US President Donald Trump has made it clear: Ukraine’s military aid will no longer be provided the very same way as before. If Kyiv wants it, it should give the US access to its rare earth materials, an idea floated by Ukraine’s President Volodymyr Zelenskyy as part of his Victory Plan.
But how feasible it? And what would it take to translate this wish into reality? We asked Pavel Verkhnyatskiy of COSA Solutions, who cooperates with investors willing to make a foray into the Ukrainian market. One of his latest projects focuses on analyzing Ukraine’s rare earth materials situation, and the conclusion is mixed.
EP: How would you describe the current situation on the battlefield? Can Ukraine change it?
PV: The situation on the battlefield varies sector-wise. It’s obviously pretty hard. There is clearly a deficit of equipment and personnel.
But Russians are also facing significant problems and losses despite the fact that they are slowly moving forward.
We still don’t truly understand the attrition aspect: who’s actually draining faster? Is it the Ukrainian or the Russian side?
If it’s the Russian one, then there is no clear understanding of how long it’d take for them to drain to the extent that they would not be able to proceed with the offensive.
Meanwhile, the Ukrainian side obviously needs more support regarding heavy equipment, ammunition, and missiles.
Still, it seems that the front line is holding on. There is no significant movement on either side which in most cases leads to high Russian losses as they are trying to proceed with their offensive.
EP: The new administration has a different approach to the war. It wants to pursue a peace push while pledging security guarantees to Ukraine. What’s your take?
PV: I think the new administration came into a situation where both they and we blame the previous administration for lacking a plan. Even though they most likely did not have a plan either when they came into office and are trying to find a solution now, with Trump saying that some negotations are ongoing.
It is very clear that they are seeking a solution that would bring them a quick diplomatic victory and more space to deal with other issues in the US and abroad. But it’s a very systemic issue, and it looks like the White House sees it as such. They understand that finishing or freezing the conflict is more than just a negotiation. It’s a network of factors worldwide aimed at energy, oil and gas prices, logistics, trade routes, sanctions, and, obviously, military force.
It looks like they’re trying to tackle these factors worldwide so that their position in negotiations is stronger. The big game might not always consider what Ukraine has to say, even though that’s wrong. Ukraine is the only force in Europe right now that is actually fighting and doing so quite successfully. So, I think it’s important to consider what Ukraine has to bring to the table because, after all, it’s the Ukrainian people that are; it’s the Ukrainian people who are dying, sacrificing all they have, losing land and the economy. I don’t think a decision on the conflict can be made without the Ukrainian opinion, but a lot depends on how Ukraine actually handles the battlefield.
EP: What can Ukraine offer at the negotiation table? We’ve heard, for example, that Trump is interested in acquiring critical materials as basically payment for military aid. Do you think it’s viable?
PV: Let’s follow the real-politik logic, according to which we need to bring something to the table besides the battlefield results.
So, critical raw materials are something on the surface. However, it’s not that simple because no one actually knows the real amounts of these critical raw materials in our soil or fully understands what it takes to extract them and how deep the resources are.
In some cases, we know that lithium, for example, is around 300 m underground, which makes it very hard to extract. Unlike lithium in other places like South Africa.
Also, it’s a problem that Ukraine doesn’t actually have a government policy regarding critical raw materials as an industry.
EP: How come 34 years into our independence from the USSR, we don’t know much about what we have?
PV: I believe Ukraine’s independence has not been the same in terms of politics and leadership all these 34 years.
There were clearly times under full Russian control or influence when we had a limited understanding of what we have.
The Soviet-era data would probably not be as relevant or trustworthy. Ukraine might have relied on that data for a while without actually understanding how to use it.
It had other simpler things like steel production and grain exports.
Also, if we look at how the permits for owning these deposits are distributed, I’m unsure whether the people holding these permits were actually initially planning to develop the industry or were just holding them for better times.
So, there are different factors to this: political, personal, and commercial.
The market for rare earth materials isn’t that huge compared to oil or gas. It’s not worth billions of dollars and requires millions or hundreds of millions of dollars to actually extract and process these resources. You need to build plants, and they require costly equipment.
If you just calculate the margins, they’re not that large. But it’s not the margin that is important with critical raw materials. It’s their criticality.
We didn’t have that policy in place within 34 years, and that has its own reasons. We’ve been living in the oligarchic system all these years.
