Current state and plans in Ukraine’s defense industry
This year, the Ministry of Defence has been allocated 64.4 billion hryvnias ($2.45bn) from the state budget, which accounts for almost 2.49% of GDP (compared to 2.46%, or 55.9 billion hryvnias last year). What will this money be spent on? Like in 2017, it is safe to say that the military budget is only supposed to address the immediate needs of soldiers (salaries, new uniforms and catering). Total wage costs for servicemen and women amount to 30.7 billion hryvnias. To be precise, remuneration was increased for the soldiers participating in the ATO at the beginning of the year: now a private on the first line of defence will receive 14,500 hryvnias ($535) a month, while his company commander will be paid 18,500 ($685). On January 20, Defence Minister Stepan Poltorak signed off on a concept for the reform of food supply to the Armed Forces. The first stage will switch individual units to the new standards, in addition to educational and medical institutions under the umbrella of the Defence Ministry. At this stage, it is planned to spend around 150 million hryvnias ($5.5m) just on repairs and equipment.
However, the army does not fight on rations alone. One sensitive issue is that of new equipment. The 2017 budget plans to allocate 6.5 billion hryvnias ($240m), or 10% of all the army's funds, to the development of weaponry and military equipment – a record amount for Ukraine. This is more than last year (4.5bn), and a larger proportion of the total funding (10% vs. 7.7%). Unfortunately, it is not certain that this money will be received in full: it was not possible in 2016 because adjustments were made to government programmes. In addition, when these amounts are converted into other currencies (which is necessary for the purchase of modern units and components abroad), the picture is even less optimistic. For reference, current NATO requirements set the level of funding for purchasing new weapons and combat training to at least 30% of the defence budget. The latter must by at least 2% of the country’s GDP. In 2017, Russia is planning to spend about $48 billion on its army. The Poles have allocated $9.6 billion to defence. The USA remains the leader with a base military budget of $546.6 billion for the 2017 fiscal year, representing a third of the total defence spending in the world. However, even with the limited funding Ukraine offers, local defence companies are continuing to work and improve, as the army cannot stop defending the country. Some military equipment is sold at public auction through the Prozorro system (mostly for the National Guard and State Emergency Service), but most is purchased behind closed doors as part of the State Defence Order. Based on data from UkrOboronProm (state-owned defence concern), 2.139 units of new and modernized defence and military equipment were transferred to recipients in 2016. New models are being developed. The key innovation projects include the new cargo plane An-132, Horlytsia and Phantom assault drones, Taipan, Duplet and Kastet combat modules, and the new Myslyvets (Hunter) fire-control system.
Changes in the Ukrainian defence industry are regulated by Cabinet of Ministers Decree No. 19-p, issued in 2016. This decree approved the Concept for the State Programme to Reform and Develop the Military-Industrial Complex until 2020. The main goal is to bring the Ukrainian defence industry to a modern level, which will enhance not only the country's defensive capabilities, but also its competitiveness on the international market. The first phase (2016-2017) of the programme identifies the following key measures:
- providing Ukrainian military units with repaired and upgraded equipment
- setting up mass production of new developments, as well as the repair, preparation and modernisation of existing weapons and equipment;
- introducing an effective cooperation mechanism between the state and defence enterprises in terms of developing and producing weapons and equipment as part of the State Defence Order
- systematically reforming the structure of defence enterprises, restructuring and corporatising them in accordance with modern international standards
- finding measures and arrangements for import substitution and the diversification of export potential
- ensuring the development of constructive military and technical cooperation with partner countries in order to supply Ukrainian military units with weapons and equipment that meet NATO standards
If the programme is successful, the Ukrainian defence industry will be fully independent from the Russian Federation by 2020, with a simultaneous increase in domestic production of equipment and components. In addition, it is expected that efforts to promote Ukrainian equipment on the international market will be intensified. Apart from the above concept, the Government of Ukraine approved the medium-term State Defence Order in February 2017. Such a programme was adopted in Ukraine for the first time and this is a very encouraging sign, as it signifies the adoption of fixed rules for the near future that will help businesses to better find their bearings in the unstable Ukrainian economy. The Order should ensure the predictability of government expenditure, create conditions for the equal use of capacity at different defence enterprises and facilitate their development.
