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Ukraine’s state defense conglomerate UkrOboronProm transformed into stock company

by Illia Ponomarenko March 29, 2023 1:38 AM 6 min read
Ukrainian soldiers load ammunition into tanks on the front line near the towns of Vuhledar and Mariinka in Donetsk Oblast on Feb. 14, 2023. (Mustafa Ciftci/Anadolu Agency via Getty Images)
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The long-running drama over the reform of UkrOboronProm, Ukraine’s problematic state-owned defense production giant, is seeing a new round amid Russia’s ongoing full-scale invasion of the country.

On March 21, Ukraine’s Cabinet of Ministers issued a decree initiating the conglomerate’s transformation into a stock company titled the Ukrainian Defense Industry. The government is the sole owner of the company’s shares.  

According to the decree, the new structure will facilitate the introduction of corporate governance at numerous state-run defense enterprises under the conglomerate’s control and open more opportunities to attract investment.

In anticipation of a new wave of criticism, Ukraine’s Prime Minister Denys Shmyhal noted that the reform was not just another “nominal change” but “a reform that has been in preparation since long before Russia’s full-scale invasion.”

“Ukraine strives to create one of the world’s most powerful defense production industries,” Shmyhal said on March 21.

The government also said the decree gives a go to approve the company’s charter and regulations on the supervisory board. As of March 28, neither document was made public by the Ukrainian government.

The Ukrainian Defense Industry is expected to have the authorized capital of Hr 237 million ($6.4 million) that will be formed from acquiring UkrOboronProm properties, according to Taras Melnychuk, the government’s representative at the Verkhovna Rada.

Incomprehensible attempts to reform the state-run defense conglomerate date back to the earliest periods of Russia’s war in Ukraine in 2014.

UkrOboronProm was established in 2010 as a quasi-ministry exercising strict control of over 100 of Ukraine’s critical state-owned defense enterprises, including key manufacturers like the Antonov Company or the tank manufacturers and repairers in Kharkiv, Kyiv, or Zhytomyr, still largely the Soviet era legacy.

The corporation is widely criticized for endemic corruption, obsolete management, and poor performance in domestic and export markets. The company has been losing its role in the rapidly growing global arms sector.

In the annual rating of the world’s top 100 defense companies by Defense News, UkrOboronProm dropped from 68th in 2016 ($920 in total annual revenue) to 97th in 2021 (with $1.3 billion in total).

After years of bureaucratic ping-pong, the Ukrainian parliament, in July 2021, finally passed a long-overdue bill on the conglomerate’s shift to a stock company. The UkrOboronProm’s enterprises were to adopt corporate governance under the Organization for Economic Co-operation and Development (OECD) standards.

According to the plan, UkrOboronProm was to be restructured as two major holdings.

The first one, preliminarily named the Defense Systems of Ukraine, was to manage 65 enterprises divided into several industrial clusters specialized in aircraft repairs, armored vehicles, high-precision weapons, munitions, and radar and maritime systems.

The other holding was to specialize in aircraft and space components.

Besides, the new companies were also supposed to retain their affiliates managing foreign arms sales and bidding contracts.

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Under the plan, the new UkrOboronProm’s reformed enterprises would be finally entitled to act independently and seek investments in production and research. Also, companies were supposed to be entitled to dispose of their surplus assets (such as non-used premises or land plots) and use the gained funds for their development only.

The decree, passed by the government in March, begins the implementation of this plan.

According to StateWatch think tank, the governmental decree gives the reformed UkrOboronProm’s successor a chance to establish transparent corporate management with safeguarding mechanisms to prevent political influence and long-ingrained nepotism.

The new management and supervisory boards must be appointed under open bidding procedures with strict public oversight, meant to give a chance to motivated and qualified candidates coming from beyond the corruption-riddled defense production system.

However, during wartime, the Ukrainian defense production sector faces two critical problems that derail the long-suffering reform.

One of them is the chronic lack of funding.

With the Russian invasion, the UkrOboronProm lost some 50% of its gross revenue, mostly due to foreign arms and services contracts terminated due to the war, said StateWatch’s expert Hlib Kanievsky.

“Now, it’s all about staying afloat, not development, at best,” Kanievsky said.

“Thus we’re not having a boom in the production of new weapon systems.”

The corporation is now mainly focused on repairing and modernizing Ukrainian military hardware coming in directly from battlefields. On March 23, the company reported a total of 3,000 Ukrainian armored vehicles repaired over the last 12 months of the war. And up to 95% of vehicles were restored by mobile repair teams in close proximity to front lines.

“What the UkrOboronProm makes from domestic contacts to sustain the military covers nothing but its immediate operational costs,” Kanievsky said.

“And this severe lack of funds may undermine the whole corporate management reform. If there are no funds, this company will not be of any interest to investors. It would be doomed to be what the old UkrOboronProm was, losing its qualified personnel and modern manufacturing capabilities.”

Ukraine has to mass purchase Soviet-standard munitions from all across the world, mostly former Warsaw Pact nations, to try and keep up with the military’s giant battlefield spending. And it continuously needs munitions and supplies here and now in extreme quantities.

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Again, this leaves the country’s defense production sector with little to no budget funding on launching and sustaining its own manufacturing. And this, the nation ends up being systemically dependent on external munitions supplies and vulnerable, the expert said.

The Ukrainian government does not disclose any information regarding the damage to the country’s vital defense production facilities from Russia’s year-long bombing campaign. However, in December, UkrOboronProm reported that over seven months of 2022, it had transferred to the Ukrainian military seven times the amount of hardware produced in 2021.

In late 2022 and early 2022, the company also said it had launched the serial production of high-deficit 82-millimeter and 120-millimeter mortar rounds and 125-millimeter tank projectiles, and 122-millimeter artillery shells.

The production is said to be launched with UkrOboronProm facilities in “NATO countries.” The output scales remain undisclosed.

The other problem impeding wartime production inside Ukraine is the lack of strategic planning in the government, as StateWatch’s Kanievsky said.

Ukraine’s Ministry for Strategic Industries was incepted in July 2020 as a result of a highly-criticized initiative to establish a full-fledged government body supervising defense production.

But over a year into a full-scale war with Russia, the ministry remained almost completely non-functional. It has not yet developed any long-lasting, comprehensive strategy that could gradually enable the mass production of hardware and munitions in Ukraine.

“For instance, when it comes to the recently-approved corporate reform decree, the UkrOboronProm filled all necessary documents as far back as June 2022,” Kanievsky said.

“But the decree was passed in March 2023. Because the ministry failed to exercise its immediate functions and represent the defense production sector within the government.”

On March 21, the Ukrainian parliament endorsed the appointment of Oleksandr Kamyshyn, the former management board chairman of state railways monopoly Ukrzaliznytsia, as the new minister for strategic industries.

“I expect him to apply his energy to fixing the sector’s issues,” Kanievsky said.

“But we have wasted time again, and we are again placing our hopes not on an institution, the ministry, but a person who may or may not be successful.”

Note from the author:

Hello! My name is Illia Ponomarenko, the guy who wrote this piece for you.

I hope you found it useful and interesting. I work day and night to bring you quality stories from Ukraine, where Russia is waging the biggest war in Europe since WWII. My little homeland, Donbas, is now the site of the worst fighting. We are helping to keep the world informed about Russian aggression. But I also need help from every one of you — to support Ukrainian wartime journalism by donating to the Kyiv Independent and becoming our patron. Together, we can help bring peace to Ukraine.

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