Ukraine Update January 2025

My first piece on Ukraine was posted in June 2024. It described the 6-person Ukraine Finance Working Group formed shortly after Putin’s February 2022 invasion of the Ukraine heartland by a US Treasury Department buddy and two other men who had also been Assistant Secretaries at Treasury in the Bush-père Administration. I was brought into the group presumably because of the work I had done on sovereign debt restructuring. This was one of three issues the working group started focusing on, but it turned out that the Ukraine government was able to negotiate reasonable restructurings of its external debt without any help from us. The other two issues were: (1) getting the Western governments to promptly deliver to Ukraine the financing that they had promised; and (2) using the roughly $300 billion of frozen Russian central bank assets to support Ukraine’s defense against Putin’s war. My 2024 piece also mentioned a new issue that I added to our group’s agenda: using Land Value Capture tools to finance post-war reconstruction. Over the past two years, the only issue where our group has been helpful is freeing the frozen Russian central bank assets for the benefit of Ukraine.

In 2014, Putin’s army invaded the Crimea, a large peninsula in the Black Sea that has been fought over a number of times in the past 400 years. Putin annexed it to the Russian Federation.

After the Soviet Union was dissolved and Ukraine became independent in 1991, Crimea had been recognized under international law as part of Ukraine’s territory. Thus, Putin’s invasion of Crimea in 2014 was an act of war in violation of its obligations as a member of the United Nations. The United States and Europe objected to the annexation but took no action to restore it to Ukraine. This failure to act has been viewed by many analysts as the kind of appeasement of Hitler’s aggression in the 1930s that led to World War II.

In February 2022, Putin’s army crossed Russia’s border with Ukraine in a large operation designed to quickly gain control of Ukraine’s capital, Kyiv, and enable the installation of a puppet government controlled by the Kremlin. To the surprise of most defense experts, Ukraine forces were able to stop the Russian attack, although US intelligence agencies had warned that an attack was imminent.

It is not easy to explain how Ukraine has been able to avoid being taken over by Russia, which has a much larger population and economy and one of the most advanced military forces in the world. Certainly, it has only been possible because Ukraine, when it was part of the Soviet Union, had a highly regarded armaments industry and even nuclear weapons. Significantly, Ukraine returned its nukes to Russia when it became independent and obtained security guarantees from Russia, the US, and the UK, as part of this deal.

It is also clear that Russia’s armed forces were grossly unprepared for and badly led in the 2022 attack on Ukraine. Still, the resistance of the Ukraine population has been phenomenal. Its political and military leadership has been astonishingly successful given a history of endemic corruption. Its industrial legacy has revolutionized warfare through the development of drones, not just in the air but on the land and in the sea as well.

The tragedy is that Putin’s war could have been stopped two years ago with a bit more support from the West—by making  good the US and UK guarantees of Ukraine’s security in the 1994 nuclear arms deal. During the Biden Administration, the US provided impressive amounts of budget financing and military hardware to Ukraine. Space-based intelligence collected by the US and shared with Ukraine is also believed to be an essential part of Ukraine’s military success.

But Biden was constantly slow in providing Ukraine with more advanced weapons as Putin escalated his attacks. Furthermore, my Ukraine Finance Working Group got increasingly frustrated with the Biden Administration for failing to make the Russian central bank assets frozen in the US available to Ukraine.

Shortly after Trump’s inauguration, we were told by a former senior member of the Biden Administration that Treasury Secretary Janet Yellen was the immovable obstacle on the frozen assets issue. It was suggested that Yellen never understood the power of the Treasury Department. She never stopped seeing this issue from her former position as Chair of the Federal Reserve System. She apparently believed that making the assets available to Ukraine would undermine the role of the US dollar as the world’s primary reserve currency. Our little group is convinced that if someone like Jim Baker, whom we had worked with during the Latin American debt crisis in the late 1980s, had been Biden’s Treasury Secretary then the assets would have quickly gone to Ukraine. And this move would have unlocked the much larger amount of assets frozen in the EU member countries.