The practical implementation of these measures is a real challenge for Ukrainian authorities. Despite some real progress, the domestic defence industry still has many problems. Not all companies have been able to completely do away with their dependence on parts from Russia. Indeed, alongside the large number of armoured vehicles that have been handed over to the Ukrainian Armed Forces since 2014, there is a problem with combat helicopters. There is still no complete production cycle for these aircraft, as rotor blades for the Mi-24, for instance, are produced in Russia. Some components for armoured vehicles are also made in Russia, which complicates their modernisation. There have been cases of Russian materials used in the production of weapons and military equipment – certain alloys are basically smuggled into Ukraine.
It is not always clear how equipment is distributed between the defence agencies. It is surprising that soldiers on the front line drive around in old Soviet ZiLs, while the National Guard takes delivery of another batch of brand new armoured trucks. An eye-catching recent piece of news was that the patrol police unit in Sarny, Rivne Oblast was given an armoured personnel carrier and infantry fighting vehicle as additional means of transport.
After the recent massive explosion incident at the military storage facility in Balakliya, Kharkiv Oblast, that destroyed a good portion of Ukraine’s artillery ammunition, the issue of supplying Ukraine’s Armed Forces with domestically produced ammunition came to the fore again. At a recent briefing, Defence Minister Poltorak said that "the Government has adopted a concept for the creation of ammunition plants in Ukraine". Although there is no information about this concept on the Cabinet website – it is more likely that the minister was referring to the National Security and Defence Council decision to start "a targeted state programme to create and develop the production of ammunition and special chemical products by 2021" – the overall intentions are sound. Even despite the fact that they seem very delayed, coming during the fourth year of an armed conflict. Even despite the fact that for several years the country's top officials have been talking about the need to build a new ammunition factory to replace the occupied one in Luhansk. Indeed, back in January 2016 the head of UkrOboronProm Roman Romanov said that "this year, as we promised two years ago, you will get the first information on the cartridge manufacturing plant that will provide for our army and country". Before this, in October 2015, then-Prime Minister Arseniy Yatseniuk promised that Ukraine would have a new plant in one year's time. "Next year, a production line of ammunition for small arms will be opened," the official government portal quoted Yatseniuk as saying. Who knows how many more briefings, promises and concepts there will be before the army finally gets its own ammunition, but this calls into question our ability to solve the defence industry's more complex issues.
Chariots of the ATO zone
Nevertheless, there is good news from the Ukrainian defence industry's end users. In comparison with the beginning of the ATO, the quantity and quality of equipment supplied to the army is gradually increasing. This goes for both overhauled Soviet equipment and new models. Indeed, company commander in the 72nd Mechanised Brigade Captain Serhiy Misiura, also known as blogger Captain Price, stated that he recently received several pieces of equipment following repairs and was pleasantly surprised by the quality of the work. According to him, his company has 100% of required military equipment, while neighbouring units are at around 80-90%. A similar opinion is shared by one of the most well-known airmobile units. The chief of staff of one of the battalions explained that new equipment arrives in small quantities, but regularly. Although the soldiers, of course, want more, the weapons they have are sufficient for carrying out combat missions; the brigade already has some units fully equipped with new APCs. The officer also noted manufacturers' active work with users on the ground – the vehicles are constantly being improved. As an example, he mentioned the replacement engine for the BTR-3 armoured personnel carrier that greatly enhanced the reliability of the vehicle as a whole. The problem with the suspension of the Spartan APC was solved in a similar manner – after the first flawed vehicles that simply could not withstand the load of the armoured bodywork (partly caused by misuse due to a lack of APCs at the start of the war), new batches started to take into account the military's concerns. The new Skhval combat module also received positive feedback from paratroopers. Among the problematic issues, in his opinion, is the lack of decent training courses for driver/mechanics. Sometimes, the unprofessional actions of servicemen can lead to the breakdown of even flawless equipment, especially since today's armoured vehicles are more complex than their Soviet counterparts, with electronics and auxiliary systems. The Lviv Armoured Vehicle Factory is attempting to solve this problem in its own way. A spokesperson explained that, in addition to the actual repair of equipment, plant experts invite crews to visit for training, joint tests and problem solving. This allows them to keep in touch with the military and prevents damage to equipment due to a lack of experience.
A common problem for all the armed forces is a lack of motor vehicles. On the frontline, there are not enough all-terrain vehicles to transport personnel and cargo, tow trucks, mobile repair shops and medical vehicles. Overall, the vehicle fleet of military units, although recently updated, still suffers from a large deficit of modern heavy equipment of various types. There is also a problem with light vehicles, especially in small units at the platoon and company level scattered across the front. They are simply not assigned to such units, because the old Soviet concept stipulated that only higher commanders should have a jeep. Long stays in the ATO zone raise a number of everyday issues that could easily be solved by an off-roader. Perhaps, in time the Ukrainian army will be able to afford this "not a luxury, but a means of transportation". Meanwhile, with the help of volunteers, a whole host of old cars, sometimes not cleared by customs, are becoming military "by vocation".
