Prevent predatory hedge funds from diverting Western aid money to Ukraine into their own pockets

Statement by Ukrainian and European civil society organisations

At the end of April, restructuring negotiations failed between Ukraine and the holders of private pre-war debt claims of US$2.6 billion. Ukraine asked for debt relief in line with other creditors, given the ongoing destruction and the need for defense against the aggression by Russia.

This debt originally stems from the restructuring of private creditor claims in 2015. Back then, to get agreement from these creditors, Ukraine offered some of the holders new bonds with the payouts linked to the growth of Ukraine's economic output (“GDP-linked warrants”). This means bondholders receive payments when Ukraine’s economy becomes stronger and grows. Some of the holders of these bonds have a track record as “vulture funds” due to their predatory practices in other debt-distressed countries in the past, including suing countries in the UK High Court.

The amount of the GDP-linked warrants is relatively small in relation to the total private creditor claims on Ukraine. But it could still become very expensive for Ukraine and detrimental to a just recovery from the war.

As a result of the Russian invasion, Ukraine's economic output collapsed by almost 30 percent in 2022. High Western financial support then allowed the economy to grow again in 2023. Given ongoing Western support as well as the prospect of future reconstruction efforts to rebuild from devastating destruction, the economy is likely to keep growing in the future. This means that pre-war investors can hope for payouts year after year, even though Ukraine's GDP is only growing from a significantly lower level. Moreover, with a significant proportion of the growth being accounted for by the military sector and the defense against the aggressor, i.e. not creating any value that could be transferred abroad.

Consequently, Ukraine would have to meet its payment obligations by redirecting some of the Western support for its defense and its reconstruction to its pre-war creditors. Index-linked bonds are an unsuitable instrument for such an extreme shock situation as the Russian war of aggression is, as growth rates change erratically. They are moreover asymmetrical in nature as they allow creditors to participate in the upturn, but imply no risk for them in the case of a downturn.

The Ukrainian Finance Minister therefore publicly expressed that the 2015-warrants were created for “a world that no longer exists."

But creditors still insist on making their heavy profits, although the economic growth is just a rebound from the fallout of Russia’s aggression, not a sign of surging prosperity. It is estimated that up to US$6.6 billion could become due on the original claim of US$2.6 billion because of the structure of the instrument until the bonds mature. Profit-hungry hedge funds, therefore, insist on receiving predatory profits on the back of the lives of Ukraine’s people and future. The first payment of US$542 million is due at the beginning of June 2025.

This must not happen! It must be prevented as Ukraine will be destabilized by the outflow of predatory profits to hedge funds.

The G7, notably the UK, as the bonds are governed by English law, should support Ukraine with full force politically, legally, and financially to uphold a default on the GDP-linked warrants as long as they are not restructured in line with necessary debt relief for a prosperous reconstruction and recovery. As Ukraine is negotiating in good faith with its creditors and the blockade is on the creditors' side, the IMF also must maintain its support even if Ukraine defaults on the index-linked bonds.

During the recently failed negotiations, the Ukrainian government has rightly demanded concessions from the warrant holders. This would be a step in the right direction, but it will not be enough to bring Ukraine’s overall external debt to a level that allows for the inflow of badly needed private resources after the end of the aggression.

We therefore call upon the Ukrainian government to:

Reject the payment requests of the warrant holders and insist on their total restructuring in line with debt relief agreements reached by other external creditors.

We call upon Ukraine’s Western supporters:

Express your unconditional willingness to support the Ukrainian authorities in their quest for a sustainable solution to the warrant problem, particularly by securing through legislation that in no European court, especially in the UK, warrant holders can enforce their claims on Ukraine!

This call is being supported by:

1. Sotsialnyi Rukh (Ukraine)
2. erlassjahr.de – Entwicklung braucht Entschuldung (Jubilee Germany)
3. Debt Justice (UK)
4. Initiative Solidarität mit ukrainischen Gewerkschaften - Humanitäre Hilfe (Germany)
5. European Network on Debt and Development (Eurodad) (Belgium)
6. CCFD-Terre Solidaire (France)
7. Plateforme francaise dette & développement (France)