This brings me to the unbelievable and seriously irrational policy of the Trump Administration toward Ukraine. In the 2024 election campaign, Trump claimed that he could stop the war in Ukraine if he won the election, even before being inaugurated. I believe he could have stopped it in 2025, but only by telling Putin that the US would support Ukraine with whatever money and weapons it required to defeat the Russian forces. Instead, Trump launched negotiations that were strongly biased in Russia’s favor and carried out by people with no knowledge of the history behind the conflict or the motivations of the Russians and the Ukrainians. I could be wrong, but I don’t see any way of stopping the war in Ukraine and achieving a sustainable peace short of a deal that makes Russia the loser.

Another part of this tragedy is that the Western countries are unable to simply provide the money and the weapons Ukraine needs on a grant basis instead of loans. This is because the key European countries—Germany, France, the UK—all have serious budget deficits and lack the political support to raise the revenue required to fund support on grant terms. Consequently, they have now agreed to make a Euro 90 billion loan to Ukraine collateralized by the Russian central bank assets frozen in the Belgium-based Euroclear payments mechanism.

The US continues to sit on the roughly $10 billion of assets it has frozen despite legislation passed by the Congress authorizing their use for the benefit of Ukraine. (Our little group had a hand in drafting this legislation, working closely with a member of Congress who was our colleague at Treasury 35 years ago.) Additional legislation with bipartisan support in both houses of the Congress that directs the use of these assets isn’t moving because Trump will not sign it.

Finally, a few comments about the state of play on the battlefield. Along Ukraine’s eastern border with Russia, there is a substantial strip of territory (the Donbas) with a large Russian-speaking population. The Russian army is occupying most of this territory but has only been able to make minor advances into Ukraine territory due to the fierce resistance of the Ukraine forces.

One of the biggest challenges for the Ukraine side is mobilizing enough men and women to hold the line. Another is keeping a lead in the art of drone warfare as Russia closes the gap due to the depth of its industrial and research capacity. As Ukraine families have fled the conflict, its population has dropped from around 45 million to around 30 million (from unconfirmed reports). This is part of the mobilization problem.

A second challenge is that Russia’s relentless attacks on Ukraine’s energy and transportation infrastructure (using drones and missiles supplied in part by Iran and North Korea) are depriving the remaining families across the country of the heat and power needed during the winter to stay warm and maintain some semblance of a normal life. These attacks add to pressure on Ukrainians to leave their country.

A third challenge is Ukraine’s endemic corruption that reached to the top of the government toward the end of 2025. This latest scandal could produce a change in government in the first half of 2026 that would either strengthen Ukraine’s resistance or weaken it.

On the Russian side, the number of its soldiers killed in this war is mind-boggling—estimated to be 15 times more than the casualties it suffered during ten years of fighting in the war it lost in Afghanistan in the 1980s (Source: Google AI). Hundreds of thousands of well-educated and skilled Russians have fled their homeland. Trade, financial, and diplomatic sanctions imposed by the Western countries have brought the Russian economy to its knees, making it dependent on China, India, and other countries that are buying its oil and gas. It is conceivable that economic hardship among the Russian population and frustration over the Russian military’s inability to defeat Ukraine will—in 2026— force Putin to accept defeat or produce a change in leadership. But this is likely to be a vain hope.

The round of Trump-led negotiations at the end of 2025 does not appear to be bringing the conflict closer to a resolution. If Trump does not act decisively in early 2026, Ukraine’s fate will rest in the hands of the EU. To turn the tide materially in Ukraine’s favor, the EU will need to do more than provide funding collateralized by frozen Russian assets. It will need to provide more and better weapons to Ukraine, tighten sanctions against Russia, and mobilize support for Ukraine among countries like India and Brazil that have not yet provided any. Sadly, too many people around the world who are enjoying the benefits of good governance and relative prosperity do not see the risk of losing these benefits if the rest of Ukraine is annexed by Russia.

LATE-BREAKING ADDITION

On 6 January 2026, a meeting of the “Coalition of the Willing, Ukraine, and the United States” issued a statement on “Robust Guarantees for a Solid and Lasting Peace in Ukraine”. The five components mentioned in this statement are impressive and could represent a meaningful step toward forcing Putin to accept a ceasefire deal. It will be especially significant If the participation of the United States in the meeting reflects a genuine commitment to the guarantees agreed upon at this meeting.