.5 (low rate) and EUR 81 (high rate) per 100 kg of product. Under such a scenario, the estimated revenue from the tax could range from EUR 15.0 to 54.9 million. For comparison, in 2024, Latvia’s excise tax on soft drinks generated EUR 15.6 million. To remain effective, tax rates should be adjusted over time in line with growth in disposable income.

Acknowledgement

This brief is based on a study Taxation of the non-alcoholic beverages with excise tax in the Baltic countries. Potential broadening of the tax base to food products high in sugar and salt completed by BICEPS researchers in 2024 (Pļuta et al., 2024). The study was commissioned by VA Government. It was developed independently and reflects only the views of the authors.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

From Integration to Reconstruction: Standing with Ukraine by Supporting Ukrainians in Sweden

Posted on April 7, 2025 | Policy Brief

People gathered in Sweden showing solidarity and supporting Ukrainians with national flags.

Sweden has strongly supported Ukraine through both public opinion and government actions, yet there has been little discussion about the needs of Ukrainian displaced people in Sweden. The ongoing war and the rapidly shifting geopolitical landscape have created uncertainty – geopolitical, institutional, and individual. Ukrainian displaced people in Sweden face an unclear future regarding their rights, long-term status, and opportunities, making future planning or investing in relevant skills difficult. This uncertainty also weakens the effectiveness of integration policies and limits the range of policy tools that can be deployed, which hinders participation in the labor market, affecting both displaced and employers. Addressing these challenges is essential, not only for the well-being of Ukrainians in Sweden, but also for Sweden’s broader role in supporting Ukraine. Helping displaced Ukrainians rebuild their lives also strengthens their ability to contribute both to Swedish society and to Ukraine’s future reconstruction and integration into Europe.

The Swedish Approach to Displaced Ukrainians

In response to the Russian full-scale invasion of Ukraine, the Temporary Protection Directive (2001/55/EC) (commonly referred to as collective temporary protection) was activated in March 2022, granting Ukrainians seeking refuge temporary protection in EU countries, including Sweden. This directive provides residence permits, access to work, education, and limited social benefits without requiring individuals to go through the standard asylum process.

However, the practicalities of the Directive’s use differed significantly between countries. Sweden, despite its, until recent, reputation of being relatively liberal in its migration policies, has at times, lagged behind its Scandinavian neighbors in supporting Ukrainian displaced people. To illustrate this, it is useful to compare the Swedish approach to that of other Nordic states, as well as Poland.

Comparison to Other Nordic States

The Nordic countries have implemented the directive in different ways, adopting varying policies toward Ukrainians demonstrating different degrees of flexibility and support. Despite its generally restrictive immigration policy, Denmark introduced some housing and self-settlement policies for Ukrainians that were more liberal than its usual approach. Norway also initially introduced liberal measures but later tightened regulations, banning temporary visits to Ukraine and reducing financial benefits. Finland, meanwhile, has taken a relatively proactive stance, granting temporary protection to over 64,000 Ukrainians – one of the highest per capita rates in the region. Its strong intake reflects a more flexible and effective implementation of the directive, particularly from late 2022, when it surpassed Sweden and Denmark in number of arrivals.

In Sweden the so-called “massflyktsdirektivet“ grants Ukrainians temporary protection until at least March 2025. Its future beyond that, however, remains uncertain, adding to the challenges faced by refugees and policymakers alike. Sweden – considered liberal in migration policies (at least, up until 2016) – has been criticized for offering limited rights and financial support to displaced Ukrainians, making it one of the least attractive destinations among the Nordic countries (Hernes & Danielsen, 2024). Under “massflyktsdirektivet”, displaced Ukrainians were entitled to lower financial benefits and limited access to healthcare compared to refugees or residents with temporary permits. It was only in July 2023 that they became eligible for Swedish language training, and only in November 2024 could they apply for residence permits under Sweden’s regular migration laws – a pathway that can eventually lead to permanent residence.

Figure 1 illustrates significant fluctuations in the number of individuals granted collective temporary protection in the Nordic countries over the first two years following Russia’s full-scale invasion. As Hernes and Danielsen (2024) show in a recent report, all Nordic countries experienced a peak in arrivals in March-April 2022, followed by a decline in May-June. Sweden initially received the most, but aside from this early peak, inflows have remained relatively low despite its larger population (Table 1). Since August 2022, Finland and Norway have generally recorded higher arrivals than Denmark and Sweden. By August 2023, Norway’s share increased significantly, accounting for over 60 percent of total Nordic arrivals between September and November 2023.

Figure 1. Total number of individuals granted collective temporary protection in the Nordic countries

Source: Hernes & Danielsen, 2024, data from Eurostat.

Table 1. Total number of registered temporary protection permits and percent of population as of December 2023

Source: Hernes & Danielsen, 2024, data from Eurostat.

