Ukrainian President Volodymyr Zelenskiy had a very uncomfortable meeting with European Commission President Ursula von der Leyen on the sidelines of the United Nations General Assembly (UNGA) on September 23, where she told him the EU would not transfer Kyiv any more money if the Rada did not push through a key package of accession reforms.

Ukraine’s Ministry of Finance (MinFin) has its back against the wall thanks to a $32bn hole in this year’s budget, of which $27bn is needed for defence spending. Finance Minister Serhiy Marchenko said last week that the government would be unable to pay teachers and soldiers’ salaries as soon as next month if Ukraine’s partners do not supply more money.

After Zelenskiy announced the shortfall during his Independence Day speech where he asked for more money and missiles, von der Leyen immediately announced Brussels would transfer €6.1bn to support short-term defence spending, but that was part of this year’s tranche from the €90bn EU loan cleared in April. But Bankova says it’s not enough and wants next year’s tranche of around €45bn brought forward to this year to close the hole.

Brussels is saying no, unless reforms that are part of the so-called “fundamental cluster” in Ukraine’s EU accession bid are enacted into law. That cluster deals with things like judicial reform and anti-corruption measures.

The slow pace of the reform programme is not new. Brussels downgraded Ukraine to a “B” in its last EU accession progress report due to backsliding on the reform process. But these criticisms have been made more poignant by mushrooming corruption scandals, including a $100mn kickback Energoatom corruption scandal that has implicated nearly everyone in the presidential administration, except Zelenskiy himself who cannot be investigated according to the constitution while still in office.

And it is still not clear where the MinFin is going to get the missing money; without it the government faces the same macroeconomic collapse it faced in April, before the EU’s €90bn loan was approved.

The row has now broken out into the open after Zelenskiy had a “tense” meeting with von der Leyen in New York, Bloomberg reported, citing a person briefed on the talks. EU officials told the Ukrainians they need to see progress on laws to curb the shadow economy, raise tax revenue and bring Ukrainian legislation closer to EU law before they release more money. The Ukrainian side was also outraged that EU capitals had agreed the same day to delist Russian oligarchs Alisher Usmanov and Mikhail Fridman as the price of extending the bloc's sanctions on Russia.

EU wish list

Zelenskiy denied there had been any friction. "The meeting was, by the way, absolutely positive. I don't know where that message came from. I would even say it was a very positive meeting," he said, as reported by UA.News. "We agreed that they will sit down and consider how to disburse part of the funds from the second tranche and expedite the transfer, because we need the money for drones.”

"More defence support is coming. And as reforms in the Rada progress, more budget support too. We have €37 billion still available in this calendar year," von der Leyen  wrote on X after the meeting.

The EU has pushed back against some of the Ukrainian figures and suggested that other partners, including Canada, Norway and Japan, should provide any extra money. Zelenskiy said the two teams would meet again in seven to 10 days.

The €90bn loan was only ever designed to cover two-thirds of Ukraine's financing needs to the end of 2027, and apart from a $9bn contribution from Norway for 2027 no other key ally has stepped in to cover the rest. The original plan was other non-European members of the G7 would cover the remaining third of estimated funding, but so far none of them have committed anything. Kyiv has not formally asked for the 2027 money to be front-loaded, but doing so would mean Brussels dropping the reform timetable attached to it.

The week before the New York meeting, Economy Commissioner Valdis Dombrovskis and Enlargement Commissioner Marta Kos wrote to the Rada reminding deputies that more than €20bn ($23bn) could be unlocked by the end of the year if they voted through 21 pre-agreed reforms, but Rada deputies remain sceptical and so far have refused to table those laws. The EU wish-list list, attached as an annex to the letter, includes an anti-corruption strategy, simpler VAT administration for individual entrepreneurs and several anti-money laundering rules.

EU ambassadors confirmed on September 23 that Kyiv had completed 10 reforms under the Ukraine Plan, clearing the way for €3bn ($3.4bn) of support, with EU ministers due to give the final sign-off on September 24. The reforms included changes to judges' integrity declarations, the appointment of a new electricity market operator, a plan to close the gender pay gap and traffic safety laws. Kyiv's reforms under the Ukraine Facility have still fallen behind the plan's deadlines.

Brussels is also waiting on a law to protect Ukraine's national minorities that Hungary has demanded before it will drop its objections to opening further accession clusters. Three EU officials told the Kyiv Independent the draft is ready and backed by both Brussels and Budapest but is another bill that the Rada deputies have frozen.

Deputy Prime Minister for European Integration Vsevolod Chentsov briefed the Council of the EU's Working Party on Enlargement (COELA) in Brussels on September 22, the government said, reporting that 114 EU-related draft laws are now before the Rada. The talks covered rule-of-law reform and minority rights, with an updated action plan putting minority education measures in place by the end of 2026 and language and political rights in 2027.

IMF handouts

Zelenskiy also met IMF Managing Director Kristalina Georgieva in New York on September 22 and said the Fund would help find some of the money Ukraine needs next year, when the government puts its external financing requirement at $52.6bn. But the IMF is also not happy with the legal slow progress and has already delayed the disbursal of this year’s second tranche of its 48-month $8.1bn Extended Fund Facility (EFF) and combined it with the third tranche due in December.

"The Verkhovna Rada has already voted on some of the decisions, and all the remaining laws needed for financial support will be passed by the end of the year," he said, Ukrinform reported.

Ukraine risks losing a combined $1.66bn of IMF money - about $692mn tied to the programme's second review and about $970mn tied to the third - after delays in passing laws on taxing digital platforms, scrapping the VAT exemption on low-value postal imports and transfer pricing, as well as unfilled appointments to the Accounting Chamber. The Rada rejected nine of 11 bills tied to international financing on September 1, and the second IMF review has been pushed back to December and merged with the third, the Kyiv Post reported, citing a government source.

The extent of the problem in Ukraine’s judicial system was highlighted by the Ukraine's National Anti-Corruption Bureau (NABU) decision to charge Bohdan Lvov on September 23, a former deputy head of the Supreme Court, with laundering assets worth about UAH26mn ($580,000), including a house, two apartments and four plots of land, the Kyiv Independent reported. Lvov, who denies wrongdoing in other cases against him, was fired from the court in 2022 after it emerged he held Russian citizenship.

The EU has made reform of the Supreme Court one of its accession requirements, but the authorities have yet to carry it out. The court's former chairman Vsevolod Kniaziev was sentenced to five years in June for taking bribes, so action is being taken piecemeal, but the endemic corruption amongst the sitting judges is a systemic problem yet to be addressed.

The funding squeeze comes as the economy loses steam and Zelenskiy is starting to sound increasingly desperate. Real GDP grew by only 1.2% y/y in August after an estimated 4% in July, with agriculture the main driver as Russian strikes hit industry, the Institute for Economic Research and Policy Consulting (IER) said, Forbes Ukraine reported on September 22. Manufacturing contracted by 4.2% and goods exports fell by 18% to $2.6bn.