Ukraine Strengthens National Defense Industry

Executive Summary:

• The Ukrainian defense industry has production capacities for purchasing, producing, and repairing weapons that exceed the available budget and thus needs more external funding from foreign investors.
• The strengthening of Ukraine’s domestic defense sector is critical for providing a steady supply of munitions for the army and for improving Kyiv’s autonomy and self-sufficiency.
• The participation of Western companies carries certain risks due to the fickle nature of politics but can bring significant profits and technological advantages through innovation cooperation.

As elections are happening throughout the West, the issue of aid to Ukraine remains a central topic of debate. Some candidates have expressed their reluctance to continue supporting Kyiv. For example, two days prior to the second-round runoffs in the French legislative election on July 7, Marine Le Pen, leader of the far-right French National Rally party, said that she would oppose Ukraine’s usage of French long-range weapons (likely a reference to SCALP-EG cruise missiles and air-to-surface AASM Hammer missiles). Additionally, she promised not to send any French soldiers to Ukraine, as was proposed by President Emmanuel Macron earlier (CNN, July 5; Ukrainska Pravda; Lefigaro.fr, July 6). While National Rally failed to triumph in the second round of voting, similar discourse has been heard from candidates running in the upcoming US and other European elections (see EDM, July 2; Le Monde, July 6). The issue itself is a common theme among pro-Kremlin entities across the West (RBC-Ukraine, July 8). Previously, Keith Kellogg and Fred Fleitz, former national security advisors to Donald Trump, revealed their peace plan for Ukraine. The draft, allegedly approved by Trump, includes halting US military aid to Ukraine to force Kyiv to negotiate (see EDM, July 2). Such news creates a strategic problem for the Ukrainian leadership about whether Kyiv will be able to ensure the same flow of military aid after elections in some partner states. One solution to this problem is investing more time and resources into further strengthening Ukraine’s national defense industry.

Since the beginning of Russia’s full-scale invasion, Ukraine has embarked on intensive development projects within the defense industry. These efforts have focused on not only increasing production rates more generally but also developing, testing, and launching mass production of completely new weapon systems, such as unmanned naval drones or the 155-millimeter self-propelled 2S22 “Bohdana” howitzer (see EDM, August 18, November 15, 2023, March 26; Kyiv Post, May 1; U24.gov.ua/navaldrones, accessed July 8). According to Ukrainian Prime Minister Denys Shmyhal, production capacity tripled in 2023, and the goal for 2024 is to increase it sixfold. He also said that more than 265 billion hryvnias (around $6.5 billion) will be spent on purchasing, producing, and repairing weapons, which “means more drones, more shells, more ammunition, and armored vehicles for [the Ukrainian] military” (Government of Ukraine, January 3).

Ukraine’s defense industry faces certain difficulties in reaching these goals, including the problem of scaling development and production. The solution here may be to attract foreign companies to speed up the development of production facilities. During the roundtable discussion “Ukrainian Defense Industry and its Capabilities to Meet the Needs of the Frontline,” Yaroslav Kalinin, director of Infozahyst Research and Production Center, which produces signals intelligence, electronic warfare, and cyber defense equipment, addressed another side of scaling problem. He stated, “If we do not bring foreign business here and do not allow local businesses to negotiate terms, then after the victory, we will face the collapse of the military-industrial complex caused by overload” (GDIP.com.ua, February 7).

Another issue is sourcing sufficient funds to support increased production in Ukraine’s war-torn economy. Ukrainian Minister of Strategic Industries Oleksandr Kamyshin has said that Kyiv is seeking funds from the European Union to boost production. According to Kamyshin, Ukraine can develop the proper production capacities, but “the only thing that is missing is funding.” The Ukrainian leadership is currently focused on three key initiatives. First, Ukraine is working to extend European Peace Facility funds to reimburse member states that procure equipment directly from Ukraine. Second, Kyiv is hoping to use the profits from frozen Russian assets for the procurement of domestic military equipment. Third, Ukraine is looking to include procurement from Ukrainian producers into the European Defence Industry Programme (Euractiv, May 9). This is necessary to fill the gap between available capacities and required production (Interfax, April 15).

Several countries have already joined these initiatives. On May 22, Swedish Prime Minister Ulf Kristersson announced a long-term assistance program for Ukraine worth 6.5 billion euros (around $7 billion) from 2024 to 2026 (X.com/SweedishPM, May 22). On June 13, Ukrainian Defense Minister Rustem Umerov signed a memorandum of understanding with his Danish colleague Troels Lund Poulsen on the purchase of weapons and equipment from Ukrainian manufacturers. “This is a big step, as Denmark has become the first foreign North Atlantic Treaty Organization country to invest in arms production in Ukraine,” said Umerov (Ukrainian Ministry of Defense, June 14).

Such support for Ukraine is becoming a priority for the United States. In particular, during the opening session of the Ukraine Defense Industrial Base Conference in Washington, US Defense Secretary Lloyd J. Austin said Ukraine’s ability to produce critical military equipment domestically is key to its ability to maintain lasting freedom and sovereignty within its borders (The Pentagon, December 6, 2023). Additionally, as part of the recently signed US-Ukraine bilateral security agreement, Washington agreed “to engage with international partners and their respective defense industries to support increased Ukrainian production over the long term” (The White House; President of Ukraine, June 13).

Several successful examples of international cooperation with Ukrainian defense companies, both state-owned and private, have already begun. Turkish drone producer Baykar is currently constructing a factory in the Kyiv region (Reuters, February 7). Additionally, German defense company Flensburger Fahrzeugbau has announced the creation of a service center for armored vehicles in Ukraine. The center will reportedly be able to repair “Leopard-1” tanks provided by Germany (Texty, January 9). Rheinmetall, one of the Germany’s largest arms producers, is also building a factory to produce German armored vehicles in Ukraine, particularly “Fuchs” armored personnel carriers (APC) and “Lynx” infantry fighting vehicles (IFV). Rheinmetall CEO Armin Papperger explained in an interview with German weekly WirtschaftsWoche that he expects production of the first Fuchs APC in late summer 2024 and Lynx IFV as early as summer 2025 (WirtschaftsWoche, December 2, 2023). The first part of the factory became operational in June (Ukroboronprom, June 10).

Establishing joint ventures in Ukraine carries several risks. Most apparent is the vulnerability of any stationary facilities to Russian attacks, air strikes, or sabotage. As of September 2023, 37 Ukrainian defense sector companies suffered from Russian attacks, according to Shmyhal (Radio Free Europe/Radio Liberty, September 30). Ukrainian industry is suffering from blackouts and a lack of qualified personnel, part of which were mobilized to the front (Economichna Pravda, September 20, 2023; see EDM, July 3). Additionally, the production of foreign weapon systems requires permits and licenses, which are sometimes held up by political issues.

According to Ukrainian Finance Minister Yulia Sviridenko, the development of the Ukraine’s domestic defense sector could bring additional benefits, including the creation of jobs, support for the national economy, boosting of other sectors of industry, and easier and faster delivery of the equipment to the front (LB, June 18). Most importantly, this could ensure autonomy and self-sufficiency in case of any sharp change in the political situation among Ukraine’s partners. For foreign manufacturers, this means additional profits, first-hand access to the latest Ukrainian projects and experience, and the opportunity to test their equipment in real combat conditions (Polskie Radio, September 30, 2023). Beyond immediate considerations, the state of Ukraine’s economy, particularly the military-industrial complex, will continue to play a significant role in Kyiv’s reconstruction of the country following the war.