Comparison to Poland

Sweden’s policies and their outcomes compare rather poorly to those of Poland, one of the European countries that received the largest influx of Ukrainian migrants due to its geographic and cultural proximity. A key factor behind Poland’s relatively better performance is that pre-existing Ukrainian communities and linguistic similarities have facilitated a smoother integration. Ukrainians themselves played a crucial role in this regard, with many volunteering in Polish schools to support Ukrainian children. Sweden also had a community of Ukrainians who arrived to the country over time, partly fleeing the 2014 annexation of Donetsk and Crimea. Since these individuals were never eligible for refugee status or integration support, they had to rely on their own efforts to settle. In doing so, they built informal networks and accumulated valuable local knowledge. Nevertheless, after the full-scale invasion in 2022, they were not recognized as a resource for integrating newly arrived Ukrainian refugees – unlike in Poland.

However, Poland’s approach was shaped not only by these favorable preconditions but also by deliberate policy choices. As described in a recent brief (Myck, Król, & Oczkowska, 2025), a key factor was the immediate legal integration of displaced Ukrainians, granting them extensive residency rights and access to social services, along with a clearer pathway to permanent residence and eventual naturalization.

Barriers to Labor Market Integration

Despite a strong unanimous support for Ukraine across the political spectrum, there is less public debate and fewer policy processes in Sweden regarding displaced Ukrainians, most likely attributable to the general shift towards more restrictive immigration policies. The immigration policy debate in Sweden has increasingly emphasized a more “selective” migration, i.e. attracting migrants based on specific criteria, such as employability, skills, or economic self-sufficiency. This makes it puzzling that displaced Ukrainians, who largely meet these standards, have not been better accommodated. Before the full-scale invasion, Sweden was a particularly attractive destination among those who wanted to migrate permanently, especially for highly educated individuals and families (Elinder et al., 2023), indicating a positive self-selection process.

When large numbers of displaced Ukrainians arrived after the full-scale invasion, many had higher education and recent work experience, which distinguished them from previous refugee waves that Sweden had received from other countries. Despite a strong labor market in 2022, their integration was hindered by restrictions imposed under the Temporary Protection Directive, which limited access to social benefits and housing. At the same time, Sweden explicitly sought to reduce its attractiveness as a destination for migrants in general, contributing to a sharp decline in its popularity among Ukrainians after the war escalated.

In addition to the restrictiveness and numerous policy shifts over time, the temporary nature of the directive governing displaced Ukrainians – rather than the standard asylum process – creates significant policy uncertainty. This uncertainty makes it difficult for Ukrainians to decide whether to invest in Sweden-specific skills or prepare for a potential return to Ukraine, whether voluntary or forced, complicating their long-term planning. It also hinders labor market integration, increasing the risk of exploitation in the informal economy. Another key challenge is the unequal distribution of rights, as entitlements vary depending on registration timelines, further exacerbating the precarious situation many displaced Ukrainians face in Sweden.

A survey of 2,800 displaced Ukrainians conducted by the Ukrainian NGO in Sweden “Hej Ukraine!” in February 2025 provides key insights into their labor market integration (Hej Ukraine!, 2025). Survey results show that, currently, 40 percent of respondents are employed, with 42 percent of them holding permanent contracts while the rest work in temporary positions and 6 percent being engaged in formal studies. Employment is concentrated in low-skilled sectors, with 26 percent working in cleaning services, 14 percent in construction, and 12 percent in hospitality and restaurants. Other notable sectors include IT (11 percent), education (8 percent), warehousing (7 percent), elderly care (5 percent), forestry (3 percent), and healthcare (3 percent). The lack of stable permits, access to language courses (until September 2024), and financial incentives for hiring displaced persons have complicated their integration.

As mentioned above, the Swedish government has over time introduced several initiatives to facilitate the integration of displaced Ukrainians. However, assessing their effectiveness is crucial to identify persistent challenges and to formulate targeted policy solutions.

The Role of the Private Sector and Civil Society

The business sector, civil society and NGOs have also played a role in supporting displaced Ukrainians, filling gaps left by the public sector. This includes initiatives aimed at creating job opportunities that encourage voluntary return. However, broader systemic support, including simplified diploma recognition and targeted re-skilling programs, is needed to enhance labor market participation.

Moreover, there is a lack of information among displaced, potential employers and public institutions (municipality level) about the tools and programs available. For example, a community sponsorship program funded by UNHCR, which demonstrated positive effects on integration by offering mentorship and support networks, was only applied by five municipalities (UNHCR, 2025). Similar programs could be expanded to address structural barriers, particularly in the labor market. Another example is the Ukrainian Professional Support Center established to help displaced Ukrainians find jobs through building networks and matching job seekers with employers (UPSC, 2024). The center was funded by the European Social Fund, and staffed to 50 percent by Ukrainian nationals, either newcomers or previously established in Sweden, to facilitate communication. Experiences from this initiative, shared during a recent roundtable discussion –  Integration and Inclusion of Ukrainian Displaced People in Sweden, highlighted that between 2022 and 2024, about 1,400 Ukrainians participated in the project, but only one-third of participants found jobs, mostly in entry-level positions in care, hospitality, and construction.  Restrictions under the temporary protection directive, along with the absence of clear mechanisms for further integration, posed significant challenges; the lack of a personal ID, bank account, and access to housing were considered major obstacles. The uncertainty of their future in Sweden was also reported as a significant source of stress for participants.

