Germany and Ukraine: From crisis supporter to strategic economic partner
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Published on: October 26, 2025 / Updated on: October 26, 2025 – Author: Konrad Wolfenstein
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Billions for Kyiv: The secret economic plan behind German aid to Ukraine
How Germany is transforming billions from Ukraine into strategic industrial partnerships
The economic dimension of the Ukraine conflict has fundamentally changed over the past three and a half years. What initially began as a humanitarian emergency and military support is increasingly developing into a complex economic network in which Germany plays a key role. The visit of Federal Minister for Economic Affairs and Energy Katherina Reiche to Kyiv at the end of October 2025 marks a turning point in this transformation, which is no longer primarily about providing aid, but rather about establishing long-term business relationships that should benefit both sides equally.
The bare figures speak for themselves. Germany has provided Ukraine with over fifty billion euros since the beginning of the Russian war of aggression, with roughly half of this sum going towards the reception and care of Ukrainian refugees. Military support amounts to approximately twenty-eight billion euros, financed through the German government's so-called "Enabling Initiative," which is budgeted at nine billion euros annually for the coming years. These financial dimensions are supplemented by the Ukraine Energy Support Fund, to which Germany has so far contributed three hundred ninety million euros and pledged a further sixty million euros at the end of October 2025.
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The reorientation of German-Ukrainian economic relations
But behind these impressive sums lies a fundamental strategic realignment. Ukraine is no longer just a recipient of German aid payments, but is developing into a key partner in an economic ecosystem that is increasingly blurring the boundaries between security policy and economic policy. The Minister of Economic Affairs' statement that security policy is always also economic policy is more than just a political platitude. It marks an admission that Germany is not only fulfilling its humanitarian obligations in Ukraine, but is also simultaneously investing in its own economic and security policy future.
The bilateral trade volume between Germany and Ukraine has developed dynamically despite, or perhaps because of, the war. In 2023, it reached a record high of nine point nine billion euros, and in the first nine months of 2024, it already exceeded the total volume of 2022. Particularly noteworthy is that trade with Ukraine exceeded trade with Russia for the first time in the first half of 2024, which is not only politically symbolically significant but also reflects the economic reality of Germany's reorientation. German exports to Ukraine rose by 30 percent to over four point six billion euros in the first half of 2025, while imports from Ukraine declined slightly, due to the war-related reduction in production capacity.
The structure of these trade relations reveals the deeper economic logic of the cooperation. Germany primarily exports machinery, electrical equipment, vehicles, and increasingly defense goods to Ukraine. In return, Germany imports agricultural products, electrical equipment such as wiring harnesses, metals, and metal products. Ukraine has long been integrated into German value chains, as is clearly demonstrated by the automotive industry. When deliveries of electrical wiring harnesses from Ukraine failed to materialize at the beginning of the war, Volkswagen was forced to temporarily introduce short-time work at its plants, underscoring Ukraine's strategic importance for German industrial production.
The defense industry as a growth engine
The real economic paradigm shift, however, is taking place in the defense industry. Ukraine has transformed at breathtaking speed from a war-torn country into one of the world's leading innovation centers for defense technology. Since February 2022, over 500 defense-focused startups have emerged, allowing them to test their products directly on the front lines and improve them in near real time. This development is being coordinated by government support programs such as the Brave1 cluster, which awarded over 540 grants worth nearly 50 million euros in its first two years.
This opens up a remarkable business opportunity for German companies. Ukraine not only offers a huge sales market for defense equipment, but also the opportunity to test and learn under real combat conditions. Calling Ukraine the Silicon Valley of the defense industry is not an exaggeration, considering the speed of innovation and practical application. German companies such as Hensoldt, Rheinmetall, Quantum Systems, and numerous startups have recognized this opportunity and are investing heavily in Ukrainian partnerships.
In July 2025, radar specialist Hensoldt received a major contract worth €340 million to supply high-performance radars and short-range radar systems. The company has increased its investments and plans to invest €1 billion in research, development, and capacity expansion by 2027. CEO Oliver Dörre clearly articulated the new philosophy in Kyiv. A traditional supply relationship must be transformed into a shared industrial base. Given the ongoing threat, it is no longer just about supplying systems, but about genuine industrial partnerships.
