Insurance at an impasse: the business relief fund hits taxes and a lack of funds

The government included in the draft state budget for the 2027 year a new program to compensate businesses for war damages worth 58,7 billion hryvnias. The Ministry of Economy expects it will help attract 2–4 billion dollars of donor funds and provide companies up to 10 million dollars to restore assets destroyed by missiles. The money is supposed to come from raising VAT from 20% to 21%. Where the government plans to get the money for the war-damage compensation program, how the compensation mechanism is supposed to work, and why the initiative is under threat — read the article from RBC-Ukraine. Key points: The government proposes a fund of 58,7 billion hryvnias to compensate businesses for war damages. The program is supposed to start in January 2027. The main source of funds is a VAT increase from 20% to 21%. But the corresponding bill does not yet exist. There is no agreement in parliament or among businesses on the financing. Some entrepreneurs support the model with reservations; others oppose raising VAT. The Ministry of Economy proposes a First-loss model: the state takes the first layer of losses, and compensation can reach 10 million dollars per company. Alternatives are also proposed, where the state covers catastrophic losses and insurers and reinsurers play a larger role. In the budget draft for 2027, the Cabinet of Ministers proposes to increase the Ministry of Economy’s expenditures by more than double — by 118% or 59,9 billion hryvnias. This is mainly due to the new Support for Economic Entities program. It allocates 58,7 billion hryvnias for insuring businesses against war risks. As explained in the budget analysis from KSE Institute, at the budget’s projected exchange rate (47,1 hryvnias/dollar) this is about 1,2 billion dollars. The idea is: the state takes the first layer of enterprises’ war losses, financed by raising the standard VAT rate by 1 percentage points — from 20% to 21%. However, the Tax Code rate has not yet been changed. Of the 131,3 billion hryvnias of additional revenues from tax measures included in the budget, only 14 billion hryvnias are based on already adopted legislation. Another 117,3 billion hryvnias, including 58,7 billion hryvnias from VAT, require new parliamentary decisions, KSE Institute calculated. The relevant bills have not yet been registered in the Verkhovna Rada. Separately, the Cabinet set up another special fund of 8,3 billion hryvnias, intended to protect fuel-sector companies. It was to be funded by raising the excise tax on fuel. Also read: Compensation for businesses’ war damages will be handled differently The Ministry of Economy wants to launch a program insuring businesses against war risks from 1 January 2027, but sets a condition. On the timeline: we want to launch as quickly as possible — that is, from 2027, if we find funding sources, — said Minister of Economy Oleksandr Kravchenko at a closed meeting with journalists. On 27 September during a televised marathon the prime minister Serhiy Koretsky named the Fund’s funding sources. From the VAT increase they plan to get 1 billion dollars, and from international partners — 4 billion dollars. The state will take the first loss Formally, this is not classic insurance but compensation for the first loss (First-loss). That is how both the ministry and businesses supporting the idea describe it. However, the budget calls the program insurance against war risks. The starting point is the scale of destruction. According to the Ministry of Economy’s estimates, annual losses of businesses’ fixed assets amount to 4–10 billion dollars and more. At the same time the capacity of the entire insurance and reinsurance market reaches 1 billion dollars. The estimated coverage shortfall is 3–9 billion dollars and more. The commercial market, according to Oleksandr Kravchenko, mostly worked via reinsurance abroad, including Lloyd’s. But that was expensive and volumes were very limited, and now they are exhausted: portfolios are risky and undiversified. The ministry says they initially considered another option: leave the system to private insurers and have the state act as a quasi-reinsurer. But that does not work for front-line territories, and now likely not for Kyiv and the region either. Moreover, according to an EBA survey, 94% of companies do not have sufficient coverage. Therefore the ministry proposed the First-loss model — covering the first layer of risks. At the same time it should create space for the second and third layers of commercial insurance. Photo: how much money they want to allocate for insuring businesses (Infographic: RBC-Ukraine) The founder of the Textile-Contact trading and manufacturing association, Oleksandr Sokolovskyi, gave this example on Facebook: an asset costs 20 million dollars, the limit is 10 million dollars, the contribution is 200 thousand dollars. If an attack caused 17 million dollars in damage, the fund would compensate 10 million dollars, and the remaining 7 million dollars would have to be