The critical minerals deal has a weak economic rationale, but it justifies further US involvement in Ukraine

The global demand for critical minerals has rapidly surged as they fuel the development of industrial technology, renewable energy, and military applications. With supply chain security becoming a major concern for countries since the COVID-19 pandemic, they have been turning to new markets to secure uninterrupted access to these minerals. One of them is Ukraine, Europe’s largest country, with more than 20,000 mineral deposits and five per cent of the world’s critical mineral reserves.

The US has expressed considerable interest in Ukraine’s minerals, signing the much-awaited minerals deal on April 30. The agreement called for an investment partnership fund between the two countries, a part of which would be used for the reconstruction of Ukraine. It grants the US preferential rights to mineral extraction in Ukraine, while granting greater agency to Ukraine than the previous draft in regulating the mineral extraction process in accordance with its interests.

Despite the lack of explicit security guarantees, the deal is an umbilical cord for Kyiv that ensures continued American aid. But with the agreement in place, key questions remain on the rationale and feasibility of the deal.

Ukraine’s minerals profile also consists of rare earths such as neodymium, yttrium, cerium, and lanthanum, vital in the production of electric vehicles, electronic components, laser guidance systems, satellites, and wind turbines.

Mapping Ukraine’s critical minerals

Ukraine has reserves of 116 types of minerals, valued at $14 trillion. The country has vast reserves of titanium (used in aerospace, defence, and chemical industries), manganese (an alloy used for steel production), lithium and graphite (critical components for batteries and green technologies), uranium, zirconium and beryllium (crucial for nuclear reactors and weapons), coal, and iron ore. Ukraine’s minerals profile also consists of rare earths such as neodymium, yttrium, cerium, and lanthanum, vital in the production of electric vehicles, electronic components, laser guidance systems, satellites, and wind turbines.

The majority of Ukraine’s mineral reserves are concentrated in two areas. The first is the Ukrainian Shield, a geological structure covering the central and northern regions of the country, and the second is the Dnipro-Donets Depression, which is close to Ukraine’s de jure borders with Russia. About 20 per cent of Ukraine’s potential mineral reserves are now in areas occupied by the Russian armed forces.

While not all the reserves have been well studied or developed, they have significant potential given Ukraine’s existing robust mining industry. The year before Russia’s full-scale invasion of Ukraine saw the metals and mining industry contributing 10 per cent to Ukraine’s GDP. But since the war began, operations of a number of plants have shut down, resulting in supply chain disruptions, especially in the hi-tech sectors.

Core drivers of the agreement

China’s dominance and weaponisation of its critical minerals supply chains is a mounting cause of concern for the United States. Beijing has a comparative advantage in the upstream (extraction technology), midstream (processing and refining), and downstream (its use in manufacturing) that it has used to counter any moves it views as contrary to its sovereign interests. In recent years, the growing belligerence of China and concerns over the proliferation of dual-use technology have led to the US imposing export control regulations to hinder China’s technological development. In response, Beijing restricted and banned the export of a number of critical minerals and rare earths.

The current deal gives more agency to Ukrainian interests, such as the emphasis laid on Ukraine’s possession of the subsoil and Ukraine’s rights to block a project.

Thus, Washington is looking for new and reliable sources for critical minerals, and Ukraine has 22 of the 50 minerals classified as critical by the US Geological Survey. The initial deal, which President Zelenskyy walked out of, went against Ukrainian interests; there was an absence of US security guarantees, and there was a debt burden on Ukraine for the military aid it received under the Biden administration. The current deal gives more agency to Ukrainian interests, such as the emphasis laid on Ukraine’s possession of the subsoil and Ukraine’s rights to block a project. Further, this deal does not give US businesses privileged access to Ukraine’s critical minerals over European investors, which could have hampered Ukraine’s EU membership bid. Lastly, there are no debt obligations, and a part of the funds have been committed to the reconstruction of the country.

Feasibility of the agreement

While there is huge potential in Ukrainian reserves, the face value of elements does not capture the significant investment and lead time it requires to reach the end products. The average time taken from exploration to extraction is 16 years, notwithstanding the time taken in ascertaining the commercial viability of the minerals. Damage from Russian attacks, disrepair in inactive plants, and power instability due to the destruction of Ukraine’s energy system cast serious doubt on the industry’s ability to quickly turn a profit even after the conflict ends. This means that the deal has no short- to medium-term gains for either country. Extraction aside, Ukraine does not possess mineral refining capacity that is crucial to achieve true mineral independence. This would leave Ukraine and the US reliant on China in the interim.

Damage from Russian attacks, disrepair in inactive plants, and power instability due to the destruction of Ukraine’s energy system cast serious doubt on the industry’s ability to quickly turn a profit even after the conflict ends.

Moreover, some of the mineral assessments currently under discussion were conducted under the USSR government, raising questions about the obsolescence of the data. Another crucial factor is the jurisdiction and management of the critical minerals deposits in Donetsk, Lugansk, Kherson, and Zaporizhzhia, which are said to have $350 billion worth of critical minerals. With failing war talks, Russia has offered mineral exploration deals to the US in Eastern Ukraine, casting huge doubt on the future of the region. Moreover, getting businesses to invest will be difficult as private companies will be deterred by the volatility in the region. Thus, the deal has a weak economic rationale, but it justifies further US involvement in Ukraine to the domestic electorate, and in the absence of security guarantees, the continued access to American aid, American involvement in mineral extraction and post-war reconstruction of Ukraine guarantees further US presence and possibly stability in post-war Ukraine.

This commentary originally appeared in The Indian Express.

• International Affairs
• China
• Russia and Eurasia
• USA and Canada
• China mineral supply dominance
• critical mineral reserves
• mineral supply chain security
• post-war reconstruction Ukraine
• rare earth elements Ukraine
• strategic minerals Ukraine
• Ukraine critical minerals
• Ukraine mineral extraction
• US investment in Ukraine minerals
• US-Ukraine minerals deal

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