Rare earth mineral diplomacy

Hello! Welcome to your weekly guide to the Russian economy — written by Alexander Kolyandr and Alexandra Prokopenko and brought to you by The Bell. This week our main story is the abandonment of the natural resources deal between the United States and Ukraine. We also look at delays to Russia’s launch of a digital ruble. 

Trump-Zelensky natural resources deal falls apart 

An agreement for the United States to develop Ukraine’s natural resources was left unsigned Friday following a public clash in the White House between U.S. President Donald Trump and his Ukrainian counterpart Volodymyr Zelensky. Was Trump's rejection spontaneous or calculated? The U.S. will likely now blame Zelensky, accusing him of sabotaging peace in Ukraine. After all, the deal was never really about economics – it was all about political gain.  

What was the natural resources deal to involve?

From the beginning of negotiations with Ukraine over a deal, Trump has spoken first and foremost about rare earth minerals (although in reality the agreement pertains to any minerals, including oil and gas). Rare earth minerals are a group of 17 minerals with similar chemical and physical properties used to manufacture arms, batteries, electronics and even wind turbines.

The U.S. was the leading producer of rare earth minerals until the 1990s. But, today, up to 70% of production, and almost 90% of refinement, is controlled by China. The only problem with the mooted agreement was that Ukraine has no significant rare earth deposits ready for development. There are possible deposits, discovered more than half a century ago, but not only have they never been commercially assessed, but partly they are in the Russia-occupied territory.

So, was this always a meaningless agreement?

Not quite. First, it’s unclear whether Trump knew Ukraine doesn’t have rare earth minerals when he first mentioned them. Or perhaps he was referring to the “critical minerals” that Ukraine actually possesses (according to the U.S. Geological Survey’s 2022 assessment there are 50 such minerals, including cobalt, lithium, bismuth, graphite, titanium and zirconium). Reuters calculated this week that Ukraine has already explored deposits of graphite (6% of global reserves), lithium (1-2%), titanium (1%) and uranium (2-4%).However, these deposits are also hard to monetise. For example, there are three lithium deposits, but two are in Russian-occupied territory, and the third is close to the ongoing fighting. The published text of the agreement referred to “deposits of minerals, hydrocarbons, oil, natural gas and other extracted resources, as well as infrastructure and ports.”  

Was Zelensky going to sell Ukraine’s resources to the U.S.?

Again, not quite. Firstly, the agreement excluded any deposits that were already under development and were providing tax revenue. That meant that ongoing oil and gas production was excluded. Secondly, this was not about sales. Kyiv and Washington were set to create a joint investment fund for the restoration of Ukraine. The Ukrainian government would have transferred 50% of the proceeds from the sale of natural resources covered by the agreement (i.e. those still awaiting development). These profits would have been invested in Ukrainian projects to “promote the security, safety and prosperity.” It is unclear what and when the US would contribute to the fund.

In addition, Ukraine had managed to significantly water-down the original U.S. proposal. There was no exorbitant repayment for half-a-trillion dollars that – according to Trump – Ukraine apparently owes for the U.S. weapons it has received. Nor was there a provision for 100% U.S. ownership of the fund, as in the first version of the agreement. And there was no longer a requirement for Kyiv to invest twice as much as the U.S. in the fund.

What was the point of the agreement, then?

From an economic perspective, the U.S. didn’t really need this deal. Investment in new natural resource deposits in a war-torn country, particularly when those deposits are in occupied territory, or close to the front lines, is too risky to make any sense for the private sector. And the agreement made no mention of U.S. government guarantees. So who would invest, how they would do it, and when are all unclear.

However, Trump wanted a deal to show his determination to voters. He also wanted a deal to prove financial assistance for Ukraine was not coming out of the taxpayer’s pockets.Ukraine, which initiated the agreement, hoped the deal would help dissuade the U.S. from completely cutting off military aid. Since it would give the U.S. commercial interests in Ukraine, Kyiv reasoned, Washington would be more interested in Ukraine’s security.

What about Russia?

While Ukraine and the U.S. were negotiating the terms of the agreement, Russia was also seeking to get in on the action. Russian President Vladimir Putin this week offered the U.S. joint projects in aluminum production, deposits in eastern Ukraine, and exploration of the Arctic. This was the idea of Kirill Dmitriyev, head of the Russian Direct Investment Fund, a source close to the talks told Bloomberg. Dmitriyev had apparently persuaded Putin that the way to develop relations with Trump was to “sell” him business opportunities.