When size matters
The above problems can be solved in different ways. Indeed, according to AutoKrAZ General Director Roman Cherniak, giving priority to domestically produced over imported equipment could significantly improve the situation. Most defence agencies abroad prefer products made in their own country and in tenders to supply equipment local manufacturers get preferences (from 10 to 20%) relative to other suppliers, even those that have an assembly facility in the country. In addition, according to Cherniak, when purchasing vehicles it should be a mandatory condition to order additional units (engines) and other spare parts (15-20% of the vehicle price) in order to ensure high-quality and efficient repair and maintenance work. He considers training sessions for the client's leading specialists critically important (even if the equipment had been supplied before). In this way, the client's experts maintain a relationship with the manufacturer. This also makes it possible to track changes that occur to the vehicle construction in service, identify weaknesses in a timely manner and make design improvements.
Another step that would allow the Ukrainian defence industry to develop properly is a change of ownership at the enterprises. In the US, the majority of defence enterprises are private: there is competition between them, allowing the customer – the Army – to get the best products at the most affordable price. The current system in Ukraine limits the ability of private manufacturers to participate in the creation of new weapons – in practice, the state discriminates against the private sector of the defence industry, which is not conducive to its development. In addition, a private manufacturer must agree the export of its products, prices and right to sign a contract with its own rival – UkrOboronProm. The few private enterprises in the defence field that currently exist in Ukraine get no support from it and additionally have their profits limited to 1%, which is not conducive to the development of production or costly research and development.
The US demonstrates another approach to the operation and development of its defence industry. There, almost a third of the defence budget is spent on weapons acquisition programs, namely on research and development work, as part of the state order (Defense Acquisition System). In addition, the US Ministry of Defense has introduced two programmes to attract small businesses into defence procurement: SBIR (Small Business Innovation Research) and STTR (Small Business Technology Transfer). With these programmes, US federal agencies make it possible for even small research companies to bring their developments to market. It is thanks to discoveries from small businesses under the SBIR and STTR programmes that the US retains its leadership in the field of military innovation. The Defense Advanced Research Projects Agency (DARPA) supports the projects, but officially the SBIR and STTR programmes are coordinated by the government Small Business Administration (SBA). This agency manages extramural funds totalling 2.5% of research budgets. It is interesting that, according to the US Defense Department, more than 50% of funding is allocated to companies with up to 25 employees and a third to businesses with up to 10 people. Moreover, the principle is to selectively target individual projects instead of introducing common benefits or discounts. Therefore, at the start-up stage, a project can receive a grant of up to $100,000 for a period of six months. After evaluating the technical advantages and opportunities of the project, winning companies receive funding of up to $1 million for two years to continue developing their idea, based on results from the first phase. During this time, the developer conducts research and evaluates the idea's commercial potential. The key is that at this stage the government does not impose any requirements on the developer regarding licences, military acceptance procedures, quality control or accounting. In other words, designers can focus on their own ideas instead of bureaucratic problems. The third stage is launching the product, and the inventor receives all intellectual property rights to their product. The state does not spend public money here either – the developer must find funding himself from other government agencies or the private sector. Thanks to the SBIR programme, the US has managed to lower the cost of upgrading military equipment; currently, around 55% of the state defence order is fulfilled by small businesses. In such circumstances, even small businesses are able to compete with industry giants such as Boeing or Lockheed Martin, who in turn are forced to reduce their appetites and optimise, which ultimately makes military equipment cheaper. As an example, we can look at the price of the fifth-generation multirole fighter Lockheed Martin F-35 Lightning II. According to the American analytical publication Defense One, the cost of one aircraft fell from $279 million in 2007 to nearly $97 million in 2017.
The Ukrainian defence industry has huge potential, however it requires a modern approach to management and implementation of new technologies not only on the shop floor, but also in the offices. Constant contact between manufacturers and users, transparent procurement systems and competition rather than corruption – this is the universal recipe for a home-grown defence industry, proven by time and many countries.
Although there’s been a sharp reduction in trade and commercial ties with Russia and in Ukraine’s dependence on its neighbor, some key sectors still show levels of interaction that pose a threat to national security