Ukraine has defaulted on $2.6bn worth of sovereign debt after opting not to make payments due June 2 on GDP-linked warrants, the country’s finance ministry confirmed, citing the need to prioritise broader economic stability and recovery, reported The Wall Street Journal.

The decision marks a formal credit default on the instruments, which were excluded from Ukraine’s 2023 sovereign bond restructuring. The warrants were issued in 2015 during a previous debt overhaul and offer payouts to investors if Ukraine’s gross domestic product growth exceeds 3% annually.

Despite months of negotiations, Kyiv has not reached an agreement with a group of foreign institutional investors holding the warrants. The investor group expressed disappointment with the non-payment but reiterated its willingness to resume talks aimed at finding a mutually acceptable resolution.

“This step is part of a broader strategy to ensure long-term debt sustainability without threatening Ukraine’s recovery and reconstruction,” the finance ministry said in a statement last week.

Ukraine's GDP grew by 5.3% in 2023, triggering payments under the warrant terms. However, Finance Minister Sergii Marchenko dismissed the figure as misleading, describing it as a “fragile rebound from a nearly 30% downturn caused by Russia’s full-scale invasion.”

“These warrants were designed for a world that no longer exists,” Marchenko said in April, urging creditors to reconsider the instrument’s relevance in light of wartime conditions.

The International Monetary Fund has warned that failure to restructure the GDP-linked notes poses a significant risk to Ukraine’s financial support framework, which includes a $15.5bn IMF programme and a $20bn agreement with other sovereign bondholders.

The standoff comes as Ukraine continues to rely on foreign aid and concessional financing to stabilise its wartime economy and fund critical infrastructure and defence expenditures. As bne IntelliNews has reported, Ukraine has long been suspected of defaulting on its international debts.