Ukrainian Government and Ukroboronprom Deadlocked Over Debt and Production Problems at Mykolaiv Shipyard

Where there is bureaucracy and waste, inevitably there has been the opportunity for on-going corruption. And such a situation is only aggravated by misplaced state secrecy. In Ukraine, there perhaps has been no greater symbol of on-going poor decision making, planning, bureaucracy and waste than the Ukrainian naval vessel Ukrayina.

The Ukrayina, a Slava-class missile cruiser, formerly known as the Admiral Flota Lobov, or Project 1164, was laid down in 1983 and launched in 1990, as the Soviet Union imploded. Docked in the Mykolaiv North Shipyard, formerly known as the 61 Communards Plant, this Soviet cruiser was designed to accommodate anti-ship, anti-submarine, anti-air and electronic fire control systems (Flot2017.com, February 1, 2011).

In 1993 The Russian Navy disavowed claims to the cruiser, passing it to the Ukrainian Navy at a time when neither country was in a financial position to complete and commission the vessel. Project 1164 was thus never completed. It remains docked at the Mykolaiv Shipyard in a state of permanent preventative maintenance (Flot2017.com, February 1, 2011).

In February 2015 the Ukrainian Ministry of Defense disavowed the Ukrayina, a vessel that it had never requested and that had no place in the plans for a post-Crimean-annexation, new Ukrainian Navy. Consequently, financing for the maintenance, ecological management, and fuel to turn the engines over during the winters has been absent. Wages, too, have not been paid. The current debt is estimated at 58–60 million hryvna (approximately $2.3 million) (Rian.com.ua, August 23, 2017).

Overbearing bureaucracy tends to attract waste and corruption, leading to the absence of external investment (UkraineAlert, January 4, 2018) as well as inevitable delays. And regarding the Ukrayina, since February 2015, the Mykolaiv Shipyard claims to have written to its parent company (the state-owned military industry enterprise Ukroboronprom) 13 times, President Petro Poroshenko 6 times and Prime Minister Volodymyr Groysman 7 times relating to funding to maintain the vessel and unpaid wages—to no avail (Rian.com.ua, August 23, 2017).

Meanwhile, Ukroboronprom also claims to have repeatedly approached the Ukrainian Cabinet of Ministers seeking a decision over funds to resolve the debt issue and the future of the cruiser Ukrayina. And on October 30, 2017, the state-owned defense firm appealed to the secretary of the National Security and Defense Council (NSDC), Oleksandr Turchynov, to bring about a solution (Niknews.mk.ua, October 31, 2017).

The following day, October 31, Ukroboronprom announced the suspension of all works at the Mykolaiv Shipyard due to its accruing debts of 58 million hryvna (UAProm, October 31, 2017). The facility produces and repairs both military and civilian vessels (Shipyard61.com.ua, accessed January 9, 2018). Notably, according to its website, this shipyard’s main naval products include two armored gunboat classes (the 20-meter Gyurza and the slightly larger Cayman-80), a Universal-300-class patrol boat, and two corvette types (the Mistral-1500T- and the Mirage-class). These smaller vessels are precisely the kinds of ships the Ukrainian Navy is looking to acquire quickly and in large numbers in order to fulfil its goal of developing its “Mosquito Fleet” concept while money is tight and Russian presence in Ukrainian littoral waters remains high (see EDM, March 9, 2017; April 12, 2017).

In November, Prime Minister Groysman expressed confidence that Ukroboronprom would resolve the 58 million hryvna debt. However, Ukroboronprom stated it was unable to meet such a request until the Cabinet of Ministers decided upon the future of the cruiser Ukrayina and agreed upon a formal plan. On December 13, the Cabinet instructed Ukroboronprom to pay the wage arrears before December 25. But this did not happen. In response, at a December 27 Cabinet meeting, Prime Minister Groysman stated he would apply to President Poroshenko to remove Roman Romanov as CEO of Ukroboronprom. “At one of the previous government meetings, the issue of debt at the Mykolaiv Shipyard was discussed. I instructed the government to sign a debt agreement with the head of Ukroboronprom. The deadline is December 25, today is the 27^th. The debt is not repaid. I heard feedback that they cannot do it. I do not understand this. Therefore, today I will sign a presentation addressed to the president, but I advise the head of ‘Ukroboronprom’ to resign independently today,” the prime minister said. Groysman concluded, “A new manager will come, he will find a solution to repay the debt to working people. So today, I will raise this issue and I hope that the president will very quickly make a decision” (Kyiv Post, YouTube, December 27, 2017).

That same day, in reply, Ukroboronprom published on its website numerous letters to the Cabinet of Ministers, written over several months, drawing certain issues to the government’s attention (Ukroboronprom.com.ua, December 27, 2017). In one of these letters, Ukroboronprom CEO Roman Romanov writes, “ ‘Ukroboronprom,’ in accordance with the Statute, which was approved by the Cabinet of Ministers, has no right to redistribute funds between participating enterprises. If you withdraw funds from other defense industry enterprises such as Antonov, Khmelnytskyi KMB, Morosov, Malyshev Plant, or Artem and others [which also fall under Ukroboronprom], Ukraine will be left without airplanes, tanks and other weapons.” In short, Romanov claims he has no legal scope to smudge or manipulate budget headers and bottom lines and thus cannot and will not comply with the prime minister’s instruction.

Needless to say the outcome has been that the workforce at the Mykolaiv North Shipyard entered 2018 with their wages still unpaid since February 2015. It is unclear whether they will be paid before February 2018, which would mark three years without wages.

The fate of the cruiser Ukrayina is also unknown. It has never been completed. It is not part of the current Ukrainian naval plan. It has been disowned by the Ministry of Defense since 2015. What awaits it? Is it still deemed “military?” Can it be sold? Can it somehow be converted to commercial use? Is it headed for scrap (Kyiv Post, September 18, 2015)?

As a result of the public spat between Ukroboronprom CEO Romanov and Prime Minister Groysman, it remains to be seen how President Poroshenko will deal with the matter. Both men hold their positions due to presidential influence and their perceived loyalty to him. Public and private balancing acts will be necessary to achieve or maintain on all sides, with elections scheduled for March 2019. Moreover, there are unpaid voters at Mykolaiv Shipyard to consider. Against this background, it is difficult to see how restructuring and reform of Ukroboronprom will actually proceed, if at all.