Debt, war, and populism: how Ukrainian Railways found itself in a financial trap

Last year was one of the most difficult years for Ukrainian Railways (UZ) since Ukraine gained independence. The state-owned company’s financial situation reached a critical point—in 2025, it did not have enough funds to pay salaries.

The state was forced to take an unprecedented step — allocating direct budget support. This did not solve the problem of UZ’s liquidity shortage (40–49 billion hryvnia in 2026), as the root causes of the situation were not addressed. As a result, the company effectively defaulted in early January this year. Without debt restructuring, the financial and other prospects of UZ remain uncertain.

A helping hand

Last spring, the financial situation at UZ became critical – a liquidity deficit formed, and there were not even enough funds to pay salaries. The situation was saved by the help of the shareholder, the state. In this way, the authorities effectively recognized the impossibility of further self-financing of Ukrainian Railways.

Last year, the government allocated almost UAH 13 billion in direct budget support to UZ: UAH 4.3 billion in May and another UAH 8 billion in October. The funds were intended to ensure the company’s uninterrupted operation, in particular to finance losses from passenger transportation and pay salaries.

This support, together with UZ’s optimization of UAH 6 billion, made it possible to reduce the company’s projected annual loss in 2025 by at least three times and temporarily stabilize working capital.

In addition, the 2025 state budget provided funds for the purchase of new passenger cars. Although this is support for infrastructure development rather than financing of working capital, it is also important in light of the loss of rolling stock due to the war.

Accumulated problems

In the first nine months of 2025, Ukrainian Railways incurred a net loss of UAH 7.3 billion, compared to a profit of UAH 1.66 billion a year earlier. Revenue from core activities fell by 15.4% year-on-year, primarily due to a 19% decline in freight revenue to UAH 50.1 billion.

There are many reasons for the critical financial situation at UZ, some of which have been accumulating for decades. The consequences of the war, populism on the part of the state, and internal problems at Ukrainian Railways that have remained unresolved for years have led to a number of consequences:

1. Decrease in freight traffic

The consequences of the war and the decline in Ukrainian production and exports led to a decrease in freight traffic, which accounts for up to 80% of UZ’s revenue. In the first half of 2025, this figure was only 79.6 million tons (-11.8% y/y). The forecast for 2025 was 160 million tons, compared to 175 million tons in 2024. This meant an 8% y/y decline and almost a 50% decline compared to 2021, when UZ transported 306 million tons of cargo. Even these volumes may decrease due to the consequences of recent shelling, as transshipment in ports has declined and coal transportation has been affected by the destruction of thermal power plants.

2. Losses from passenger transportation

Passenger transportation has become a major financial burden for Ukrainian Railways. Revenues from passenger transportation cover only up to 40% of transportation costs. In 2024, losses from this segment exceeded UAH 18 billion, and in 2026, they are projected to grow to UAH 22 billion.

This situation has arisen because Ukrainian Railways performs a social function by providing affordable transport in the regions, especially in wartime. Even before the war, the central government did not address this issue, and many local authorities do not transfer compensation for suburban passenger transport at all. Similarly, the central government has been slow to raise interregional transport tariffs to realistic levels for years. Only inter-state passenger transport generates profit for Ukrainian Railways.

3. Increase in operating expenses

The main reasons for the increase in costs are the rise in energy prices and labor costs, which account for up to 80% of the company’s expenses. The cost of electricity alone has more than doubled. In total, in 2022–2024, the growth in prices of industrial producers in Ukraine amounted to 47.3%, 24.2%, and 19.7% year-on-year. Industrial inflation inevitably affects UZ’s costs.

4. Critical debt burden

As of the end of September 2025, Ukrainian Railways’ total debt amounted to UAH 73 billion (mostly Eurobonds), over 90% of which are foreign currency liabilities formed as a result of infrastructure projects prior to 2021. Every percentage point of hryvnia devaluation automatically increases the state-owned company’s debt. The most acute issue regarding debt servicing will arise in 2026, as in July, Ukrainian Railways must pay UAH 31.4 billion ($703 million) on Eurobonds and UAH 2 billion ($45 million) in coupon payments.

Ukrainian Railways acknowledges that it is impossible to service the debt without further restructuring and state support. The company has effectively already declared default — on January 9, UZ suspended coupon payments on Eurobonds maturing in 2019 and 2021, as the funds ($45 million) are needed to ensure current operations. Even indexing freight tariffs will not save the situation, as the amount of additional revenue until July (the debt repayment deadline) will be incomparably smaller.

5. Declining revenue

In the first nine months of 2025, Ukrainian Railways’ revenue from its core activities fell by 15.4% to UAH 66 billion.

6. Losses from attacks

Last year, Russia attacked Ukrainian Railways’ infrastructure more than 1,100 times — roughly the same number of times as in 2023–2024 combined. Missile and drone strikes were carried out on railcar depots, bridges, traction substations, as well as individual locomotives and trains. This has already resulted in losses of over $5.8 billion for Ukrainian Railways.

7. Personnel shortages

The level of remuneration at UZ lags behind the industry average, leading to an outflow of skilled personnel. The number of employees at the state-owned company fell to 183,600 in 2024 from 216,000 in 2022. The shortage in key specialties reaches 20–30%.