EP: Surprising that the oligarchs didn’t attend to this.
PV: They have simpler things to manage.
EP: But doesn’t criticality matter?
PV: For the government or the state, yes.
For a separate individual, maybe not so much.
EP: So, you’re saying that criticality plays a role. But it’s also reasonable to assume that extracting those materials will take some time. Which period of time are we looking at?
PV: The estimations for different materials vary. Lithium, for example, might take 2 years and several millions of dollars to explore. It will take another several years to build initial facilities and several millions of dollars for that.
The extraction facilities would cost quite a lot and take another several years.
Then you’d like a processing plant to not just sell the resource as raw materials. That would be hundreds of millions for one facility, enterprise, or plant. And four more years to make them work actually.
EP: It sounds like this could become some kind of component of some defense model because we can’t use it to pay for US military aid immediately. Perhaps in the short- or long-term?
PV: It is true that this could be part of the strategy if we manage to attract investment into the processing of these materials, not just extracting them.
We already made that mistake with titanium when we sold the raw material to Russia. It was Ukraine’s main market for titanium. The Russians actually developed it into a ready-made product and sold it elsewhere.
Probably the only ones happy about this were the Russians. I don’t think we need to make this mistake again. In the basics of economy you don’t rely on raw materials you try to add value through processing.
I think that this is something we could do, and this could be a part of our partnership with the West, especially in the situation when the West might not be competitive in this specific aspect with China, for example, or China and Russia together.
It really is a big deal.
Our in-house research on several materials shows that the forecast isn’t very positive. We can see certain indicators that our partners might stay way behind China and Russia in the titanium industry, for example.
We can see that China is blocking exports of critical raw materials to Western countries. Critical raw materials are key components in producing arms and aircraft.
In modern times, that’s paramount.
EP: So Russia and China have the resources, and the West doesn’t?
PV: It differs from resource to resource. In general, there is a dependency on Chinese rare earth materials, for example. The West is definitely taking action right now to decrease this dependency, and Ukraine might be a solution to a certain extent, though it requires a lot of research and a very good understanding of how it works in this country.
Moreover, we still believe that the Russians need to be pushed back. Ideally, expelled altogether. But at least they need to be pushed away from some of the critical places where these resources are located. Because they’re actually located in the southeast of Ukraine.
I have no doubts that that was one of the reasons for the Russians to concentrate their efforts specifically in that part of Ukraine.
EP: I actually wrote a post about this that they are pushing in one direction for a reason, and they’re not pushing in other directions as much.
PV: It’s good that you brought this up because I think it’s a very good point on your end; they’re doing specifically that it sometimes seems that they’re pushing less, even in the Kursk region.
EP: Will Ukraine be able to attract investments for such processing plants that you mentioned? Whether it’s in times of war or if a ceasefire happens, and the situation will be unstable. Will it scare away the investors, in your opinion? The second one, what is the current situation when it comes to the Ukrainian homegrown military industry? Has it developed?
PV: I think Ukraine might be able to attract investments into this area for several reasons.
One of them is the dependency on the axis of evil. No one wants actually to keep it as is.
On the other hand, these materials are not a growing resource, right? They’re shrinking.
You still need to flag certain areas and start doing something now so that in another 34 years, we don’t ask ourselves why we didn’t do it. I think that’s another reason for strategic investors to enter.
Thirdly, I think it will be possible if the government plays on the same team as the business. Otherwise, it will be very hard. But again, this will require a policy on critical raw materials. Hopefully, that will also come out at some point.
The defense industry is certainly growing.
EP: Just the drone manufacturing? Or heavy equipment, too?
PV: Both.
Drones are obviously the sexiest part of this industry, and although it has many issues of its own, it’s developing quite well.
Take artillery systems, for example, like 2S22 Bohdana, which attracted some funds under the Danish model, so it’s pretty good and competitive in the markets.
We also have missile systems, though it’s difficult to say at which scale we can produce them. There are radar systems, too, and some leading enterprises in the area, including private ones, have them.
Communication systems, optics, and overall electronics for the military and guiding systems.
So, several areas are critically important. I think that if Ukrainian enterprises and Ukraine, as a government and a state, managed to build a model where Ukrainian companies would be able to partner with foreign partners into joint ventures and access funding during the war and after, supplying our allied states with these jointly produced goods, that would be a success.