covered by an insurer under a separate policy. Additional instruments for giants A single limit of 10 million dollars may be sufficient for small and medium businesses. But will that be enough for large enterprises? The government is preparing solutions for giants and critical infrastructure — portfolio insurance, reinsurance, separate sectoral limits, and cheaper long-term capital, including via interest-rate compensation. Additionally, thanks to resolution No. 594 in the spring of 2026 the program of concessional loans up to 25 million euros with an effective rate of 10% was launched for large businesses. The target purpose is construction of distributed generation facilities and energy storage systems. In September resolution No. 1156 significantly expanded it: now support covers construction, restoration, and resilience strengthening of fuel and storage-logistics infrastructure, development of manufacturing capacities in processing industries, and replenishment of working capital for wholesale and retail trade — for settlements with producers and suppliers. Updated terms: loans from 100 million hryvnias, in front-line territories from 30 million hryvnias, maximum limit — 1 billion hryvnias for a group of related companies. The operator is the National Development Institution. At the same time the state compensates a fixed 5,5 percentage points per year of the base rate (the base rate itself is capped at 18%). Separately, the Ministry of Economy is finalizing changes to resolution No. 28, which regulates the affordable loans program 5–7–9%. These changes, deputy minister Yehor Perelyhyn explained at a closed EBA seminar on 24 September, will be of most interest to those who work with retailers, with suppliers, and manufacturers supplying large chains. At the Forbes Ukraine Forum on economic resilience Perelyhyn emphasized: for SMEs this is the 5–7–9% program; for large businesses — resolution No. 594. In the state budget draft — 2027 for concessional lending to SMEs, 19 billion hryvnias are allocated. The state gives you a resource worth inflation; you invest your resource in parallel — and off we go to rebuild, — described the principle at the Forbes Ukraine Forum on economic resilience deputy minister Perelyhyn. In addition, the Ministry of Economy is considering broader use of Political Risk Insurance (PRI): this instrument alone is not attractive or necessary in Ukraine, but combined with long-term loans from Western partners it can reduce the cost of raising funds. Where the fund money will come from The ministry compares five funding sources and calls a VAT increase the most balanced and legally stable. Photo: where you can get money to restore businesses (Infographic: RBC-Ukraine) Oleksandr Kravchenko names a VAT increase as one of the most realistic options. In his view, today it is the only solution that allows quickly mobilizing the minimally necessary funds so Ukrainian businesses can withstand intense enemy shelling this winter. The ministry explains that mandatory insurance would essentially be the same as a tax but more complex to administer. Voluntary participation without state support would make contributions unrealistic. An import levy, according to ministry calculations, also requires parliamentary action and would be effective for at most a year due to World Trade Organization (WTO) restrictions. In essence it would double customs duties and has a worse impact on inflation and GDP. The ministry estimates the inflationary effect of the VAT increase at up to 0,8 percentage points. At the same time the calculation on donors is openly linked to Ukraine’s own contribution. The more serious Ukraine’s position and willingness to co-finance — the greater the chance to attract substantial international partners’ funds, — the minister of economy told journalists. Last week at the Forum on economic resilience the head of the Verkhovna Rada Committee on Finance, Tax and Customs Policy, Danylo Hetmantsev, suggested finding resources not by increasing pressure on the formal economy but by reducing shadow activity, closing schemes, and improving law enforcement. He estimated the shadow economy’s potential for 2026 at over 1 trillion hryvnias and stressed that this reserve is currently unused. However, detaxation is not a free resource. The budget draft for 2027 already counts on it. KSE Institute calculated that 64,9 billion hryvnias (5,6% of customs payments) would flow to the special fund only in case of customs overperformance. Another 11,8 billion hryvnias are planned from taxation of international parcels, which also requires changes to the law. Conditional support and open opposition The Ministry of Economy’s idea has already been supported by several influential business organizations. At the same time AmCham and EBA have not yet published a position. Internal discussions continue. But support for the project comes with conditions. For example, in a letter from the Federation of Employers of Ukraine (FEU) to the head of the Rada, the prime minister, Hetmantsev and Kravchenko dated 17 September the