FPV drones, artificial intelligence, and other cutting-edge technologies have fundamentally reshaped the landscape of modern warfare. In this context, what accounts for the remarkable surge in Ukraine’s defence innovation market since the onset of the full-scale Russian invasion?
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Rapid growth of the defence technology market
Since the onset of the full-scale Russian-Ukrainian war, sweeping changes have reshaped the landscape not only of regional and global geopolitics but also of every sector of the economy.
Among the most significantly impacted is the information technology sector. Even prior to 2022, Ukraine’s IT industry was among the fastest-growing in Europe, but the full-scale invasion has propelled its defence technology branch to the forefront. This sector encompasses a variety of innovative technologies deployed directly in combat zones and in ancillary areas such as demining and cybersecurity.
According to DataDriven, Ukraine’s defence technology market more than doubled in 2023, surpassing $400 million. Today, over 300 defence tech companies are operational in the country, with the largest segments comprising drones (19%), robotics (13%), and artificial intelligence (13%). Overall, Ukraine’s domestic defence market is projected to reach approximately $5 billion by 2024.
The production of unmanned aerial vehicles (UAVs) is the fastest-growing sector within Ukraine’s defence technologies. Driven by substantial state investments, drone production soared more than 100-fold in 2023. By the summer of 2024, an impressive 96% of UAVs acquired by the government were manufactured domestically. The Ministry for Strategic Industries projects that Ukraine will produce 1 million FPV drones and a total of 2 million drones of all types by the end of 2024.
Financial incubators are crucial to the advancement of this sector. The largest, Brave1, was established by the government in 2023 as a military technology development cluster. In the past year, it has allocated $3.7 million in funding to defence tech companies, with plans for $39 million in investments in 2024. With Brave1’s backing, successful projects include Roboneers (focused on ground-based robotic platforms), Kvertus (which develops electronic warfare systems), and FoxFour (which applies artificial intelligence to drone technology).
Private accelerators such as D3, Freedom Fund, and Green Flag Ventures are also making their mark. They primarily target UAVs, electronic warfare, AI robotics, cybersecurity, and demining while also investing in other promising technologies with significant growth potential.
Drivers of development and market challenges
DataDriven identifies several key factors driving the rapid growth of Ukraine’s defence tech market. The full-scale war has created an urgent strategic necessity for the rapid modernisation of the military-industrial complex. State support and increased defence spending have made funding for the sector, particularly defence technologies, a top government priority. Additionally, a favourable environment characterised by various investment programmes, funds, and the availability of essential resources has facilitated the emergence of hundreds of new manufacturers. Moreover, access to financing has improved significantly, with private, state, and donor funding becoming more readily available for defence tech startups.
On the other hand, several limiting factors impede the growth of Ukraine’s defence tech industry. Market restrictions, notably the ban on exporting defence products, confine demand to state orders, hindering the industry’s development as companies are unable to sell surplus goods abroad. Additionally, the lack of long-term plans poses challenges; with state orders largely confined to short-term contracts, manufacturers find it difficult to strategise for the future. Access to skilled labour further complicates matters, as only a limited number of specialists possess the necessary expertise in defence tech, and many of them are not exempt from mobilisation.
The government’s efforts to implement standards within the sector could soon create a significant challenge for defence tech companies. Presently, the absence of stringent regulation serves as a crucial catalyst for market growth. Therefore, the government must tread carefully when considering any restrictions, as overly rigid measures could stifle innovation and hinder progress in this rapidly evolving field.
State regulations
Three ministries currently oversee state regulation of defence procurement in Ukraine. The Ministry for Strategic Industries is tasked with procurement planning, while the Ministry of Defence manages the utilisation of military products. Additionally, the Ministry of Digital Transformation focuses on technological initiatives, including the notable Army of Drones project. This tripartite structure aims to streamline and enhance the effectiveness of defence procurement processes in a rapidly evolving landscape.
The National Defence Procurement Agency operates under the Ministry of Defence, engaging in agreements with manufacturers of defence products. Starting from January 1, 2024, all procurement activities conducted by the Ministry of Defence will be channelled through this agency, which has secured contracts worth $5.8 billion for the upcoming year. Analysts at DataDriven regard the aforementioned export restrictions as the most significant challenge confronting Ukrainian defence tech. The Ministry of Defence justifies these restrictions for two primary reasons: first, that goods sold abroad may ultimately be acquired by forces hostile to Ukraine; and second, that Ukrainian manufacturers currently lack the capacity to produce an “export version” of their products, which could effectively protect original technologies from being replicated.
A negative consequence of these restrictions is the substantial loss of opportunities to access international markets. This situation incentivises investors to circumvent the existing limitations, for instance, by registering products in foreign jurisdictions. As a result, Ukraine faces the risk of losing valuable investments, while its production capabilities may gradually migrate to other countries.
Future of defence tech
Despite facing several constraints, Ukraine’s defence tech sector is poised for significant growth in the coming years. As long as full-scale Russian aggression persists, the Cabinet of Ministers is committed to increasing funding for technological advancements, with the overarching aim of achieving self-sufficiency in defence industries and reducing reliance on exports.
Should hostilities cease and international trade resume, Ukraine stands to emerge as a global leader in defence technology. The foundation for this potential success lies in maintaining a regulatory environment that avoids stringent state oversight and imposes a minimal tax burden on defence tech manufacturers.
Even amid the challenges of full-scale war, Ukrainian businesses have demonstrated a remarkable capacity for innovation, suggesting that, when afforded entrepreneurial freedom, they can attain positions of global leadership.
