Ukraine may default on Yaresko's GDP warrants. Why it happened and what are the risks
The media is once again talking about a possible default by Ukraine. This time, it is because the Ministry of Finance has not agreed with investors on the restructuring of GDP warrants worth about $2.6 billion.
What are GDP warrants? Why has the time come for them now? What proposals are on the table of the Ministry of Finance? And most importantly, what does this mean for the economy, creditors and the average taxpayer? This was analyzed by LIGA.net
What the Ministry of Finance proposes
The Financial Times article says about $600 million that Kyiv has to pay to GDP warrant holders by the end of May or default on the payment. The Ministry of Finance says that negotiations are still ongoing, and the exact amount of the payment has not yet been determined.
A possible default on GDP warrants will not mean a default by Ukraine on Eurobonds issued on international capital markets. After all, this issue was settled during the restructuring in the summer of 2024.
A GDP warrant is a special type of government debt instrument (security) under which payments to investors depend not on a fixed amount or percentage, but on the growth of the country's economy, i.e. its gross domestic product (GDP). If the country's economy starts growing faster than a certain level, investors receive additional payments.
These securities were issued back in 2015 as part of the debt restructuring. At that time, Arseniy Yatsenyuk was the Prime Minister and Natalie Jaresko was the head of the Ministry of Finance. The purpose of the issue was to attract creditors to support the country.
The Ministry of Finance offers creditors two options to resolve the situation:
Exchange of the warrants for new Eurobonds issued in 2024 (1.35 bond units for each warrant unit).
Changes in payment terms- payments for 2025-2028 are canceled, the ability to redeem/cancel GDP warrants will be extended until May 2029, and the redemption price will increase progressively from 85 cents in 2026 to 100 cents in 2029. The restructured warrants (with payments in 2029-2041) will have the same characteristics as the existing warrants, except for the redemption option. The holders will receive 36.6 cents of A and B bonds for every 100 cents of warrants.
Why we needed warrants?
In 2015, Ukraine successfully restructured its $15 billion public debt with a partial write-off of 20% of the debt. In exchange, GDP warrants were issued – debt instruments whose repayments depend on economic growth.
Payments are activated if GDP exceeds $125.4 billion and annual GDP growth exceeds 3%. Growth above 4% is subject to an increased payment rate (40%).
In 2023, Ukraine's economy grew by 5.3%, which creates obligations to pay about $500-600 million in 2025 under GDP warrants, explains Victoria Klimchuk of the Center for Analysis of Public Finance and Public Administration at the Kyiv School of Economics (KSE).
The issue of warrants in 2015 allowed Ukraine to achieve its intermediate goal of reducing its debt-to-GDP ratio, which had risen sharply due to Russian aggression in Crimea and Donbas. Despite the fact that Ukraine paid an extremely small amount over 10 years, the issue cannot be considered successful because there was no limit on the amount of payments. This was stated by Mykhailo Demkiv, financial analyst at ICU Group.
In 2015, it seemed that the Ukrainian economy would not soon recover from the shocks. In addition, no one could have predicted the extraordinary events. At first, the pandemic shut down the economies of the countries, and later, statistics recorded a sharp increase in GDP as people returned to their normal lives.
"It is the sharp growth of GDP that means large expenses for the Ministry of Finance on warrants. This risk did not materialize at the time, because both the economic downturn and its recovery in our country were not as sharp as in many others. The full-scale invasion resulted in a 29% economic contraction in 2022. A certain normalization of life and de-occupation of certain regions allowed us to record a 5.3% growth in 2023," says Demkiv .
He adds that it is logical to assume postwar GDP growth. Even with a conservative GDP growth of about 4% in the coming years, the volume of payments will be significant. The warrant issue lacks a mechanism that would serve as a safeguard against sharp drops and rises in GDP.
"I expect that the Ministry of Finance and the creditors will eventually find a compromise and agree on the terms of the restructuring. A borrower's failure to fulfill its obligations is always bad for both investors and the issuer itself. It's no secret that the Ukrainian Ministry of Finance has been working for many years to build a reputation as a reliable borrower," explains the analyst .
This is work for the future, because this status means lower risk. Accordingly, it means an opportunity to raise money cheaper in the future.
