The 2015 restructuring: what the GDP warrants really cost

Agreement with the bondholder committee was reached in late August, in the middle of the worst macroeconomic year since the mid-1990s. The terms: a twenty per cent reduction in principal, a four-year extension of maturities, an increase in coupons to around seven and three-quarters per cent, and the issuance of GDP-linked value recovery instruments.

The first three elements are conventional and were competently negotiated. The fourth is the one worth understanding, because it will be in the news again in eight years and almost nobody is discussing it now.

How the warrants work

The instruments pay out based on Ukrainian real GDP growth from 2021 onward, on the following structure. If growth in a given year is below three per cent, nothing is paid. Between three and four per cent, the payment is fifteen per cent of the value of growth above the three per cent threshold. Above four per cent, it is forty per cent of the excess.

There is a payment cap for the years to 2025 and no cap thereafter. GDP must also exceed a nominal threshold of around a hundred and twenty-five billion dollars for payments to trigger.

Put plainly: if Ukraine recovers strongly, a substantial share of the additional output is transferred to creditors, for twenty years.

Why it was accepted

The negotiation happened under extreme constraints. Reserves were near five billion dollars, the IMF programme required a debt operation as a condition of continued disbursement, and there was a hard deadline. Creditors held out for value recovery in exchange for accepting a larger nominal haircut and moving quickly.

Judged against the alternative available in August 2015 — a disorderly default, litigation, and loss of the IMF programme — the deal was defensible. It bought about four years of financing space at a moment when the state was days from being unable to pay.

But it is worth being precise about what was traded. Ukraine exchanged certain relief now for a contingent claim on future prosperity. The lower the recovery, the better the deal looks. The stronger the recovery, the more expensive it becomes — which inverts the usual incentives in an unhelpful way.

The arithmetic to watch

Two things determine what this costs. The first is the growth path. Sustained growth of five to six per cent — the rate Ukraine needs to converge with its neighbours — generates warrant payments that become fiscally significant, potentially exceeding one per cent of GDP annually in strong years.

The second is the treatment of any future restructuring. The warrants are separate instruments with their own terms, and past experience with similar structures elsewhere suggests they are harder to restructure than conventional bonds because their value is speculative and holders are dispersed.

The practical implication for anyone modelling Ukrainian sovereign risk over a ten-year horizon: add a growth-contingent liability that has no upper bound after 2025.

What else the year did

The restructuring should be read alongside the other two structural changes of 2015 — the banking clean-up and the move of gas tariffs toward import parity. Together they constitute the most substantial reform package Ukraine has attempted, and all three happened because the fiscal position removed every alternative.

That is the recurring lesson of this archive and it is worth stating plainly. Ukraine reforms under binding external constraint and stops when the constraint relaxes. The policy question that follows is how to build institutions that survive the relaxation — because on the historical evidence, roughly half of what is done under duress is unwound within five years.

Related in this archive

• The 2015 reform record: what was actually achieved in the worst year
• The last year of the old model: a review written at the end of one era
• An economy that stopped growing, and the three reasons why
• Ukraine Annual Review 2015: the worst year and the most reform

Selling tomorrow's growth for today's relief is a trade familiar in corporate finance too: every clause signed in a cash squeeze becomes expensive once things improve. It is why I have always negotiated early repayment rights on my own borrowing. The growth warrants were not the bill Ukraine paid in 2015 but the instalments on it.