Rheinmetall went a step further and, in May 2023, established a joint venture with the Ukrainian state-owned Ukrainian Defense Industry for the repair and subsequent production of infantry fighting vehicles. A tank factory opened in western Ukraine in June 2024. In parallel, Rheinmetall plans to build an ammunition factory in Ukraine, for which a contract worth a low three-digit million euro was awarded in July 2024. Commissioning is scheduled within 24 months, and the company will also be jointly responsible for its operation with its Ukrainian partner. These investments are not philanthropic gestures, but calculated business decisions in a market that offers significant growth prospects for the foreseeable future.
The DefTech boom and its economic consequences
The momentum in the defense technology sector has triggered a remarkable wave of investment. German DefTech startups received 90 percent of the venture capital flowing into defense technology companies in Europe, amounting to approximately 760 million euros. Throughout 2024, venture capitalists invested approximately 1.25 billion euros in German DefTech startups, which represents the highest level in Europe. In the first half of 2025, one in five euros invested in a German startup went to a defense company.
This boom reflects not only the changing security situation, but also the realization that future wars will be decided primarily by drones, software, and artificial intelligence. Ukraine serves as both a test laboratory and a sales market. Companies such as ARX Robotics, which develops autonomous mini-tanks, Quantum Systems with its drones, and Helsing with its AI-supported defense systems have already delivered their first fleets to Ukraine and are gaining invaluable experience under real-world operational conditions.
The strategic significance of this development extends far beyond individual supply contracts. Germany, which had massively scaled back its defense industry after the Cold War, is rapidly catching up. Ukraine offers not only a market but also an innovation platform. German companies can benefit from the combat experience and technological know-how of Ukrainian partners, who have developed world-class expertise in areas such as drone defense, electronic warfare, and swarm technologies. This reverse knowledge transfer dynamic, in which Germany not only supplies but also learns, is an essential component of the new partnership logic.
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The energy partnership as the second pillar
Parallel to defense cooperation, intensive cooperation is developing in the energy sector. Russian attacks have systematically destroyed Ukraine's energy infrastructure. Between 55 and 60 percent of the gas infrastructure has been affected, and damage to the energy sector has increased by 70 percent year-on-year, according to World Bank estimates. Ukraine is facing its fourth winter of war, and its electricity and heat supplies are at existential risk.
This is where the German-Ukrainian energy partnership comes in, extending far beyond emergency aid. Germany is not only providing support with generators and mobile power plants, but is also investing in the systematic reconstruction and modernization of Ukraine's energy infrastructure. Increasing the Ukraine Energy Support Fund is just one element of this. More important is the establishment of a joint task force to plan and coordinate concrete reconstruction projects. A Ukrainian-German business forum is scheduled to take place in Berlin in December 2025, serving as a platform for new partnerships between energy companies from both countries.
German energy companies such as E.ON and RWE, which were part of Economics Minister Reiche's delegation, see significant business opportunities in Ukraine. Rebuilding the energy infrastructure will require billions of euros in investments over decades, and German companies possess the technological expertise needed to achieve this. At the same time, Ukraine is pursuing an ambitious strategy of decentralization and transformation to renewable energies. As Vice Chancellor Robert Habeck put it during a visit to Kyiv, a power plant can easily be bombarded, but a wind farm with 40 wind turbines requires 40 missiles. This logic makes the expansion of renewable energies not only ecologically sound, but also a matter of national security.
The economic calculation of reconstruction
The World Bank estimates the total cost of Ukraine's reconstruction at $524 billion over the next ten years, equivalent to two-point-eight times Ukraine's estimated 2024 gross domestic product. This astronomical sum can only be mobilized through a combination of public funds and private investment. The European Union has developed various financing instruments, including the €9.3 billion Ukraine Investment Framework and a planned €140 billion loan package to be financed with interest income from frozen Russian assets.
For German companies, this reconstruction represents a unique business opportunity, albeit one associated with considerable risks. Investment conditions in a war-torn country are complex. Security risks, unstable energy supplies, skilled labor shortages, and bureaucratic hurdles contrast with attractive growth prospects. However, the resilience of German direct investors is remarkable. Although the value of German direct investment in Ukraine fell from just under four billion euros in 2021 to less than one and a half billion euros in 2023, the number of companies with German participation has barely changed. While the companies have written down their investments, they have not ceased operations. This resilience signals confidence in the long-term prospects of Ukraine as a business location.
Despite all the wartime turmoil, bilateral trade volume is demonstrating remarkable resilience. It already reached a new record high in 2024, and further growth is forecast for 2025. This development stands in stark contrast to the slump in trade with Russia, which fell by 72 percent in 2024 compared to 2021. Germany's economic reorientation from east to west within Eastern Europe is proceeding at an impressive pace.