Implications and Policy Recommendations

The lack of clarity surrounding the future of the EU Temporary Protection Directive, as well as its specific implementation in Sweden, leaves displaced Ukrainians in a precarious situation. Many do not know whether they will be allowed to stay or if they should prepare for a forced return. This uncertainty discourages long-term investment in skills, housing, and integration efforts.

Uncertainty also affects Swedish institutions, making it difficult to implement long-term policies that effectively integrate Ukrainians into society. To address these issues, the following policy recommendations are proposed.

  • Extend Temporary Protection Status Beyond 2025: Clear guidelines on the duration of protection are necessary to provide stability for displaced Ukrainians
  • Improve Labor Market Access: Introduce targeted programs for skill recognition, language training, and financial incentives for businesses hiring displaced Ukrainians
  • Enhance Civil Society and Private Sector Collaboration: Support mentorship and community sponsorship programs that facilitate integration
  • Acknowledge and Utilize displaced Ukrainians as a Resource: Recognizing displaced Ukrainians as potential assets in rebuilding Ukraine and strengthening European ties should be a priority.
  • Increase Public and Policy Debate: There is a need for greater discussion on how to integrate Ukrainians in Sweden, as an important complement to the policy priority of providing aid to Ukraine.

By implementing these measures, Sweden can provide displaced Ukrainians with greater stability, enabling them to engage in the formal labour market rather than being pushed into informal or precarious employment. This not only benefits Ukrainians by ensuring fair wages and legal protection, but also strengthens Sweden’s economy through increased tax revenues and a more sustainable labour force.

As Sweden continues to support Ukraine in its fight for sovereignty, it should also recognize the value of displaced Ukrainians within its borders, fostering their contribution to both Swedish society and Ukraine’s eventual reconstruction.

References

  • Hernes, V., & Danielsen, Å. Ø. (2024). Reception and integration policies for displaced persons from Ukraine in the Nordic countries – A comparative analysis. NIBR Policy Brief 2024:01. https://oda.oslom et.no/oda-xmlui/handle/11250/3125012
  • Hej Ukraine! (2025). Telegram channel. https://t.me/hejukrainechat
  • Elinder, M., Erixson, O., & Hammar, O. (2023). Where Would Ukrainian Refugees Go if They Could Go Anywhere? International Migration Review, 57(2), 587-602. https://doi.org/10.1177/01979183221131559
  • EUROSTAT. Decisions granting temporary protection by citizenship, age and sex – monthly data. Dataset. https://ec.europa.eu/eurostat/databrowser/view/migr_asytpfm__custom_15634298/default/map?lang=en
  • Myck, M., Król, A., & Oczkowska, M. (2025, February 21). Three years on – Ukrainians in Poland after Russia’s 2022 invasion. FREE Policy Brief. Centre for Economic Analysis (CenEA). https://freepolicybriefs.org/2025/02/21/ukrainians-in-poland/
  • Ukrainian Professional Support Center (UPSC). (2024). https://professionalcenter.se/omoss/
  • United Nations High Commissioner for Refugees (UNHCR). (2025). Community sponsorship. UNHCR Northern Europe. Retrieved [March 6, 2025] from https://www.unhcr.org/neu/list/our-work/community-sponsorship

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Human Capital Loss Among Belarusian and Ukrainian Migrants to the EU

Posted on March 31, 2025 | Policy Brief

Silhouettes of construction workers on scaffolding at sunset, symbolizing underemployment among human capital migrants in the EU.

This policy brief examines the underutilization of human capital among involuntary migrants from Ukraine and Belarus in Poland and Lithuania. Focusing on those who migrated after 2020 (Belarus) and 2022 (Ukraine), the brief investigates the factors influencing the conversion of their pre-migration skills into gainful employment in their host countries. Our findings show that despite many migrants possessing high levels of education and professional qualifications, structural barriers and low convertibility of their skills, hinder their full labor market integration. This skill underutilization not only limits migrants’ professional growth and earning potential but also deprives the host countries of valuable skills and potential economic gains.

Effective labor market integration substantially benefits both host and sending countries and migrants themselves. For host nations, successful integration can alleviate critical skill shortages, boost productivity, and drive economic growth (Boubtane, Dumont, & Rault, 2016; Boubtane, 2019; Engler, Giesing, & Kraehnert, 2023; Bernstein et al., 2022). Conversely, inadequate integration leads to underemployment, diminished potential, and economic inefficiency. Countries of origin can benefit from remittances, the return of migrants with enhanced skills, and strengthened international economic ties. However, poor integration risks an uncompensated “brain drain” (Reinhold & Thom, 2009; Barrett & O’Connell, 2001; Iara, 2006; Barrett & Goggin, 2010; Co, Gang, & Yun, 2000). For migrants, the ability to continue their careers means higher earnings and less stress from the acquisition of a new profession, while the non-utilization of existing skills results in their depreciation, potentially causing permanent wage reductions even upon return to the home country (Bowman & Myers, 1967).

