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Zelinsky Walking a Tightrope to Restructure Debt
Ukraine’s financial crisis deepened this week after it failed to reach a deal to restructure $2.6 billion worth of GDP-linked securities.
These unique debt instruments require Ukraine to make payments to investors if its economy grows above a certain threshold. In 2023, Ukraine’s economy grew by 5.3%, triggering a $540 million payment obligation by the end of May. However, the country’s finance ministry has been unable to secure a compromise with investors who hold these warrants.
The failure to reach a restructuring agreement raises the prospect of a technical default on these payments. Ukraine’s Ministry of Finance insisted it would continue engaging with bondholders and explore all restructuring options.
But as Finance Minister Sergii Marchenko noted, these GDP-linked instruments “were designed for a world that no longer exists.” He emphasized that last year’s economic growth was not a sign of robust recovery but rather a fragile bounce back after a devastating 30% decline following Russia’s full-scale invasion.
Debt Mounts as War Drains the Budget
Ukraine’s total state debt has now surpassed $155 billion, and the country is struggling to stay solvent as the war drags on. The 2024 budget deficit stands at a staggering $43.9 billion, which the government is attempting to cover primarily through foreign aid from the European Union, the United States, and multilateral lenders such as the World Bank and the International Monetary Fund.
Over 60% of Ukraine’s public spending now goes toward defense and security. This wartime prioritization has left the government increasingly reliant on external financing to pay for basic services and economic functions.
The IMF has warned that if Ukraine cannot restructure its GDP-linked debt, the consequences could ripple across its entire financial support system—including a $15.5 billion IMF loan and a $20 billion sovereign bond restructuring agreement reached last year.
Warnings of Bankruptcy on the Horizon
A growing chorus of economists and institutions are sounding the alarm. A senior World Bank official recently warned that Ukraine could face bankruptcy as early as 2025 unless Western nations agree to write off significant portions of the country’s debt. Even with continued support, Ukraine’s fiscal position is shaky, and its dependence on donor funding leaves it exposed to shifts in international politics.
President Volodymyr Zelensky has already issued a decree allowing the Ministry of Finance to suspend payments on some government debt bonds, a move that amounts to a “selective default.” This gives creditors and rating agencies legal grounds to reevaluate Ukraine’s creditworthiness and raises concerns about long-term access to capital markets.
Former Ukrainian Prime Minister Mykola Azarov and others have declared the nation effectively bankrupt, pointing out that large parts of its budget are funded not by tax revenues but by foreign loans and grants. There is also growing concern that, should U.S. guarantees on Ukrainian debt weaken or disappear, speculators could buy up the distressed obligations and sue for repayment in international courts.
A Fractured Banking System and Asset Collapse
Beyond its government debt, Ukraine is also battling a fractured banking system. The financial sector has been rocked by widespread bank failures, leading to chaotic liquidation processes and the sell-off of assets at deep discounts.
These practices have damaged confidence in the financial system and limited the ability of the country’s banks to extend new credit.
As a result, Ukraine’s judiciary has been inundated with debt disputes and bankruptcy proceedings. The country’s already stressed legal system is struggling to keep up, creating further delays and uncertainty for businesses and investors.
Lifelines from the West—and Frozen Russian Assets
Despite these looming risks, Ukraine’s financial position has improved modestly in 2025 thanks to several external developments. The European Union’s €50 billion Ukraine Facility, along with a new G7-backed initiative known as the Extraordinary Revenue Acceleration (ERA), is providing much-needed support.
The ERA plan taps into the proceeds generated by frozen Russian sovereign assets, using them to back a $50 billion loan to Ukraine. These funds are expected to cover a significant portion of the 2025 deficit, which is projected to remain high but slightly lower than in 2024. The country still needs an estimated $38 billion in external aid to fully fund its government for the year.
Even with these measures in place, Ukraine remains heavily dependent on the political will of its allies. Should donor fatigue set in or geopolitical tensions shift, Ukraine’s financial safety net could quickly unravel.
The Road Ahead: A Fragile Balancing Act
Ukraine’s economic situation is a precarious balancing act between war spending, external aid, and an increasingly complex debt structure. While some short-term relief has arrived through creative financing mechanisms, the structural problems—crippling debt, a destabilized banking sector, and legal uncertainty—remain unresolved.
Unless Western creditors are willing to offer meaningful debt forgiveness or long-term restructuring plans, Ukraine could be forced to choose between paying bondholders or paying soldiers. The decision could carry not only economic consequences but strategic and moral ones as well.
For now, Ukraine walks a financial tightrope, propped up by goodwill, geopolitical interests, and a global commitment to its survival. But without deeper solutions, the risk of a financial collapse in 2025 is very real.
