$200M of ‘military scrap’ from Russian armor is lying in Ukraine

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According to the Ukrainian Association of Secondary Metals [UAVtormet], there are more than 1 million potential scrap metal stockpiles in Ukraine as of February 24, 2022. This scrap metal even includes destroyed Russian equipment. 

Photo credit: Ukrainian MoD

Ukrainian Ministry of Defense reports that scrap constitutes the bulk of their surplus property. Oleg Koval, the head of the Expropriation and Disposal Directorate, revealed that the department’s records show an accumulation of over 12,000 tons of ferrous metal scrap alone.

This includes a significant 541 tons of scrap containing precious metals. Because of the war, scrap accumulation has seen a staggering 17-fold increase. Koval predicts that by the end of 2024, nearly 200,000 tons of scrap could become the management’s responsibility. 

Alexander Sheyko, head of the expert scientific board of UAVtormet, further elaborates that scrap is also stored in the warehouses of the State Border Service, the National Police, and the SBU. The scrap yards’ necessary guard and monitoring duties result in the ministry spending money, rather than earning from scrap sales.

Trade complexity

The intricacies of trading ferrous metal scrap held in Ministry of Defense warehouses are rooted in the fact that transactions have to be carried out in conjunction with approved governmental entities, according to Koval. Currently, collaborations are only in operation with three state-owned enterprises, namely “Ukroboronservis”, “Ukrspectorg”, and the “Cherkassky Automobile Repair Plant”

Photo credit: Reddit / Getty Images

When it comes to the sale of scrap that contains precious metals, complexities tend to increase. In Ukraine, only six specialized private processing enterprises deal with such commodities. Of the six, only two have reached the stage of forming agreements with the Ministry of Defense – these being “Solaris” and “Hyacinth”, as Koval clarified. 

In recent years, due to the unique elements of the implementation process, there has been a noticeable accumulation of scrap in the ministry’s warehouses, as Koval highlighted. The potential risks of not receiving funds and associated legal outcomes deter many from handling the transfer of these materials. 

Scrap prices are not tempting

On the economic front, the current going prices for scrap are not particularly tempting in the Ukrainian market. Koval pointed out that the average rate for ferrous metal scrap teeters is around $185-$195 /t, while alloy steel experiences zero sales.

Photo credit: Telegram

Crossing into Poland, however, sees a spike in rates where a tonne of carbon steel scrap can go for $326-348, and alloy steel from $545, as reported by UAVtormet’s Sheiko. Notably, the processing cost of a tonne of military scrap in Ukraine is nearly identical to, if not slightly above, the market rate by 10-15%. 

Increase in exports

Throughout the first ten months of 2023, there has been a fourfold surge in the export of waste and scrap from ferrous metals, approximating 147,000 tons, in comparison to the same timeframe the previous year. This is reflected in the State Customs Service’s data.

The monetary value of scrap metal exports during this period reached $42 million, showcasing a growth of 2.9 times. However, it is imperative to note that the Ministry of Defense has prohibitions in place against exporting ferrous and non-ferrous conversion scrap.

“The steel in enemy armored vehicles only contributes to about 5% of the newest Ukrainian steel,” stated Yury Ryzhenkov, the CEO of Metinvest group, during a July interview for the FAQ talks project. Metinvest holds the title of the largest producer of iron ore and steel in Ukraine, as well as one of the major contenders within the CIS. 

As explained by Sheiko, the scrap metal, predominantly from Russian armored vehicles, comprises three distinct types of metal. Only a third of this can be flexibly processed in Ukraine. Another third is only touched by a small portion of Ukrainian enterprises. The remaining third, which is alloy steel scrap often imbued with ‘exotic’ other metals like niobium, molybdenum, tungsten, etc., wasn’t fully processed in Ukraine before the war. 

Photo credit: The War Zone

Nearly $200 million

If the government decides to ban the export of military scrap, other options arise such as establishing processing in Ukraine. Already there have been parties showing investment interest, says Sheiko. As per the calculations by “UAVtormet”, approximately 7 billion UAH [$200 million] could be made from the military scrap sales, potentially creating between 2000-2500 new jobs locally. 

Sheiko noted that several foreign entities are weighing up the establishment of processing centers or industrial park manufacturing grounds. Things have already progressed beyond mere discussion, with some companies sussing out land for miniature metallurgical plants. 

Investor access

What does the Ministry of Defense ask for? They want to offer potential investors access to their sites and make the process of transferring surplus property much simpler. The ministry has initiated a resolution with such suggestions, awaiting the Cabinet of Ministers’ deliberation, Koval states.

If the government backs this document, by year-end or early next year, the Ministry of Defense can independently offload this scrap through open platforms like Prozorro. Awaiting the green light are the Ministry of Finance, the Ministry of Economy, and the Ministry of Strategy and Industry. 

Photo by Vitalii Hnidyi

While waiting for the resolution, the Ministry of Defense discovered a method to transfer over 1.4 kg of gold found in its warehouses to the National Bank, the first occurrence in history, notes Koval. This gold initially bought for the Armed Forces of Ukraine’s polyclinic dental offices, is estimated to garner approximately UAH 3.5 million [$96K] by this year’s end. 

Filling the budget

Koval adds that 80% of these revenues will replenish the state budget while the remaining 20% will trickle into the Ministry of Defense’s special fund. This fund’s proceeds are then allocated across the department’s financial programs. 

The department plans to enhance budgets through the selling of the remaining scrap, which contains precious metals. Nearly 541 tons of such scrap are presently managed by Koval.

Optimistically, about 100-200 kg of pure precious metals could be retrieved each year during the processing, mainly comprising silver, clarifies Volodymyr Milakov, a specialist at the Kyiv Chamber of Commerce and Industry. The Ministry of Defense foresees an annual revenue of around UAH 10 million [$275K] by selling scrap laden with precious metals.

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