Migrants can be broadly categorized into voluntary migrants or forced migrants. Voluntary migrants assess labor market prospects beforehand and often possess convertible human capital – one that can be used in a new labor market. This group often includes professionals like IT specialists and scientists and those in low-skilled but highly transferable professions. Forced migrants, on the contrary, may be utterly unprepared for changes in jurisdiction and possess skills of limited transferability. For example, even highly specialized professions requiring extensive training and substantial human capital, such as lawyers, officials, and teachers, often prove “non-convertible“ (Duleep & Regets, 1999). These individuals’ skills are frequently country specific.

Low convertibility of skills generates significant negative consequences. Highly educated professionals, for instance, may find themselves relegated to low-paying, unskilled jobs, unable to leverage their expertise. This hinders their professional development and deprives host countries of valuable skills and potential contributions to economic growth. Addressing these mismatches is crucial for maximizing the benefits of migration for stakeholders in both home and host countries.

Forced Migration from Belarus and Ukraine

The political crisis in Belarus, starting with the contested 2020 presidential elections, led to widespread repression and significant forced migration. Belarus’s role in supporting Russia’s 2022 invasion of Ukraine exacerbated this situation, resulting in approximately 300,000 Belarusians seeking refuge in the European Union (Eurostat). This number accounts for a substantial proportion of the country’s 9 million population and its approximately 5 million-strong labor force (Belstat).

Russia’s full-scale invasion of Ukraine triggered the most significant wave of migration in Ukrainian history, with over 6 million of the pre-war 44 million population fleeing to the EU (UNHCR). About 90 percent of the initial refugees were women and children due to a mobilization law preventing most men aged 18 to 60 from leaving (UNHCR).

Online Survey and Migrant Differences

To better understand the situation of migrants, their integration into the EU labor market, and to develop data-driven recommendations for improving their conditions, the CIVITTA agency, in partnership with BEROC, conducted an online survey in the summer of 2024. This brief is based on the survey results. The survey includes responses from 616 Ukrainian nationals who migrated to Poland or Lithuania after Russia’s full-scale invasion of Ukraine in 2022, as well as 173 Belarusian migrants who left their home country after 2020. The research focuses on individuals aged 28 to 42, providing insights into their experiences and challenges in the labor market in their host countries. While we acknowledge the sample’s limitations in terms of representativeness, we believe the findings provide valuable insights into the specific challenges faced by involuntary migrants and their adaptation strategies in the new labor market.

Key differences characterize these migration waves. Ukrainian migration comprises of more women, while Belarusian migrants show a more balanced gender distribution, with 47 percent women in our sample versus 62 percent for Ukrainians. Family separation is also notable, as 91 percent of married Belarusians live with their spouses, compared to only 75 percent of Ukrainians (due to the mobilization law).

Survey respondents from both groups possess high levels of human capital with 60 percent of Ukrainians and 90 percent of Belarusians holding higher education degrees. Among Belarusians, 94 percent had over five years of work experience before migration, with and 79 percent of Ukrainians stating the same.

Ukrainian return intentions are split: 38 percent plan to return, 19 percent will not, and the rest are undecided. An end to the war and changes in Russian foreign policy would increase return rates to 70 percent. For Belarusians, 35 percent plan to return, 38 percent will not, and the rest are undecided. Education level is key, as less-educated Belarusians are more likely to stay abroad. An end to repression would increase the share of those Belarusians who want to return to 70 percent, and a regime change would increase this percentage to 82 percent.

Factors Conditioning Human Capital Loss

As expected, due to the involuntary nature of migration of the two groups in focus, a large fraction of survey participants reported losing their profession after migration. As Figure one shows, 48 percent of Belarusians and 63 percent of Ukrainians in our sample reported full loss of their prior careers. The lower percentage of Ukrainians fully retaining their careers (23 percent) compared to Belarusians (44 percent) could be attributed to several factors, including the more recent and disruptive nature of the Russo-Ukrainian war leading to more significant displacement and challenges in finding comparable work. The higher percentage of Ukrainians starting their careers from scratch (49 percent compared to 29 percent among Belarusians) also supports this idea.

Figure 1. Preservation of careers in the EU

Source: Authors’ computations based on survey data.

To foster an evidence-based discussions on the smooth integration of migrants into the EU labor market and the prevention of human capital loss, it is crucial to examine the individual factors that influence career continuity for Belarusian and Ukrainian migrants. We therefore utilize a logistic regression model to identify key predictors that increase the likelihood of migrants remaining in their profession after relocating to Poland and Lithuania.

In our quantitative analysis, an outcome binary variable for staying in the profession is equal to 1 if an individual either “continued career started in a home country (in the same position)” or “remained in the same profession but started working in a position lower than the one held before emigration.” As predictors, we consider a set of sociodemographic variables reasonably related to the probability of staying in the profession and dummy variables for the most common spheres of employment (see Table 1).

Table 1. Overview of model variables

Who Maintains Their Career After Emigration?

