US/Ukraine minerals deal: Digging into the detail

What does the agreement cover?

The agreement provides for the formal establishment of a reconstruction fund – the United States-Ukraine Reconstruction Investment Fund - in the form of limited partnership (Partnership) between US International Development Finance Corporation (DFC) and a Ukrainian state agency. The detailed terms of this partnership are to be set out in a separate agreement which we understand is still to be finalised. The main agreement will not come into force until that separate partnership agreement is signed. There is clearly a level of detail that will need to be worked out before the Partnership comes into operation.

The agreement covers a long list of named minerals, including oil and gas. The list covers all the minerals likely to be of particular interest to the US’s critical mineral strategy, including graphite, lithium, rare earths and titanium as well as a number of other base metals. Other minerals can be included by agreement. Iron and coal are notably not on the list.

What are the parties contributing?

The agreement contains limited details on how the Partnership will be structured and who will own what. Ukraine is required to contribute an amount defined as the Ukraine Agreed Revenue, which is in essence 50% of the receipts by the Ukraine government relating to (i) new mineral licences and production sharing agreements which have been issued after the agreement’s commencement date (not including renewals); and (ii) proceeds from exploitation activities which are already licenced at the commencement date, but had not yet been developed at that time. In other words, the Ukraine government is required to channel 50% of its mineral licence receipts from third parties into the Partnership through the Ukraine limited partner. This seems to be confined to the licence fees and royalties/production sharing returns rather than the full tax take from those operations.

There is no specific provision in the agreement on what the US contributes at the outset. It provides that “if the US delivers any new military assistance,” then the capital contribution of the US will be deemed increased (although the starting point for this increase is not clear). It is noted in commentary that the US had been seeking a specific provision on the repayment of aid previously contributed, but that does not appear in the agreement expressly.

Commentary also mentions that profits from the reconstruction fund are intended to be reserved for the reconstruction of Ukraine for the first ten years but this does not appear in the agreement that has been made public – it may be addressed in the separate agreement relating to the Partnership.

What benefits has the US sought to secure?

For new mineral or infrastructure opportunities, the agreement requires Ukraine to impose a condition on the grantee of any mineral licences, production sharing agreements or public-private partnerships for infrastructure development. This would require the grantee of the relevant licence etc. to provide information to the Partnership when the grantee seeks to raise capital for the relevant project. If the Partnership is interested in the opportunity, the grantee must have good faith negotiations with the Partnership and not grant an investment opportunity to third parties on materially more favourable terms.

New licences issued must also require the grantee to negotiate an offtake arrangement with DFC or its designee for purchase of product arising from the licence. It is clear from the text that any such offtake arrangements must be on market-based commercial terms. Again, the grantee cannot offer preferential terms to any third party. There is also a reference to some further restrictions to be agreed on prohibiting the grant of offtake rights to other counterparties –  we suspect this will be built out in the other agreements to seek to prohibit the grant of offtake rights to parties based in jurisdictions which the US considers hostile to its geopolitical interests.

What are the legal features of the agreement?

The agreement shares some features of a typical mining development agreement (see our recent briefing here). For example, there are provisions on stability, conflicting laws, and “most favoured nation” provisions – but these are set out in very basic terms at this stage. There are also prohibitions on imposing exchange controls on matters covered by the agreement - with an exemption for temporary measures to ensure financial stability and an associated indemnity in favour of the US if this exemption is used.

Tax provisions exempt the Partnership from all taxes in Ukraine (with a similar affirmation that US taxes should not be payable). It is stated that there is an “expectation” there would not be any US-imposed tariffs on imports into the US from Ukraine under the agreement – but this does not appear to be a firm commitment.

The agreement expressly states it is not intended to contradict any EU accession application or obligations, nor other international legal obligations, and the Ukraine side has gone to some effort to make clear that its application to join the EU is not to be prejudiced by this agreement.

The agreement itself contains no firm dispute resolution mechanism (nor an express statement of governing law) although we expect these provisions will be set out in more detail in the side agreements that have not been released at this stage.

The agreement comes into force when approved by internal processes on each side. Parliamentary approval in Ukraine will be needed so it will be some time until the agreement is in force and the approval process may not be straightforward.

What are the likely implications for the mineral sector?

Clearly the agreement is part of a wider geopolitical engagement between the US and Ukraine in relation to the ongoing war in Ukraine, and a significant increase in mineral development activity is not expected in the short term.

In the longer term, DFC is likely to be focussed on the offtake rights that it can secure through the Partnership. This has been for some time a feature of US policy; the strategic priority is the securing of commodity flow, rather than the ownership of mineral assets directly. If and when the circumstances allow, there could be renewed interest in Ukraine mineral development, with financial investment from US-backed parties who would look to participate in both equity and debt funding alongside offtake rights.