 “Iron” expectations

Given the situation in 2025, forecasts for UZ’s performance in 2026 look no less pessimistic. A stress test of Ukrainian Railways’ operations showed that, under all scenarios, the state-owned company will be unprofitable in 2026–2028. According to various sources, Ukrainian Railways’ liquidity deficit this year is estimated at 40–49 billion hryvnia (even without taking into account the repayment of Eurobonds).

The outlook for operational activities is also negative. Ukrainian Railways’ freight transportation profits, which exceeded UAH 20 billion in 2024, may turn into a loss of UAH 0.6 billion in 2026, with the state-owned company’s net loss reaching UAH 29 billion.

The only positive factor is the continuation of state support. This year, Ukrainian Railways will receive UAH 16 billion to cover losses from passenger transportation (the Verkhovna Rada’s economic committee proposed allocating UAH 26 billion). Another UAH 5.7 billion has been allocated for the purchase of passenger cars.

UZ expects volume of freight traffic in 2026 will remain virtually unchanged (161 million tons). It is expected that the transportation of iron and manganese ore will remain relatively stable at 44 million tons in 2025–2026, while grain transportation will decrease to 31 million tons, which is 22.5% less than in 2024. The building materials segment is expected to decline from 35 million tons in 2024 to 30 million tons in 2025–2026. The company plans to partially offset these losses by increasing the volume of other cargo transportation from 32 million tons in 2024 to 36–37 million tons in 2025–2026.

At the same time, it’s unlikely that rail freight volumes will stabilize in 2026. This year began with systematic attacks on critical infrastructure and a widespread power shortage across virtually the entire country, which will inevitably lead to a significant decline in industrial production due to the suspension or reduction of output at many enterprises. While Ukrainian Railways expects freight traffic to decline by 13 million tons in 2025, there are no signs of growth in 2026. On the contrary, a further decline of 5-10 million tons can be expected.

Necessary steps

To stabilize (there is no question of improvement in the medium term) the financial situation of Ukrainian Railways, a number of measures need to be taken:

1. End of tariff pressure on the freight segment

UZ has not raised freight tariffs since July 2022. Attempts in 2024–2025 to promote the convergence of tariff classes and tariff indexation were vetoed by joint efforts of the business community.

The Ministry of Development considers the indexation of freight tariffs inevitable, proposing to implement it gradually, in two stages. It is likely that the government does not consider the state support for Ukrainian Railways in 2026 in the amount of UAH 16 billion to be a sufficient measure to ensure the necessary level of financial stability for the company.

UZ proposes to increase freight tariffs by 27.5% from January 1 and by another 11% from July 1, which could bring it UAH 22.5 billion. Ukrainian Railways seeks to unify tariffs and create a formula for annual indexation.

Increasing freight tariffs in one form or another creates a vicious circle: after another jump in tariffs, shippers switch to road transport, which leads to a decrease in transport volumes. According to Ukrainian Railways’ calculations, a 20% increase in freight tariffs will lead to a 19% decrease in transport volumes. Obviously, such an additional reduction in the freight base is not what Ukrainian Railways needs right now.

2. Debt restructuring

After the first debt restructuring in 2022, the second attempt at the end of December 2024 was unsuccessful. The company has until July to make another attempt.

3. Internal optimization

As part of its optimization efforts, UZ has proposed nearly UAH 17 billion in economic benefits in 2026,. Ukrainian Railways plans to increase revenues through the sale of ferrous scrap: the planned level for 2026 is 370 thousand tons, which could bring up to UAH 3 billion. However, this point is overly optimistic, since UZ was unable to even approximately fulfill its ferrous scrap sales plan for 2025.

4. Systematic state financing of passenger transport

Currently, decisions on state support for Ukrainian Railways are made taking into account the current critical financial situation on the basis of annual allocations to the state budget (or through the reserve fund). Systematic budget financing of passenger transport is needed, based on the European PSO (Public Service Obligations) model. This will make it possible to abandon cross-subsidization and make Ukrainian Railways’ financial flows more predictable.

UZ understands that due to the reduction in the freight base, it is no longer possible to cover losses from passenger transportation with profits from freight transportation during the war. In addition, the financial separation of the freight and passenger segments is a requirement of the EU.

5. Structural reform of the company

Due to the war, discussions about the importance of urgent restructuring of the company have almost ceased, but the need for it has not disappeared. This year, Ukraine must adopt a law on rail transport as part of its obligations under the Association Agreement with the EU. In 2026, the Ministry of Development plans to begin structural reform of Ukrainian Railways, although the final liberalization of the railway transport market will only be possible after the end of martial law.

Without a comprehensive and systematic approach, Ukrainian Railways risks moving from survival mode to degradation mode, with direct consequences for exports, industry, and the stability of the Ukrainian economy as a whole. The most important element of this is systematic targeted state support.

In the context of full-scale aggression, Ukrainian Railways remains the backbone of the Ukrainian transport system, accounting for over 65% of freight traffic. The collapse of Ukrainian Railways is not in the interests of the state, shippers, or the company itself.