Based on the regression coefficients in Table 2, we can identify characteristics related to losing career-specific human capital. In our regression, we control for both home and host country factors. One noteworthy finding is that, while Ukrainian migrants in our sample report significantly higher rates of career loss than Belarusian migrants, nationality itself does not emerge as a significant predictor of career loss once other characteristics are accounted for.

Our results also show that the probability of staying in a profession is higher among men, those with more extended work experience and higher income before emigration, and those who were invited to a host country by an employer. The same holds for entrepreneurs, those who do not plan to return, and those employed in the fields of Architecture & Engineering and Information and Communication Technologies.

Table 2. Results of regression analysis

Note: *** Significant at the .001 level. ** Significant at the .01 level. * Significant at the .05 level.

Conclusion

Several conclusions and policy advice can be derived from the survey results.

The higher likelihood of entrepreneurs staying in their profession suggests that supporting migrant entrepreneurship can be a valuable strategy to retain human capital. This can be done, for example, by:

  • Providing access to resources, mentorship, and funding for migrant entrepreneurs.
  • Streamlining the procedures for migrants to start and operate businesses.
  • Facilitating access to capital for migrant-owned businesses.

The research highlights the disproportionate impact of human capital loss on women.  Therefore, policies should include gender-specific programs that address women’s unique challenges in integrating into new labor markets. This could include:

  • Skills retraining and certification programs: Designed to align women’s existing skills with the demands of the host country’s labor market, with consideration for childcare needs and other barriers women may face.
  • Connecting women migrants with established professionals in their fields to facilitate knowledge transfer and career guidance.
  • Language training programs: Tailored to the specific needs of women, potentially incorporating childcare support to enable participation.

The study highlights the positive role of international companies in supporting employee relocation. Respondents who were invited by an employer demonstrated the most successful integration into the new labor market. To enhance and strengthen these networks, policies may focus on:

  • Encouraging corporations to hire and train migrant workers, potentially through tax breaks or other incentives. This could include partnerships with migrant-serving organizations to connect companies with qualified candidates.
  • Developing digital platforms that connect migrants with diaspora networks, potential employers, and relevant resources.

In addition, policies should address the non-recognition of foreign qualifications, simplifying and expediting the procedures for recognizing foreign degrees and professional certifications. Initiatives to create targeted training programs could complement such policies and allow migrants to quickly acquire any missing skills or certifications required by the host country’s professional bodies. These policy measures would enhance the utilization of migrants’ human capital, benefiting both migrants and host countries while also supporting sending countries. This could be achieved by fostering a successful diaspora or facilitating productive reintegration in the case of return migration.

References

  • Barrett, A., & Goggin, J. (2010). Returning to the question of a wage premium for returning migrants. National Institute Economic Review, 213, R43–R51. https://doi.org/10.1177/0027950110389752
  • Barrett, A., & O’Connell, P. J. (2001). Does training generally work? The returns to in-company training. ILR Review, 54(3), 647–662. https://doi.org/10.1177/001979390105400403
  • Bernstein, S., Diamond, R., McQuade, T. J., & Pousada, B. (2022). The contribution of high-skilled immigrants to innovation in the United States (No. w30797). National Bureau of Economic Research. https://doi.org/10.3386/w30797
  • Boubtane, E. (2019). The economic effects of immigration for host countries. L’Economie politique, 84(4), 72–83. https://doi.org/10.3917/leco.084.0072
  • Boubtane, E., Dumont, J.-C., & Rault, C. (2016). Immigration and economic growth in the OECD countries 1986–2006. Oxford Economic Papers, 68(2), 340–360. https://doi.org/10.1093/oep/gpv024
  • Bowman, M. J., & Myers, R. G. (1967). Schooling, experience, and gains and losses in human capital through migration. Journal of the American Statistical Association, 62(319), 875–898. https://doi.org/10.2307/2283723
  • Co, C. Y., Gang, I. N., & Yun, M.-S. (2000). Returns to returning. Journal of Population Economics, 13, 57–79. https://doi.org/10.1007/s001480050121
  • Duleep, H. O., & Regets, M. C. (1999). Immigrants and human-capital investment. American Economic Review, 89(2), 186–191. https://doi.org/10.1257/aer.89.2.186
  • Engler, P., Giesing, Y., & Kraehnert, K. (2023). The macroeconomic effects of large immigration waves. IAB-Discussion Paper. https://doi.org/10.5167/uzh-239271
  • Iara, A. (2006). Skill diffusion in temporary migration? Returns to Western European working experience in the EU accession countries (Development Studies Working Paper No. 210). Centro Studi Luca d’Agliano. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=921492
  • Reinhold, S., & Thom, K. (2009). Temporary migration and skill upgrading: Evidence from Mexican migrants. University of Mannheim, unpublished manuscript.
  • UNHCR. (n.d.). Operational Data Portal. https://data.unhcr.org/

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Ukraine’s Fight Is Our Fight: The Need for Sustained International Commitment

Posted on February 24, 2025 | Policy Brief

A large Ukrainian flag being carried by a crowd of demonstrators in Lithuania, symbolizing Ukraine International Commitment and global solidarity against aggression.