"Unlike other countries restructuring their debt, Ukraine is forced to do so not because of irresponsible fiscal policy and excessive debt accumulation, but because of Russian aggression," notes Mykhailo Demkiv.
Is Ukraine really facing a default?
We had a similar situation last year. Although it was not without problems, we managed to agree on a debt restructuring. It was bonds, Eurobonds that were restructured, and warrants were just taken out of the negotiating circle. This was stated by Oleksandra Betliy, Senior Research Fellow at the Institute for Economic Research (IER).
The Ministry of Finance is using what is written in the IMF program – this year Ukraine has to save money and not pay out warrants. This is in line with the principle of equal treatment. It should be the same for all debt holders.
This year, according to the restructuring, there will be no payments on Eurobonds to official creditors.
"Negotiations are underway. It is very similar to what happened last year. The only thing is that the proposal of the Ministry of Finance to restructure the warrants is based on what was achieved last year to restructure the bonds. It is clear that those who hold our warrants want to be paid here and now. They want us to pay 75% of what we owe in May. They are basing this on the fact that the economy grew in 2023, but they don't take into account that this happened after it fell by 29%," says Betliy .
So far, there is no talk of default at all. It is likely that everyone will come to an agreement in the same way as last year. The vast majority of restructurings in the world – and this applies not only to Ukraine – are conducted in such a way that technical negotiations begin before the moment when the payment is due. But they end just after the moment when the payment is due. And this is a common pattern.
KSE's Victoria Klimchuk notes that Ukraine has enough resources to fulfill its debt obligations in general. In the first three months of 2025, the amount of funds raised was UAH 146.4 billion ($3.5 billion) higher than the amount of expenditures on public debt repayment and servicing.
The desire for warrant restructuring is more a strategic debt management in the post-war environment, rather than a sign of Ukraine's financial insolvency.
"If Ukraine decides not to make payments on these instruments, it should be understood that a default on GDP warrants is not a complete default of the state. It is a local default that concerns only payments on these specific debt instruments and does not lead to an automatic default on other obligations," Klimchuk explains .
At the same time, maintaining the current conditions for GDP warrants creates certain fiscal risks for Ukraine in the medium term. The likelihood of a rapid economic recovery after the end of a full-scale war with GDP growth rates of more than 3% per year directly increases the risk of an increase in annual payments on GDP warrants.
This may create an additional burden on the state budget and limit the resource base of the budget, reducing the ability to finance critical areas.
What will happen to the restructuring negotiations?
Mykhailo Demkiv admits that the negotiations may last longer than a month. However, against the backdrop of the war, such a failure to fulfill obligations would not be something extremely negative. After all, in November last year, the government did not pay on the state guarantee of Ukrenergo. The same situation may happen with warrants.
Klimchuk believes that a consensus will be found and an agreement on debt restructuring will be reached. If such an agreement is not reached by the end of May, Ukraine will face a choice: either to make the payment or to declare a local default on the warrants.
What will be the consequences for Ukraine in case of default on GDP warrants?
Viktoriya Klimchuk says that a default on GDP warrants will have a number of political consequences for Ukraine. The most important one is the deterioration of the international image and investor confidence. A default, even a technical one, could be perceived as a signal of instability, which would complicate Ukraine's access to international financial markets in the future:
Ukraine will be perceived as a less reliable and even riskier investment partner. Even before the war, attracting foreign direct investment was a key objective of investment policy, which will become much more difficult under these conditions.
Restrictions on attracting new loans. After a default, it will be more difficult for Ukraine to obtain new loans on favorable terms, which could slow down economic and infrastructure recovery.
Impact on financial assistance and support from international partners. The IMF and other donors may revise financing conditions or demand more stringent reforms, as a default poses risks to the stability of financial support.
"As for the average Ukrainian, with limited financial resources (subject to a reduction in financial and credit assistance), the government will be forced to cut funding for infrastructure, social and security programs. This situation creates a risk of deepening social tension due to cuts in social spending and slower economic growth due to restrictions on investment," Klimchuk explains .
In addition, in the event of a default, the hryvnia may temporarily depreciate due to panic in the currency market and capital outflows. However, as noted above, a default on the GDP warrants does not automatically lead to a default on Ukraine's other debt obligations. This means that a systemic collapse of the financial system will not occur, and the impact on the exchange rate will be limited to local fluctuations and temporarily increase devaluation expectations.