The EU perspective as an economic game changer
A key factor in Ukraine's long-term economic attractiveness is the prospect of EU accession. Formal accession negotiations have been underway since June 2024, and although the process will take years, the prospect of EU membership alone fundamentally changes the logic of investment. German companies will then no longer invest in a third country, but in a future EU internal market.
Studies by the Bertelsmann Foundation and the Vienna Institute for International Economic Studies conclude that Ukraine will be economically quite capable of successfully managing EU membership. Ukraine's economic size is comparable to that of Romania, the Czech Republic, or Hungary at the time of their accession. Its level of prosperity corresponds to that of Latvia, Lithuania, or Romania when they applied for membership. If Ukraine were to become an EU member today, the Union's economic output would increase by only one percent, while its population would grow by nine percent. Thus, Ukraine's accession would not overburden the EU but could be as successful as Poland's integration.
Despite the war, the Ukrainian economy is showing remarkable signs of recovery. After a dramatic slump of 30 percent in 2022, gross domestic product grew by 5.5 percent in 2023 and by approximately 4 percent in 2024. Growth of around 3 percent is expected for 2025. While these figures are still well below pre-war levels, they demonstrate the adaptability and resilience of the Ukrainian economy. Access to the Ukrainian maritime corridor across the Black Sea, the resumption of agricultural exports, and the booming defense industry are contributing to this growth.
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How Ukraine is transforming Germany's defense industry
The strategic dimension of economic relations
German-Ukrainian economic relations have long since grown beyond a purely bilateral logic and have acquired a pan-European and transatlantic dimension. Ukraine acts as a bridgehead for the European defense industry and as a test laboratory for technologies that will also be relevant to NATO in the future. Germany is leveraging its economic cooperation with Ukraine to build technological sovereignty in critical areas and reduce dependence on non-European suppliers, particularly from the United States.
The Kiel Institute for the World Economy has demonstrated that almost 80 percent of Europe's military supplies are procured outside the EU, with the majority of high-tech weapons coming from the United States. This dependence is strategically problematic, especially given the uncertain transatlantic relationship. Cooperation with Ukraine offers the opportunity to build European, and especially German, capacities while simultaneously benefiting from Ukrainian know-how.
With the ReArm Europe program, which has a budget of one hundred and fifty billion euros, the EU has created a framework that also includes investments in Ukrainian production capacities. Ukraine is explicitly named as a priority production location. By the end of July 2025, loan applications from nine EU member states for defense production projects in Ukraine had already been submitted. A key goal is that by 2026, around 70 percent of Ukrainian defense production will meet NATO-compatible standards, which would significantly increase export opportunities and integrate Ukrainian manufacturers as full-fledged partners into European supply chains.
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The challenges of the business model
Despite all the euphoria about the economic opportunities, the structural challenges must not be overlooked. Ukraine's current account balance has transformed from a surplus of 3.6 billion euros in 2021 to a deficit of almost 800 million euros in 2024. Germany's primary income from Ukraine has fallen dramatically, while secondary income, i.e., aid payments and remittances from refugees, has increased massively. This demonstrates that, despite all the trade, the economic relationship continues to be heavily influenced by transfer payments.
The corruption problem remains an obstacle to investment. The chairwoman of the Committee on Eastern European Economic Relations, Cathrina Claas-Mühlhäuser, explicitly warned that a potential weakening of the anti-corruption effort was a cause for concern. Private sector involvement and capital for reconstruction depend on a legally secure environment. Ukrainian policymakers must build trust in this area, not erode it.
Added to this are the war-related risks. Ongoing Russian attacks on infrastructure, unstable energy supplies, weak physical defenses against missile attacks, and a growing shortage of skilled workers pose significant operational challenges. The Executive Director of the Ukrainian Council of Defense Industry, Ihor Fedirko, cites these factors as the greatest risks for potential investors. Nevertheless, he emphasizes that both demand and the necessary funds exist, and the business potential outweighs the risks.
German support programs attempt to mitigate these risks. The German government is providing nine billion euros annually through the Ukraine Rebuild Initiative, which not only finances direct arms deliveries but also supports the development of production capacities in Ukraine. Export credit insurance and investment guarantees are intended to facilitate German companies' economic involvement. KfW, together with European partners, has established a fund that, through a first-loss tranche of two hundred and twenty million euros, mitigates the risks for private investors and aims to mobilize capital of approximately one billion euros for reconstruction projects.