We are at a critical juncture in the defense of Ukraine and the liberal world order. The war against Ukraine is not only a test of Europe’s resilience but also a critical moment for democratic nations to reaffirm their values through concrete action. This brief examines Western support to Ukraine in the broader context of international efforts, putting the order of magnitudes in perspective, and emphasizing the west’s superior capacity if the political will is there. Supporting Ukraine to victory is not just the morally right thing to do, but economically rational from a European perspective.

As the U.S. support to the long-term survival of Ukraine is becoming increasingly uncertain, European countries need to step up. This is a moral obligation, to help save lives in a democratic neighbor under attack from an autocratic regime. But it is also in the self-interest of European countries as the Russian regime is threatening the whole European security order. A Russian victory will embolden the Russian regime to push further, forcing European countries to dramatically increase defense spending, cause disruptions to global trade flows, and generate another wave of mass-migration. This brief builds on a recent report (Becker et al., 2025) in which we analyze current spending to support Ukraine, put that support in perspective to other recent political initiatives, and discuss alternative scenarios for the war outcome and their fiscal consequences. We argue that making sure that Ukraine wins the war is not only the morally right thing to do, but also the economically rational alternative.

The International Support to Ukraine

The total support provided to Ukraine by its coalition of Western democratic allies since the start of the full-scale invasion exceeded by October 2024 €200 billion. This assistance, which includes both financial, humanitarian, and military support, can be categorized in various ways, and its development over time can be analyzed using data compiled by the Kiel Institute for the World Economy. A summary table of their estimates of aggregate support is provided below.

A particularly relevant aspect in light of recent news is that approximately one-third of total disbursed aid has come from the United States. The U.S. has primarily contributed military assistance, accounting for roughly half of all military aid provided to Ukraine. In contrast, the European Union—comprising both EU institutions and bilateral contributions from member states—stands as the largest provider of financial support. This financial assistance is crucial for sustaining Ukraine’s societal functions and maintaining the state budget.

Table 1. International support to Ukraine, Feb 2022 – Oct 2024

Source: Trebesch et al. (2024).

Moreover, the EU has signaled a long-term commitment to provide, in the coming years, an amount comparable to what has already been given. This EU strategy ensures greater long-term stability and predictability, guaranteeing that Ukraine has reliable financial resources to sustain state operations in the years ahead. Consequently, while a potential shift in U.S. policy regarding future support could pose challenges, it would not necessarily be insurmountable.

What is crucial is that Ukraine’s allies remain adaptable, and that the broader coalition demonstrates the ability to adjust its commitments, as this will be essential for sustaining the necessary level of assistance moving forward.

Putting the Support in Perspective

To assess whether the support provided to Ukraine is truly substantial, it is essential to place it in context through meaningful comparisons. One approach is to examine it in historical terms, particularly in relation to past instances of large-scale military and financial assistance. A key historical benchmark is the Second World War, when military aid among the Allied powers played a decisive role in shaping the outcome of the conflict. Extensive resources were allocated to major military operations spanning multiple continents, with the United States and the United Kingdom, in particular, dedicating a significant share of their GDP to support their allies, including the Soviet Union, France, and other nations.  As seen in Figure 1, by comparison, the current level of aid to Ukraine, while substantial and essential to its defense, remains considerably smaller in relation to GDP.

Figure 1. Historical comparisons

Source: Trebesch et al. (2024).

Another way to assess the scale of support to Ukraine is by comparing it to other major financial commitments made by governments in response to crises. While the aid allocated to Ukraine is significant in absolute terms, it remains relatively modest when measured against the scale of other programs, see Figure 2.

A recent example is the extensive subsidies provided to households and businesses to mitigate the impact of surging energy prices since 2022.  Sgaravatti et al. (2021) concludes that most European countries implemented energy support measures amounting to between 3 and 6 percent of GDP. Specifically, Germany allocated €157 billion, France and Italy each committed €92 billion, the UK spent approximately €103 billion. These figures represent 5 to 10 times the amount of aid given to Ukraine so far, with some countries, such as Italy, allocating even greater relative sums. On average, EU countries have spent about five times more on energy subsidies than on Ukraine aid. Only the Nordic countries and Estonia have directed more resources toward Ukraine than toward energy-related support. Although not all allocated funds have been fully disbursed, the scale of these commitments underscores a clear political and financial willingness to address crises perceived as directly impacting domestic economies.

Figure 2. EU response to other shocks (billions of €)

Source: Trebesch et al. (2024).

Another relevant comparison is the Pandemic Recovery Fund, also known as Next Generation EU. With a commitment of over €800 billion, this fund represents the EU’s comprehensive response to the economic consequences of the Covid-19 pandemic. Again, the support to Ukraine appears comparatively small, about one seventh of the Pandemic Recovery Fund.

The support to Ukraine is also much smaller in comparison to the so-called “Eurozone bailout”, the financial assistance programs provided to several Eurozone member states (Greece, Ireland, Spain and Portugal) during the sovereign debt crisis between 2010 and 2012. The programs were designed to stabilize the economies hit hard by the crisis and to prevent the potential spread of instability throughout the Eurozone.