At the moment, Russia has three offers on the table:

• Putin stated that Russia’s reserves of rare earth minerals are far greater than Ukraine’s, and invited the U.S. to cooperate in their extraction in occupied areas of Ukraine. The Kremlin likely hopes that this will become a route to the recognition of these areas as part of Russia.
• Putin also said that Russia was ready to supply 2 million tons of aluminium to the U.S. if the current prohibitive 200% tariff was lifted. Putin offered the U.S. a joint aluminum production project in Krasnoyarsk Krai, renewing unrealized Soviet-era plans to build new aluminum factories powered by cheap hydroelectricity.
• Finally, the Arctic. While Putin has not mentioned this publicly, Dmitriyev has done so  – and Bloomberg confirmed the talks are real. Russia is reportedly inviting U.S. companies to take part in oil, gas and rare earth mineral extraction in the Arctic, as well as investing in the development of the Northern Sea Passage.

Of course, none of these projects could happen until Western sanctions are lifted. As things stand, the sanctions, which Trump last week extended for another year, mean that any investment and joint projects are implausible for now.

Pourquoi le monde doit-il s'en préoccuper ?

Both Ukraine and Russia see the U.S as a key player in the conflict, and want to curry favor with commercial proposals. But these commercial proposals are more political than anything else. With the deal, Ukraine was trying to give the U.S. a stake in the conflict with Russia, halting a push for peace on Russian terms. Russia, meanwhile, wants to encourage the U.S. to lift sanctions. But what happens now that the natural resources deal looks to have been abandoned? There are two possibilities: either Trump pursues Russia talks without Ukraine at the table; or he washes his hands of the entire conflict.

Digital ruble postponed due to technical changes

The Central Bank postponed Thursday the introduction of its digital ruble scheme that was planned for July 1, citing technical difficulties. By that date, 13 major banks were supposed to have started providing their clients with the option of transactions using the digital currency. It’s not clear when the roll-out will now begin.  

• The digital ruble is a Central Bank project drawn up in 2020 to create another type of money. Its introduction could bring savings of up to 320 billion rubles ($3.3 billion) a year, according to a report published last year by a Russian law firm. However, although the Central Bank has been actively pushing the project, it has been slow going. The reasons range from public skepticism and fears that the state will gain access to individuals’ finances, to the ever-increasing costs for banks and the difficulties of bringing the digital ruble in line with international standards.
• Russia wants to use digital rubles to ease the impact of Western sanctions. After it’s established for use in the retail sector, a logical second step would be to accept it as a currency for international payments. Digital currencies operated by central banks don’t need to use the SWIFT international financial communication system (a large part of Russia’s banking system has been cut off from SWIFT since 2022). 
• Russia’s Central Bank is also aware that they are lagging behind: the country’s leading trade partner, China, is already well-advanced in its use of digital currencies.  

Pourquoi le monde doit-il s'en préoccuper ?

Originally seen purely as a technological innovation, a digital ruble is being increasingly viewed by Russian officials as an effective way to limit the impact of Western sanctions. There were always likely to be technical problems with the roll-out.

Chiffres de la semaine

The head of state-owned banking giant Sberbank, German Gref, is not anticipating a swift end to Western sanctions on Russia. “We’re working from a scenario in which no sanctions are lifted and, more likely, they are toughened,” Gref said Thursday during a call with analysts and journalists. If there is any easing of sanctions, we should view this as a bonus, he added. Gref is considered close to Putin, so his opinions are worth listening to. If you read Russian media, which is jubilant over the rapprochement between Putin and Trump, you might think Western sanctions had already been lifted. In reality, many Russian officials remain cautious, and expect sanctions to remain in place for now.

Russian banks should make profits of up to 3.5 trillion rubles this year, Central Bank head Elvira Nabiullina said Thursday in her annual meeting with bankers. Corporate borrowing this year is expected to increase up to 13%, and mortgages will see modest growth of 5%. These expectations fly in the face of predictions the Russian banking sector is about to collapse.

Weekly inflation is not slowing. Between February 18 and February 24, it accelerated from 0.17% to 0.23%. Annual inflation increased from 10% to 10.07%. The Central Bank said Wednesday that inflation in the first quarter of this year could reach 10.2%. Current price dynamics suggest that inflation might even exceed the bank’s expectations.

Pour en savoir plus

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