The Ukraine business case as a strategic calculation
The phrase that Ukraine is a business case for the German economy initially seems cynical given the human suffering and destruction. However, from an economic perspective, it describes a reality that cannot be ignored. Ukraine offers German companies a market in which they can do long-term business while simultaneously pursuing strategic interests.
The combination of cost-efficient production, a highly skilled workforce, government support, and direct combat testing under real-world conditions makes Ukraine a unique location for the defense industry. Companies that generate at least 90 percent of their revenue in the defense sector and establish a branch in Ukraine receive tax breaks, customs benefits, and simplified export controls. These incentives should not be underestimated.
At the same time, Germany benefits from Ukrainian innovations. Ukraine has developed world-class expertise in areas such as drone defense, electronic warfare, swarm technologies, and AI-supported sensor technology. German companies can access this know-how through cooperations and joint ventures and integrate it into their own products. The Test in Ukraine test platform, offered by the state-supported defense cluster Brave1, enables international manufacturers to test their systems under near-war conditions that cannot be simulated in any laboratory worldwide. Diehl was the first foreign company to use this platform.
The strategic logic behind this business model goes far beyond short-term profit interests. Through its cooperation with Ukraine, Germany is building technological competencies that are essential for its own security. After decades of underfunding, the Bundeswehr is not operational in many areas. Cooperation with Ukraine helps to address these deficits and, at the same time, build a European defense industry that can operate independently of non-European suppliers.
German Defense Minister Boris Pistorius articulated this logic clearly. The image of war has changed. While initially the focus was on jets and tanks, then artillery, the focus now increasingly revolves around electromagnetic warfare and drone combat. This, he said, clearly demonstrates what Germany can learn from Ukraine. Therefore, it is a good idea to enter into joint production. The Ukrainian government sees unused capacity in its own defense industry worth thirty billion euros annually, which could be activated through Western cooperation.
The long-term prospects of the economic partnership
German-Ukrainian economic relations will develop fundamentally in the coming years. The state of war will end at some point, and Ukraine will enter a phase of massive reconstruction. German companies that invest and establish partnerships now will then enjoy significant competitive advantages. They will have local presence, market knowledge, and established relationships.
The prospect of EU accession is changing the entire investment logic. With integration into the European single market, many of today's risks will become obsolete. Legal certainty, stable institutions, and harmonized standards make Ukraine a normal investment location within Europe. Experience with the EU accessions of Central and Eastern Europe shows that this transformation process can be highly successful economically. Poland, the Czech Republic, the Baltic states, and Romania have demonstrated impressive catch-up processes since their accessions and are now firmly integrated into European value chains.
Ukraine boasts significant structural advantages that will persist even after the war. The country has a highly skilled population with strong competencies in engineering, IT, and technological research. The IT sector was already one of the strongest pillars of the Ukrainian economy before the war and has continued to develop despite the conflict. Agriculture is among the most productive in the world and will be able to regain its full export capacity after the war. Its strategic location on the Black Sea and transit routes to Asia make Ukraine an important logistics hub.
Added to this are the country's natural resources. Ukraine has significant reserves of critical raw materials needed for high-tech industries and renewable energy technologies. Processing these resources in the country could become an important pillar of the future economy. The EU has recognized this and defined critical raw materials as one of the priority areas for investment in Ukraine.
However, the demographic situation poses a significant challenge. Millions of Ukrainians have fled the war, many of them highly qualified professionals. Their return is essential for reconstruction. The Ukrainian government is working on programs to facilitate refugees' return by providing housing, jobs, and educational opportunities. German investment can play a key role in creating the economic prospects necessary for a return.
The geopolitical embedding of the economic model
German-Ukrainian economic relations cannot be viewed in isolation from the larger geopolitical configuration. The conflict between Russia and the West will shape the European security architecture for decades. Ukraine's economic integration into Western structures is a central building block of this new order.
Germany is pursuing a dual strategy. On the one hand, it is securing Ukraine's strategic ties to the West through economic ties and preventing the country from falling back into the Russian sphere of influence. On the other hand, it is using this cooperation to strengthen its own economic and security position. This strategy is not altruistic but based on a realistic assessment of German interests.