Overall, the scale of these commitments underscores a clear political and financial willingness and ability to address crises perceived as directly impacting domestic citizens. This raises the question of whether the relatively modest support for Ukraine reflects a lack of concern among European voters. However, this does not appear to be the case. In survey data from six countries – Belgium, Germany, Hungary, Italy, the Netherlands, and Poland – fielded in June 2024, most respondents express satisfaction with current aid levels, and a narrow majority in most countries even supports increasing aid (Eck and Michel, 2024).

A further illustration comes from the Eurobarometer survey conducted in the spring of 2024 which asked: “Which of the following [crises] has had the greatest influence on how you see the future?”. Respondents could choose between different crises, including those mentioned above, and the full-scale invasion of Ukraine.

Figure 3 illustrates the total commitments made by EU countries for Ukraine up until October 31, 2024, compared to other previously discussed support measures, represented by the blue bars. The yellow bars, on the other hand, show a counterfactual allocation of these funds, based on public priorities as indicated in the Eurobarometer survey. Longer yellow bars indicate that a higher proportion of respondents perceived this crisis as having a greater negative impact on their outlook for the future. By comparing the actual commitments (blue bars) with this hypothetical allocation (yellow bars)—which reflects how resources might have been distributed if they aligned with the population’s stated priorities—it becomes evident that there is substantial public backing for maintaining a high level of support for Ukraine. The results show that the population prioritizes the situation in Ukraine above several other economic issues, including those that directly affect their own personal finances.

Figure 3. Support to Ukraine compared to other EU initiatives – what do voters think?

Source: Trebesch et al. (2024); Niinistö (2024); authors’ calculations.

The Costs of Not Supporting Ukraine

When discussing the costs of support to Ukraine it is important to understand what the correct counterfactual is. The Russian aggression causes costs for Europe irrespective of what actions we take. Those costs are most immediately felt in Ukraine, with devastating human suffering, the loss of lives, and a dramatic deterioration in all areas of human wellbeing. Also in the rest of Europe, though, the aggression has immediate costs, in the economic sphere primarily in the form of dramatically increased needs for defense spending, migration flows, and disruptions to global trade relationships. These costs are difficult to determine exactly, but they are likely to be substantially higher in the case of a Russian victory. Binder and Schularik (2024) estimate increased costs for defense, increased refugee reception and lost investment opportunities for the German industry at between 1-2 percent of GDP in the coming years. As they put it, the costs of ending aid to Ukraine are 10-20 times greater than continuing aid at Germany’s current level.

Any scenario involving continued Russian aggression would demand substantial and sustained economic investments in defense and deterrence across Europe. Clear historical parallels can be drawn looking at the difference in countries’ military spending during different periods of threat intensity. Average military spending in a number of Western countries during the Cold War (1949-1990) was about 4.1 percent of GDP, much higher in the U.S. but also in Germany, France and the UK. In the period after 1989-1991 (the fall of the Berlin Wall, the dissolution of the Soviet Union), the amounts fell significantly. The average for the same group of countries in this period is about 2 percent of GDP and only 1.75 percent if the U.S. is excluded.

Also after 1991 there is evidence of how perceived threats affect military spending. Figure 4 plots the change in military spending over GDP between 2014-2024 against the distance between capital cities and Moscow. The change varies between 0 (Cyprus) and around 2.25 (Poland) and shows a very clear positive correlation between increases in spending and proximity to Moscow.  There has also in general been a substantial increase in military spending after 2022 in several European countries, but in a scenario where Russia wins the war, these will certainly have to be increased further and maintained at a high level for longer.  An increase in annual military expenditure in relation to GDP in the order of one to two percentage points would mean EUR 200-400 billion per year for the EU, while the total EU support to Ukraine from 2022 to today is just over €100 billion.

Figure 4. Increase in military expenditures in relation to distance to Moscow

Source: SIPRI data, authors’ calculations.

A Russian victory would also have profound consequences for migration flows, with the most severe effects likely in the event of Ukraine’s surrender. The Kiel Institute estimates the cost of hosting Ukrainian refugees at €26.5 billion (4.2 percent of GDP) for Poland, one of the countries that received the largest flows. Beyond migration, a Russian victory would also reshape the global geopolitical order. Putin has framed the war as a broader conflict with the U.S. and its democratic allies, while an emerging alliance of Russia, Iran, North Korea, and China is positioning itself as an alternative to the Western-led system. A Ukrainian defeat would weaken the authority of the U.S., NATO, and the rules-based international order, potentially driving more nations in the Global South toward authoritarian powers for military and economic support. This shift could disrupt global trade, affect access to food, metals, and energy. Estimating the full economic impact of such a shift is difficult, but comparisons can be drawn with other global shocks. The European Union’s GDP experienced a significant contraction due to the Covid-19 pandemic, 5.9 percent contraction in real GDP according to Eurostat, 6.6 percent according to the European Central Bank. While the economy rebounded relatively quickly from the pandemic, a permanent geopolitical realignment caused by a Russian victory would likely have far more severe and lasting economic consequences.

