From growth to default: how 5.3% of GDP turned into a problem
9 June 16:53
ANALYSIS
Ukraine has fulfilled its promise to investors holding Ukrainian government bonds, but not the one it made in 2015, when it pledged to pay them a percentage of the country’s economic growth for 20 years. This refers to a recent promise, or rather a warning, that the Ukrainian side would miss the next payment if a compromise was not reached with investors on the restructuring of payments. And so it happened: no compromise was reached, and the payment was missed.
How the Ukrainian government will continue to build relations with investors and what consequences the failure to fulfill financial obligations may have for Ukraine and Ukrainians – these issues were investigated by
Officially: obligations recognized, explanations provided
A statement by the Ministry of Finance of Ukraine published on the Irish Stock Exchange confirmed that, according to calculations, as of April 30, 2025, the amount of payment on government derivatives due on June 2, 2025, is USD 665 million 453 thousand 507.60.
At the same time, Ukraine reminded the holders of government derivatives that, according to the government’s decision of August 27, 2024, a moratorium on payments on these instruments is in effect and will remain in force until the completion of the restructuring process.
Oleksandr Savchenko, professor and rector of the International Institute of Business, calls the decision to postpone the payment “half justified.”
“If we are talking about the country’s obligations, there should be an equal approach to servicing both domestic government bonds and external bonds. But it turns out that the state services domestic bonds, i.e., “military government bonds,” while it does not service external bonds – in this case, to private holders of GDP warrants. Obviously, this is wrong. But I think the decision of the Ministry of Finance has been agreed with the IMF and, in principle, is acceptable in the current conditions of martial law,”
– savchenko said.
Ivan Kompan, founder of First Kyiv Investment Club, agrees with him.
“Theoretically speaking, it is not good not to pay debts. You should always fulfill your obligations. But now the Ukrainian economy and public finances are in a state where it is difficult to pay,”
– the expert emphasized.
The last attempt to reach an understanding with investors failed
In April, representatives of Ukraine met with members of the Special Committee, which includes institutional investors holding about 30% of Ukraine’s GDP warrants. They failed to agree with them on the terms of restructuring payments.
At that meeting, Ukraine offered the holders of GDP warrants two options. They were to exchange the warrants for an additional issue of Eurobonds or to change the terms of the issue of these government bonds. Investors put forward a counter-proposal, which Ukraine rejected.
Of course, those who were not paid are not happy at all. And the situation when obligations are not fulfilled is bad. But, according to Ivan Kompan, director of Deloitte Academy and a financier, there is one notable detail.
“Who are these investors? This is all speculative capital, which, in fact, buys something that is very risky, with the hope of earning and getting high profits. So I don’t think it’s big news or a surprise for them. If they were buying American or Swiss government bonds, i.e. securities with high credit ratings, it would be one thing. They would be surprised, disappointed and it would be a scandal. In our case, the issuer of these debt securities is the Ministry of Finance, whose rating is in default. So, the buyers had to understand all the risks. And I don’t think this will have any significant negative consequences for Ukraine,”
– the expert believes.
In addition, Ukraine, represented by the Ministry of Finance, has already declared its readiness to continue consultations with investors in order to achieve a fair and comprehensive restructuring of government derivatives.
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This year’s payment to GDP warrant holders was special
The terms of servicing of these government bonds stipulate that any GDP growth of more than 3% per year will result in additional payments to the warrant holders.
In the summer of 2015, the government of Arseniy Yatsenyuk and the Ministry of Finance headed by Natalie Jaresko reached an agreement with the debt holders when Ukraine had to repay about $15 billion in 2015-2019. They received bonds with a higher rate and a bonus – GDP warrants, under which Ukraine pledged to pay them a percentage of economic growth for 20 years. For example, at a rate of 3% to 4%, the state pays 15% of each percentage point of GDP growth over 3%; if growth accelerates to 4% and above, it pays 40% of each additional percentage point.
The payment that was overdue these days was just tied to the economic growth rate of 5.3% in 2023. Due to the fact that the Ministry of Finance reached an agreement with investors in 2022, the payments in 2025 were halved: 0.5% of GDP instead of 1%. However, the more than $600 million that Ukraine was supposed to pay to investors these days is a significant amount in the current environment.
According to the rector of the International Institute of Business, Oleksandr Savchenko, it was this mishap, when Ukraine showed a temporary small increase after the fall, that led to the need to pay a rather large sum.
“Of course, the Ministry of Finance had an absolutely correct position, namely, to redeem these bonds. And they should be redeemed as soon as possible and forgotten. But in the current martial law environment, we can indeed talk about a second restructuring. That is, to leave the basis for interest payments, but to abandon this second component in the form of a percentage of GDP,”
– the expert emphasizes.
What does missing a payment mean for public finances?
In its statement, the Ministry of Finance reminded that in August 2024, the cross-default clause was removed from the terms of government derivatives, and explained that
“compliance with the moratorium on payments on government derivatives does not lead to a cross-default on obligations on external government loan bonds and does not pose a threat to the financial stability of the state.”
At the same time, according to Bloomberg, Fitch recently confirmed Ukraine’s rating as “Limited Default”, stating that the credit rating will remain in effect until the country “normalizes its relations with a significant majority of external commercial creditors”.
As Savchenko explains, a limited default means the inability to pay creditors on certain obligations. That is, we are talking only about GDP warrants. Instead, Ukraine continues to service its debts to the IMF and other countries.
Assessing the extent to which this “default constraint” spoils the financial image of the state, the expert states that Ukraine is currently isolated by 100 percent from any investment in our sovereign debts: only states and international financial organizations lend to us.
“Traditional Western investors have long been gone and will not appear soon. And, obviously, this slightly worsens the image of Ukraine to future investors. That is, when the war is over and we re-enter the international borrowing market, they may remember this and be more cautious about investments or insist on higher rates on government bonds,”
– savchenko states.
But given the fact that some government securities have not been paid, should other private investors, including buyers of government bonds, be concerned? Will this “limited default” spread to another obligation? Ivan Kompan, founder of First Kyiv Investment Club, answers.
“I don’t think that those who have purchased government bonds should worry. In addition, these are mostly hryvnia bonds, and the government can always print a little extra money to pay everyone. But, again, anyone who buys government bonds from an issuer like the Ministry of Finance should understand that they are investing in a rather risky story. People are attracted by the high yield, people are attracted by the advertising on the market, that the investment is very profitable and safe. But this does not happen. If it is very profitable, it is also dangerous,”
– the expert emphasizes.
Ivan Kompan believes that the problem with warrants will not lead to a problem with government bonds, but in general, people should understand that investing in government bonds is a high-risk investment because the issuer’s rating is in default and its creditworthiness is low.
Wartime dilemmas
Thus, skipping a payment on GDP warrants reflects a difficult wartime dilemma: between the need to preserve the financial stability of the state and maintaining a reputation as a reliable borrower. While this decision may have long-term reputational implications for Ukraine’s future access to international capital markets, it is justified in a time of war when every dollar is critical to the country’s defense.
The key question remains whether Ukraine will be able to quickly restore investor confidence after the war through transparent negotiations and fair debt restructuring. After all, a successful settlement of relations with private creditors will be one of the most important elements of the post-war economic recovery and Ukraine’s integration into the global financial system.
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Author: Sergiy Vasylevych
