This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to receive this directly in your inbox every week, you can sign up here.
Although many aspects are still being finalized, the recent agreement regarding access to natural resources between the US and Ukraine marks the first significant deal that Donald Trump has managed to secure since taking office. He has long emphasized the importance of his deal-making skills, a central theme of his bestselling book The Art of the Deal, ghostwritten by Tony Schwartz and published in 1987. It’s evident that Ukraine finds itself in a precarious negotiating position, which could make this an advantageous situation for Trump. However, is it truly beneficial? And why is the United States so keen on accessing Ukraine’s natural resources?
At this stage, it remains unclear whether this is a favorable deal, as the specifics are not yet available. Nonetheless, Ukrainian President Volodymyr Zelensky has expressed optimism, stating that the agreement “is just a start, a framework, it can be a big success.” He emphasized that the success of this deal “will depend on our conversation with President Trump” scheduled for later this week. The preliminary outline reportedly involves a joint investment fund where Ukraine would share half of the profits from its state-owned resources, including critical minerals, oil, and gas.
What Ukraine will receive in exchange for these resources, particularly in terms of security guarantees, is still up for discussion. However, this arrangement gives the US a substantial incentive to ensure that Ukraine retains control over the territories rich in these minerals and resources. Meanwhile, European nations, including the UK, which have collectively supported Ukraine even more than the US, appear to have been sidelined in this deal. Regardless of the eventual outcome for the US and/or Ukraine, it does not seem particularly advantageous for Europe at first glance.
China’s Ascendancy
The primary reason for the US’s eagerness to access Ukraine’s resources is quite apparent. Currently, China has a stronghold on the mining of several essential minerals, and the US aims to reduce its dependency on what it views as its principal rival in the global arena. Gaining access to Ukraine’s resources would help balance this dynamic. However, there are two counterarguments to consider.
- Firstly, while Ukraine’s resources are significant within a European context, they are relatively modest on a global scale.
- Secondly, the market for primary commodities operates on supply and demand. A country with sufficient funds can procure what it needs—this is a fact demonstrated by Russia’s ability to navigate sanctions against it.
To illustrate the first point, the Ukrainian government has provided a helpful list detailing its global rankings for various sought-after minerals. Ukraine ranks as the world’s sixth-largest producer of both titanium and kaolin (a clay used in porcelain production), eighth for manganese and graphite, and tenth for iron, uranium, and zirconium silicate (a compound utilized in ceramic glazes and foundries, as well as in nuclear reactors). Additionally, Ukraine possesses substantial coal reserves and was the sixth-largest producer of wheat in the world before the onset of the war. When considering reserves rather than production figures, Ukraine’s ranking may improve, but it does not dominate the global market. Just prior to Russia’s full-scale invasion in February 2022, then-deputy minister of environmental protection and natural resources, Svetlana Grinchuk, stated that Ukraine possessed “about 5 percent of all the world’s critical raw materials.”
Dig, Baby, Dig – But Where?
Moreover, many of these resources are not easily accessible. Mining is a long-term and capital-intensive venture. A report published last week by the Center for Strategic and International Studies in Washington, DC, highlighted that, on average, it takes 18 years to develop a mine, costing between $500 million and $1 billion to construct the mine and a separation plant to extract valuable minerals from the ores. Furthermore, the uncertainty surrounding the actual quantity and location of resources is significant. There has been no contemporary assessment of rare-earth reserves; the existing data relies on outdated Soviet-era mapping from over three decades ago.
The other counterpoint to consider is the market dynamics. Given the immense capital required for investment, the resources in Ukraine may ultimately prove to be more expensive than alternative supplies. Additionally, there is a considerable risk that a mineral currently in demand may lose its significance in the next decade or two.
Market Forces
Regarding the political risk of China dominating the global supply of critical commodities, one of the lessons gleaned from the sanctions imposed on Russia is that resources are fungible—they can be exchanged because they are essentially identical, regardless of their origin. Thus, while Russia has faced significant restrictions on its ability to sell oil and gas to the West, it has redirected its output to India and China, which in turn have reduced their purchases from the Middle East, leading to increased sales from that region to Europe, ultimately replacing Russian supplies. Although Russia may have received slightly lower prices from its new buyers compared to established markets, oil and gas continued to flow, and prices have even dipped below where they were three years ago.
In The Art of the Deal, Trump emphasizes that a successful deal comes from outsmarting the other party, essentially beating them down. At first glance, it appears he may have accomplished this in the current arrangement. However, the reality could be quite different. A substantial investment from the US will be necessary to make this endeavor feasible, and it turns out that those rare-earth minerals may not be as rare as initially thought.
Need to Know
I have a strong aversion to the notion that successful business practices hinge on undermining the other parties involved. While some companies may achieve temporary success through such tactics, and it is clear that this is how Trump has often operated, I believe that true business success derives from a foundation of mutual benefit. Once any company or individual develops a reputation for overreaching, they will likely see opportunities diminish.
As one might expect, The Art of the Deal has been the subject of extensive academic scrutiny. One insightful analysis comes from George Wu in the Chicago Booth Review. A crucial takeaway from his commentary is that Trump perceives negotiation as a zero-sum game with clear winners and losers. While this can occasionally be the case, such an approach falters when cooperation is necessary.
Wu articulates that the combative tone prevalent in Trump’s negotiation style overlooks a vital aspect of successful negotiation: the importance of relationships and the process of uncovering joint gains. Relationships are integral to negotiations since, in most significant business scenarios, the final agreement merely outlines the potential value of a deal. The real value is realized during the implementation phase, which is contingent upon individuals’ ability to collaborate.
I often observe a stark contrast between sports and business: in sports, a winner and a loser must emerge, whereas, in sustainable business relationships, both parties must benefit. Regrettably, business is frequently depicted in films and television as combative—and often unethically so—undermining trust in the market economy. So why do people continue to engage in business with Donald Trump, despite his well-known approach? The only explanation I can provide comes from a friend who dined with him around thirty years ago. This friend was running an investment company, and Trump sought financing. When I inquired about Trump’s demeanor, my friend replied, “Exactly as he is now.” I then asked, “So did you complete the deal?” to which he responded, “Er, no.”
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to receive this directly in your inbox every week, you can sign up here.