federation supported the first-loss model. It does not object to raising VAT to 21% only for the period of martial law if the funds are accumulated in a separate special fund account. At the same time the FEU proposes a temporary import levy similar to 2015. According to its calculations, levy parameters on import volumes for 2025 would yield 3,3–3,4 billion dollars. Combined with VAT, the fund’s own resource would reach about 4 billion dollars per year. Ministry estimates are more modest. According to its presentation, a levy at 1,5–1,8% would provide 0,9–1,2 billion dollars. The Ukrainian Food Retail Alliance (UFRA) demands that compensation not be limited to fixed assets. It believes destroyed inventories should also be covered, including those in leased warehouses. The VAT increase should be temporary, and payments transparent. The Oil and Gas Association of Ukraine (NAU) reminded of its own initiative — a fuel infrastructure recovery fund funded by a targeted contribution of 20 dollars per ton of fuel. The association asks to be included in the working group. The Ukrainian Grain Association (UGA) supports the system idea but proposes voluntary participation and no funding via VAT increase. For exporters this would mean freezing working capital: grain companies have significant VAT to reclaim, so a higher rate increases tax credit. UGA also requests permission to insure inventories, primarily grain in elevators, and to use international mechanisms. As an example it cites the EBRD’s guarantee mechanism for reinsurers up to 110 million dollars. Opposition including large operators The CEO of Nova Poshta, Volodymyr Popereshnyiuk, compared raising taxes to support business to putting out a fire with gasoline. Raising VAT from 20% to 21% to insure against strikes, he wrote on Facebook, means finishing off by hand what rockets and drones have not yet destroyed. Instead, the state should introduce tax breaks, deregulation and privatization, and cut officials and state spending. Intertop Ukraine CEO Serhiy Badridinov at the Forbes Ukraine Forum on economic resilience expressed concerns that raising VAT to 21% would endanger the formal economy by reducing consumption. At the same time the shadow economy would have more incentives to grow. Badridinov’s call for detaxation was echoed at a seminar organized by the Centre for Economic Strategy (CES) by the EBA automotive committee representative, Vidi’s head of innovation, Ihor Zahlada. A representative of Epicentr-K at the same seminar explained: increasing VAT by 1 percentage points would mean that 25% of received compensation would be paid by Epicentr itself. The Association Insurance Business also voiced remarks. At an online discussion organized by CES its representative Vyacheslav Chernyakhovskyi called the program design unusual. He said nobody has seen the calculations. Without a deductible, he warned, claims would come even for minor damages. Also, companies already reluctantly pay for existing programs. According to him — 0,5% in dangerous territories and 1–1,3% for commercial war-risk insurance. So with a contribution of 2% to the program, the most at-risk businesses would primarily join. The Economic Expert Platform considers it more appropriate for the state to take on the catastrophic layer of risk (not the first) and partially compensate premiums. Oleg Hetman believes that would require 2–3 times fewer resources without raising taxes. The Association of Ukrainian Banks (NABU) also proposed measures. NABU chairman Serhiy Naumov emphasized unequal risk-distribution conditions: banks with Ukrainian capital lack access to risk-sharing limits from the EBRD and EIB available to foreign players. NABU proposed that the state fund provide risk-sharing guarantees that the National Bank would recognize as collateral on par with guarantees from international financial organizations. If no compromise is found According to the Ministry of Economy’s roadmap, four months should pass from the start of work on the program to its launch. These deadlines include passing legal changes and political coordination with the government, the Rada, the National Bank, and the IMF. However, Danylo Hetmantsev has already stated he does not see potential in parliament to raise VAT and excise for such funds. The reason is a lack of business support for the idea itself. There still needs to be an initiative from business, — he emphasized. So prospects for a January start rely on parliament passing the necessary laws in the next two to three months. Yet the bill still does not exist. This situation creates several significant dangers. Budget risk. Expenditures of 58,7 billion hryvnias are written in before the right to collect the money exists. If the VAT increase is not adopted, the special fund intended to be funded by it will have no source. The budget, which already plans a deficit of 15% of GDP (1,67 trillion hryvnias), has no buffer for unfunded expenditures. Also read: Ukraine prepares for critical dependence on external aid Donors. The ministry says that the preliminary signal from