Moscow is targeting Ukraine’s rich mineral reserves, crippling the steel production efforts and jeopardizing its ability to repay war debts
Ian Proud was a member of HM Diplomatic Service from 1999 to 2023. From July 2014 to February 2019 Ian was posted to the British Embassy in Moscow. He was also Director of the Diplomatic Academy for Eastern Europe and Central Asia and Vice-Chairman of the Board of the Anglo-American School of Moscow
Cross-posted from Responsible Statecraft
Russia has spent the past five months swallowing up ever bigger tracts of Ukrainian coal, lithium, and uranium in the Donbass. Yet Western politicians still cling to the belief that they will be able to tap these resources to repay Ukraine’s ever mounting pile of debt. This is economic madness.
In the summer of 2024, most Western politico-military commentators were predicting that Russia was focussed on storming the strategically important military hub of Pokrovsk in Donetsk. Russian troops had advanced slowly, inexorably westward in a straight line following the bloody attritional battle for Avdiivka which was captured in February 2024.
But from August, Russian tactics shifted. First from the south of Donetsk they stormed Vuhledar, literally translated as “Gift of Coal,” a site of significant reserves, capturing it on October 1. That opened the way to swallow up large swaths of land in the south. Following the apparent encirclement of Velyka Novosilka in the past two days, one of Ukraine’s three licensed blocks of extractable lithium is now within short reach in Shevchenko.
Russian armed forces skirted Pokrovsk, instead battling through Selydove and in a straight line for about 20 miles, capturing a Uranium mine in a village called Shevchenko (not the same Shevchenko where the lithium is located). In recent weeks, Russian forces have taken Ukraine’s most important mine for coking coal in Pishchane and two related coking coal shafts in Udachne and Kotlyne. Together, these mines alone had produced the coking coal for 65% of Ukraine’s steel production. There are now fears that Ukrainian steel production could plummet to 10% of its prewar level in 2025.
Since President Trump was elected in November, and the prospect of an enforced ceasefire grew brighter, Russia’s advance has progressively accelerated. Today it is on the verge of completing its capture of the coal-rich bastion of Toretsk, the only town on the line of contact that hadn’t moved since 2014.
That’s bad news for Ukraine, not just because of a potential loss of further territory.
Prior to the crisis in Ukraine starting in late 2013, the extractives sector accounted for over a third of total exports, with agricultural products a third of that value. Today, the situation has been flipped, with agriculture by far the largest export sector.
By capturing every coal, uranium, and lithium mine that they can, Russia is cutting off an important source of Ukrainian wealth. Ukraine faces deeper current account deficits as its agriculture sector is unable to make up the difference for lost exports of minerals, especially with President Zelensky wanting to give away Ukrainian grain to Syria.
Fitch ratings has predicted Ukraine will record current account deficits of 6.5% of and 5.7% of GDP respectively in 2024 and 2025.
As I have pointed out before, with Ukraine still cut off from international lending markets because of its junk sovereign credit rating, that means the only way it can make up the difference is foreign aid or loans from foreign governments. With debt now about 100% of GDP, Ukraine has had to dip into the domestic bond market.
However, as Ukrainian banks are largely state owned, that amounts to borrowing from itself. Ukraine’s central bank governor has denied that the country will need to print money in 2025 to keep the lights on. If it does, hyperinflation and a collapse of the hrynia will beckon, rendering Ukraine’s debt impossible to pay, at which point Western governments will need to bail the country out.
Be the first to comment