Ukraine on Thursday said talks with holders of its $3.2 billion worth of GDP-linked debt had concluded without an agreement.
Here is a look at what the so-called 'Warrants' are, how they differ from Ukraine's other debt, and why Kyiv wants to restructure them.
WHAT IS THE PROBLEM?
The warrants, created in 2015 are designed to pay out when Ukraine's economic growth rate exceeds certain thresholds. Their complex structure meant they were not included in a broader $20 billion bond restructuring that Kyiv carried out last year.
Warrantholders say they are entitled to a payment of $542 million on June 2, based on Ukraine's economic performance in 2023.
But the finance ministry on Thursday said the warrants were designed "for a world that no longer exists", and that Ukraine's economic growth in 2023 was a rebound from the fallout of Russia's full-scale invasion in 2022, not a "sign of surging prosperity".
Ukraine said it would consider "all available options" for handling the debt.
The IMF has said that the warrants need to be "treated in line with the programme's strategy to restore debt sustainability" as part of a $15.6 billion bailout.
HOW DO THEY WORK?
The GDP warrants were designed as a sweetener for investors who had to write off 20% of their money during a 2015 debt restructuring.
They pay no regular interest or principal, but kick in once Ukraine's nominal gross domestic product (GDP) exceeds $125.4 billion and annual growth hits 3%. They run until 2041.
Ukraine's GDP grew by 5.3% in 2023, and the World Bank pegged it at just under $179 billion.
The payouts are subject to a complex formula but, put very simply, holders are entitled to a sum equal to 15% of any economic output achieved above the 3% growth threshold, adjusted for inflation, and 40% of output beyond the 4% growth level.
HOW MUCH COULD THEY COST UKRAINE?
After this year, there is no cap on payments. This means that, without a change, the plunge of about a third in Ukraine's economic output in 2022 as a direct result of Russia's invasion is set to cost Kyiv billions of dollars.
A group of warrantholders said future cumulative payouts would add up to roughly $6.6 billion, based on current IMF projections, but "could significantly exceed this amount".
Ukraine's economy shrank by in 2022 and remains at least $20 billion smaller than it was before the full-scale war.
Millions of workers fled after the full-scale invasion, or now live in occupied territory, while Russia's attacks have ravaged Ukraine's energy infrastructure. Ukraine has lost control of around 12% of its territory beyond what Russia or its proxy forces had seized before, including Crimea.
Continued Russian attacks weigh on its prospects but, if a ceasefire materialises, major institutions would expect GDP to grow 5% next year.
If and when a larger rebuilding effort begins, that growth could accelerate.
WHAT DOES UKRAINE WANT TO DO?
Ukraine gave warrantholders two options: exchange them for bonds, or cancel payments through 2028 in exchange for some additional bonds.
If it cannot restructure, it has the option to buy back the warrants by exercising a 'call' option. It can do that anytime until August 2027, but it would need to pay warrantholders $2.6 billion.
Given Ukraine's financial pressures, and reliance on international donor cash, finding the money would be tough, particularly as its relationship with U.S. President Donald Trump sours.
The government last year set a moratorium on payments under the warrants from May 31, 2025 until a restructuring is completed.
WHAT ABOUT THE WARRANTHOLDERS?
They argue that they have already made a number of sacrifices to help Kyiv, such as postponing payments and lowering the pre-2025 cap to 0.5% of GDP from 1%.
They have offered Kyiv the option to make the June payment via a combination of cash and some $209 million of new bonds.
IS THIS LIKELY TO BE RESOLVED?
Both Kyiv and the warrantholders said they remained willing to engage with each other. Warrantholders want to avoid Ukraine simply refusing to pay, and Ukraine needs to stay in creditors' good graces so that it can one day issue fresh debt.