Given that Ukraine is at the forefront of Russia’s aggression, its resilience serves as a critical test of Europe’s ability to withstand potential future threats. Thus, strengthening our own security and economic stability in the long term is inseparable from strengthening Ukraine’s resilience now. The fundamental difference lies in the long-term trajectory of these investments. In a scenario where Ukraine is victorious, military and financial aid during the war would eventually transition into reconstruction efforts and preparations for the country’s integration into the EU. This outcome is undeniably more favorable—both economically and in humanitarian terms—not only for Ukraine but for Europe as a whole. Therefore, an even more relevant question is whether the level of support is enough for Ukraine to win the war.

Is Sufficient Support Feasible?

Is it even reasonable to think that we in the West could be able to support Ukraine in such a way that they can militarily defeat Russia? Russia is spending more on its war industry than it has since the Cold War. In 2023, it spent about $110 billion (about 6 percent of GDP). By 2024, this figure is expected to have increased to about $140 billion (about 7 percent of GDP). These amounts are huge and represent a significant part of Russia’s state budget, but they are not sustainable as long as sanctions against Russia remain in place (SITE, 2024). For the EU, on the other hand, the sacrifices needed to match this expenditure would not be as great. The EU’s GDP is about ten times larger than Russia’s, which means that in absolute terms the equivalent amount is only 0.6-0.7 percent of the EU’s GDP. If the U.S. continues to contribute, the share falls to below 0.3 percent of GDP.

Despite the economic advantage of Ukraine’s allies over Russia, several factors could still shift the balance of power in Russia’s favor. One key issue is military production capacity—Russia has consistently outproduced Ukraine’s allies in ammunition and equipment. While Western economies have the resources to manufacture superior weaponry, actual production remains insufficient, requiring both increased capacity and political will. Another challenge is cost efficiency. Military purchasing power parity estimates suggest that Russia can produce approximately 2.5 times more military equipment per dollar than the EU, giving it a cost advantage in volume production. However, this does not fully compensate for its overall economic disadvantage, particularly when factoring in quality differences.

Manpower is also a critical factor. Russia’s larger population allows for sustained mobilization, but at a steep financial cost. Soldiers are recruited at a minimum monthly salary of $2,500, with additional bonuses bringing the first-year cost per recruit to three times the average Russian annual salary. Compensation for injured and fallen soldiers further strains state finances, with estimated payouts reaching 1.5 percent of Russia’s GDP between mid-2023 and mid-2024. Over time, these costs limit Russia’s ability to fund its war effort, making mass mobilization financially unsustainable.

Overall, advanced Western weaponry and superior economic capacity can match Russia’s advantage in manpower if the political will is there. Additionally, Russia’s already fragile demographic situation is deteriorating due to battlefield losses and wartime emigration. Any measure that weakens Russia’s economic capacity—particularly through sanctions and embargoes—diminishes the strategic advantage of its larger population and serves as a crucial complement to military and financial support for Ukraine.

Conclusion

Ukraine’s western allies have provided the country with substantial military and financial support since the onset of the full-scale invasion. Yet, relative to the gravity of the risks involved, previous responses to economic shocks, and citizens’ concerns about the situation, the support is insufficient. The costs of a Russian victory will be higher for Europe, even disregarding the human suffering involved. With U.S. support potentially waning, EU needs to pick up leadership.

References

  • Becker, Torbjörn; and Anders Olofsgård; and Maria Perrotta Berlin; and Jesper Roine. (2025). “Svenskt Ukrainastöd i en internationell kontext: Offentligfinansiella effekter och framtidsscenarier”, Commissioned by the Swedish Fiscal Policy Council.
  • Binder, J. & Schularick, M. (2024). “Was kostet es, die Ukraine nicht zu unterstützen?” Kiel Policy Brief No. 179.
  • Eck, B & Michel, E. (2024). “Breaking the Stalemate: Europeans’ Preferences to Expand, Cut, or Sustain Support to Ukraine”, OSF Preprints, Center for Open Science.
  • Niinistö, S. (2024) .“Safer Together – Strengthening Europe’s Civilian and Military Preparedness and Readiness” European Commission Report.
  • Sgaravatti, G., S. Tagliapietra, C. Trasi and Zachmann, G. (2021). “National policies to shield consumers from rising energy prices”, Bruegel Datasets, first published 4 November 2021.
  • SITE. (2024). “The Russian Economy in the Fog of War”. Commissioned by the Swedish Government.
  • Trebesch, C., Antezza, A., Bushnell, K., Bomprezzi, P., Dyussimbinov, Y., Chambino, C., Ferrari, C., Frank, A., Frank, P., Franz, L., Gerland, C., Irto, G., Kharitonov, I., Kumar, B., Nishikawa, T., Rebinskaya, E., Schade, C., Schramm, S., & Weiser, L. (2024). “The Ukraine Support Tracker: Which countries help Ukraine and how?” Kiel Working Paper No. 2218. Kiel Institute for the World Economy.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.