partners is: without Ukraine’s own contribution they will not join. The FEU also believes that the fund’s own contribution will strengthen Ukraine’s negotiating position. Without a stable national source 2–4 billion dollars of donor funds remain in doubt. At the same time the 2027 budget already depends on external financing. According to KSE Institute calculations, 84,3% of needed loans, i.e., 32,6 billion dollars, still lack confirmed sources or partners’ commitments. Business. Current programs, according to Oleksandr Kravchenko, cannot meet the needs of all businesses. They work for SMEs but do not cover large enterprises. The government has already decided to expand the program under resolution No. 1541 to Kyiv and Kyiv region and to simplify procedures. Compensation under it still does not exceed 30 million hryvnias. However, the minister of economy estimates that limited fiscal resources do not allow much more. At the time of preparing the material the current program (component 1) has already been expanded by resolution No. 1157: Kyiv and Kyiv region, fuel (for excise warehouses operators), freight transport over 7,5 tons, agricultural machinery and fuel trucks have been added. The procedure was significantly simplified — it is no longer necessary to enter data into the Register of damaged/destroyed property and have inspections by local government commissions, which previously delayed document collection by 3–4 months. However, the compensation ceiling remained 30 million hryvnias, and queues for application review already reach 270 packages. Simultaneously the limit for compensating insurance premiums (component 2) was raised from 3 to 5 million hryvnias per contract, and requirements on property type were effectively removed — now inventories and cargo can be insured if agreed with the insurer. In addition, the insurance premium compensation mechanism was extended to leased property. A one-time contribution is 0,5% of the probable loss (maximum — 150 thousand hryvnias). January start at risk The Ministry of Economy warns: if some money is not included in this budget cycle, next year there will be no money for business at all. Several exit options are proposed, each with a cost: Redesign. The Ukrainian Business Council, the Economic Expert Platform and analytics centers propose the M3 model, where risk is shared across four levels. But the Ministry of Economy believes that option does not cover uninsured assets and requires much more time than is left until January. Expand coverage to inventories. This is demanded by UGA, UFRA and M3 authors. The ministry says it is currently considering only fuel because it is easy to quantify; other goods can be added later. Find another source. FEU proposes an import levy, Hetmantsev — detaxation. The ministry considers an import levy worse for inflation and GDP, and other sources incapable of providing the needed funds within four months. Part of the detaxation resource is already included in the budget. Limit to the current. The expanded program No. 1541 and concessional lending will remain. But the ministry admits this is insufficient. Economist and former NBU Council chair Bohdan Danylyshyn in a column for RBC-Ukraine notes that a war-risk insurance system should have been created long ago. At the same time, financial mobilization cannot be reduced to constantly raising taxes on the legal economy. That is the impasse. The Ministry of Economy and Hetmantsev agree on the need but disagree on the price and who should pay it. All sectors must find a compromise, — Oleksandr Kravchenko stressed. — We need to support the economy. In turn, at an EBA-organized seminar for business Yehor Perelyhyn said a joint position with the Ministry of Finance has already been reached, negotiations with parliament and donors are ongoing. As soon as parliament returns… I hope this will move from a dead point. If we really want the program to start in January 2027 — we need to act in this way, — he said. Either we take a significant step forward, or at the next Ukraine Recovery Conference (URC) we will again talk about war insurance, — summed up Minister of Economy Oleksandr Kravchenko. However, so far there is neither a VAT bill nor an agreed program design nor confirmed donor commitments. And January is approaching. Questions and answers (FAQ): – What is the fund of 58,7 billion hryvnias? – A business support program for insuring and compensating war damages. It is planned to launch in January 2027. – Where will 58,7 billion hryvnias come from? – The main source is a VAT increase from 20% to 21%. But the corresponding bill does not yet exist. – How much can one company receive? – Up to 10 million dollars in compensation under the proposed First-loss model. – How will the insurance work? – The state and donors form a fund to cover the first layer of losses, and insurers cover the remaining risks. The insurance cost will be 2% of the coverage amount. – Will the program operate in 2027? – The ministry plans to launch in 2027 if funding sources are found and the necessary decisions are adopted.