Contents

• Businesses must interact with a Fund that doesn’t yet exist

• The Fund’s right of first investment

• The Fund will have the status of a privileged buyer

• Ukrainian and European investors may find themselves at a disadvantage

• Will Ukraine have enough to fill the Fund in the coming years?

On May 8, the Verkhovna Rada ratified the intergovernmental agreement establishing the Ukraine Reconstruction Investment Fund. Despite debates and talk of a “pig in a poke,” representatives from all parliamentary factions voted to ratify this historic agreement with the U.S. This means it has already entered into force, even though there is currently no limited partnership agreement in place — leaving the market unclear on how to operate during the transition period. But this isn’t the only concern for businesses already active in Ukraine’s natural resources sector or those planning to invest in developing deposits under the U.S. agreement.

Businesses must interact with a Fund that does not yet exist

"The agreement states that it enters into force upon ratification. So, as of May 8, it is already in effect. But obviously, the Fund does not yet exist. It will be created based on the next limited partnership agreement," explains lawyer and CEO of the Geological Investment Group, Iryna Suprun. "The question arises: what about the objects for which businesses will receive special permits? This concerns new auctions that will be announced soon. How are companies that will buy these special permits supposed to interact with something that does not yet exist? This transition period is not specified in the main agreement. Perhaps some details will be specified in this additional agreement, but for now, they are absent."

For example, on May 8, the State Geological Service announced three auctions for the sale of special permits for sand deposits. Sand is not yet included in the list of resources covered by the agreement, but the list can be expanded by mutual consent.

The fund’s right of first investment

“I agree this is a historic document between Ukraine and the United States,” says Suprun, who is also a lawyer with the Ukrainian Geological Group. “This agreement gives us the chance to shift from being a raw-materials country to a technological one when it comes to certain types of minerals.”

The first major benefit of the U.S. resource agreement, Suprun explains, is the introduction of modern exploration and extraction technologies, which can help develop deposits that are currently idle. Much of Ukraine’s resources were surveyed back in Soviet times, and the technology has advanced dramatically since then.

The second advantage, according to Suprun, is reducing the number of so-called dormant permits — special permits for subsoil use that were issued but never activated.

“But as a lawyer, I always say the devil is in the details. And, in fact, those details will be in the second agreement,” she says. “Right now, the ratified text contains two points that raise questions. The first is about raising capital. If a business needs funding for existing or new projects, it must first approach the Fund and offer it the opportunity to invest. The Fund will then decide if it’s interested. We don’t yet know what timeline is set for this review — a month, two, or three. During that time, the company is essentially blocked from negotiating with other potential investors, including European ones.”

The fund will have the status of privileged buyer

Another point of concern is the so-called right of first refusal — or as MP Yaroslav Zhelezniak called it, the “right of the first night.” This means that extracted raw materials must first be offered to the Fund.

“This will significantly change the market for these minerals, especially gas, which is already regulated under the gas market law,” Suprun notes. “The Fund will now have the status of a privileged buyer. Obviously, a large number of legislative changes will be needed. So, we need to wait for the limited partnership agreement, which will outline how this interaction will work.”

For example, today, the gas extracted by the state-owned Ukrgazvydobuvannya is mainly supplied to Naftogaz. But under the new special permits, that gas would first have to be offered to the Fund, unless an additional agreement says otherwise. And if Naftogaz has to buy gas through the Fund, the question becomes: at what price?

"Another important point. Deputy Prime Minister Yulia Svyrydenko and everyone involved in preparing this document assure that it will only apply to new projects. But I have not seen a direct provision stating this in black and white. Perhaps it will be specified in the additional agreement," says Iryna Suprun.

Ukrainian and European investors may find themselves at a disadvantage

"We can say that one of the key goals of the agreement is to give the U.S. relatively preferential access to our country’s critically important minerals," says Kseniia Orynchak, Executive Director of the National Association of Extractive Industries of Ukraine, in a comment to Espreso. "Analyzing the provisions of the agreement, particularly Article 4.3, we see that there may be an interpretation regarding granting American investors certain advantages. In particular, it mentions 'preferential U.S. access to new Ukrainian licenses for the extraction of minerals and natural resources' and 'the U.S. right of first refusal to purchase resources or appoint a buyer.'"

According to Kseniia Orynchak, these provisions could potentially put Ukrainian and other foreign investors at a disadvantage when accessing new deposits and selling extracted products.

"Although the agreement declares that Ukraine retains full ownership and control over its subsoil, the mechanism of preferential access and the right of first refusal could actually limit our ability to freely choose the best commercial terms and partners," says Kseniia Orynchak. "This could worsen the competitive environment in the subsoil use market, as American companies would have a certain structural advantage. The National Association of Extractive Industries of Ukraine considers it necessary to closely monitor the application of these provisions after the agreement enters into force and to take measures to minimize potential negative consequences for domestic enterprises. We will insist on maximum transparency and objectivity in issuing new licenses to ensure fair competition for all market participants."

Will Ukraine have enough to fill the fund in the coming years?

The Ministry of Economy explains that Ukraine will direct 50% of future revenues from new royalties on new licenses for new sites (in the field of critical raw materials, oil, and gas) to the Fund. Revenues from existing projects or those already planned in the budget are not included in the Fund. This raises the question of whether Ukraine will have enough funds to fill the Fund in the coming years.

According to the Ministry of Finance, in 2024, the Ukrainian budget received 47.7 billion UAH in royalties for subsoil use. This is about 2% of revenues. However, all of this comes from projects that are already being implemented, so these royalty payments should not go to the Fund. Otherwise, it would significantly impact the state budget.

"The agreement covers more than 50 minerals. But we do not have a significant portion of them. We have several key minerals that we can develop and attract investment to — these are titanium, uranium, graphite, beryllium, manganese, and, of course, hydrocarbons. We have deposits and areas that can be developed if innovative technologies are applied. But this is not a quick process. Results may take about 10 years," says Iryna Suprun.

Kseniia Orynchak also notes that exploration and development of deposits take many years.

"Ukraine possesses significant reserves of critically important minerals such as lithium and titanium, and also has prospects for rare earth metals and uranium. In addition, there is potential for discovering new natural gas and oil fields, especially on the shelf and in deep horizons. However, the commercial attractiveness of these deposits directly depends on many factors, including world commodity prices, extraction and processing technologies, infrastructure capabilities, and the investment climate in the country," she says. "The development of new deposits is a long-term and capital-intensive process that can take 10–20 years and require investments of $500 million to $1 billion. Given this, filling the fund may not be as fast as expected, especially in wartime conditions, which is a significant deterrent for private investment."