The fact that the Minister of Economic Affairs was accompanied on her trip to Kyiv by representatives of the defense industry, drone manufacturers, and energy companies demonstrates the new priorities. The focus is no longer primarily on humanitarian aid, but on building long-term business relationships in strategically important sectors. The formulation that traditional supply relationships must be transformed into joint industrial bases marks this transformation.
The agreements between Germany and Ukraine to deepen armaments cooperation, signed at NATO Headquarters in October 2025, include concrete air defense projects, the simplification of work and study visits, and the promotion of cooperation in military training. Federal Defense Minister Pistorius spoke of a win-win situation. The agreement strengthens Ukrainian defense and deterrence capabilities while simultaneously enabling Germany to benefit from Ukraine's innovative potential.
This formulation is remarkably honest. It acknowledges that Germany not only gives but also takes. Ukraine is no longer merely a recipient of aid, but a partner on equal terms, possessing the competencies that Germany needs. This recognition is an important step toward a more symmetrical relationship, one that is no longer characterized by a donor-recipient relationship, but one of mutual benefit.
The critical examination of the business model
Despite the economic logic of the Ukraine engagement, it is also necessary to critically examine whether the conflation of security policy and economic policy does not create problematic incentive structures. If German companies profit massively from the war, this may create an interest in maintaining the conflict, or at least in maintaining a long-term unstable security situation that justifies high military spending.
This danger cannot be dismissed, even if it is rarely addressed in political debate. Historically, the arms industry has always benefited from conflicts, and the renaissance of the defense industry in Germany and Europe is directly attributable to the Ukraine war. Massive investments in DefTech startups, rising defense budgets, and new business opportunities are creating an economic dynamic that makes peaceful conflict resolution unattractive, at least economically.
At the same time, it must be acknowledged that the threat from Russia is real, and Europe urgently needs to restore its defense capability after decades of neglect. Cooperation with Ukraine offers a pragmatic path to this end that benefits both sides. The alternative would be to leave Ukraine to its own devices and simultaneously rebuild its own defense industry, laboriously and costly, without being able to benefit from Ukraine's experience.
The ethical dimension of this constellation remains ambivalent. The human suffering in Ukraine is immense, and the destruction will shape generations. At the same time, it makes economic sense and strategic sense for Germany to take advantage of the economic opportunities arising from this situation, as long as this does not come at the expense of Ukrainian interests, but rather in a partnership that benefits both sides.
Ukraine as a test laboratory: How Germany combines technology and security
German-Ukrainian economic relations are undergoing a historic transformation. What began as a humanitarian catastrophe and security crisis is developing into a complex economic network in which Germany plays a central role. The more than fifty billion euros that Germany has made available to Ukraine so far are just the beginning of a long-term economic cooperation that goes far beyond aid payments.
Ukraine has become a business case for the German economy, particularly in the defense and energy sectors. German companies are investing in Ukrainian production capacities, establishing joint ventures, and using Ukraine as a test laboratory for new technologies. In return, Germany benefits from Ukrainian know-how, which is a world leader in many areas of defense technology.
This cooperation is not altruistic, but follows a clear strategic logic. Through its cooperation with Ukraine, Germany is building technological competencies that are essential for its own security and, at the same time, positioning itself for the post-war period, when Ukraine will enter a phase of massive reconstruction and potentially join the EU.
The risks of this strategy are considerable. The war continues, the destruction continues, and Ukraine's political future is uncertain. Corruption, unstable institutions, and war-related operational challenges hamper economic engagement. Nevertheless, the resilience of German companies, which have remained committed to Ukraine despite massive losses in the value of their investments, demonstrates that confidence in the long-term prospects prevails.
The formula that security policy is always also economic policy is more than rhetoric. It describes a new reality in which the boundaries between these areas are increasingly blurred. The billions of euros for Ukraine are not just aid, but investments in a strategic partnership from which Germany intends to benefit economically, technologically, and security policy-wise. Whether this calculation will pay off remains to be seen in the coming years. However, the course has been set, and the momentum is impressive.
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The global economy is currently experiencing a fundamental change, a broken epoch that shakes the cornerstones of global logistics. The era of hyper-globalization, which was characterized by the unshakable striving for maximum efficiency and the “just-in-time” principle, gives way to a new reality. This is characterized by profound structural breaks, geopolitical shifts and progressive economic political fragmentation. The planning of international markets and supply chains, which was once assumed as a matter of course, dissolves and is replaced by a phase of growing uncertainty.
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