Room for growth: What’s holding back the defense industry and what needs to change
Ihor Kopytin, Member of Parliament of Ukraine
Over the past three years, Ukraine’s defense industry has demonstrated record growth. However, there are negative factors that hinder the development of the defense industry. Addressing these issues will contribute to the sector's sustainable strengthening and enhance its competitiveness on the global market.
Globally, the demand for security is on the rise, and every country is now reviewing its plans to build reliable protection against risks, gradually increasing the share of the budget allocated to defense and the production or procurement of necessary weapons. Recently, the EU adopted its first-ever European Defence Industrial Strategy. It envisions greater investment in the development of the defense industry -- meaning billions are set to be poured into the EU's defense sector. But what about Ukraine? Our defense industry, with an estimated production potential of $35 billion, remains under the influence of negative factors that hinder its development and undermine the prospects for scaling up. So, what’s really going on—and is there a way out?
Where's the Money? Why Ukraine's Defense Industry Is Struggling with Underfunding
A lack of funding is currently the main issue raised by Ukrainian defense industry manufacturers. The production capacity of the companies significantly exceeds the financial capabilities of the state budget, creating a substantial gap between potential output and actual government orders. In practice, the volume of state procurement for defense products is three times smaller than what companies are ready—or already able—to produce. For example, the Ministry of Defense may place an order with a manufacturer for 50 UAVs, while the company could easily deliver 600 or even 1,000 units within a short timeframe. Naturally, such small contracts can provide limited support to producers—but only for a very short period. And this brings us to the second major issue.
The second major issue: the Ministry of Defense does not sign long-term contracts—such as for two or three years. This makes it impossible for manufacturers to plan production volumes over extended periods, which in turn affects their working capital and deters investment in development. After all, there is no clarity: you may invest $2 million today into new research, development and equipment, but a year later there are no orders—and therefore no return on investment. Naturally, when it comes to long-term contracts, legislation must be taken into account. Unfortunately, such forward-looking procurements are not currently provided for under the Law on the State Budget. This means there is important work to be done in parliament to revise the legal framework in a way that better supports domestic manufacturers.
The third issue: critical underfunding of certain manufacturers—particularly those working on electronic intelligence (ELINT) and electronic warfare (EW) systems. Official data shows that this sector is currently contracted at only 10% of its capacity. What does that mean for companies? Production lines are being halted, employees are being moved to shortened workweeks, placed on unpaid leave, or even laid off altogether. There is also a severe lack of funding for the development and testing of new technologies. In practice, this leads to a situation where domestic production grinds to a halt—while the state turns to foreign markets for procurement. This is illogical, and it simply shouldn’t be the case
Beyond Budgets: How Bureaucracy and Corruption Hold Back the Defense Industry
It’s not just the lack of funding that hinders the active development of the sector. There are also several other issues that the state is fully capable of addressing—provided that government institutions begin to carry out their functions effectively.
What is it all about? Primarily Bureaucracy and Inefficiency Within the State Apparatus. Unfortunately, state and procurement procedures often stall the production process. Companies may wait for months to receive approvals, sign-offs, or other bureaucratic clearances. In effect, whether deliberately or simply by blindly following procedures, officials delay decision-making and the start of work on critical projects. Time passes — but nothing is being produced. Meanwhile, there are growing concerns on the front lines about the pace and reliability of deliveries. This “come back tomorrow” approach — if we can call it that — critically undermines the efficiency of defense manufacturers. And if we also factor in the not-always-transparent tender processes, where companies with no proven track record suddenly win contracts, we end up with a situation where production volumes shrink, employees are laid off, and there is no room for innovation or investment.
And let’s not forget — the corruption octopus is still very much alive in Ukraine, and it seems to feel quite at home here. Abuses of public funds and various corrupt schemes lead to inflated defense contract prices, kickbacks paid to certain individuals in exchange for contracts, and other financial manipulations. All of this stems from a lack of proper oversight and control, as well as the absence of thorough audits and project performance checks. The result is bleak: misuse of state funds, inefficient spending, and serious obstacles for manufacturers who refuse to play dirty and expect the government to operate transparently and within the law. Meanwhile, defense contracts continue to be awarded to companies with no relevant experience or capacity to deliver on them.
Solving the Key Issues: How to Support the development of Ukraine’s Defense Industry
Naturally, the state must take responsibility for gradually resolving the key issues that are slowing down the sector’s development. First and foremost, this means ensuring government investment and consistent contract financing, along with long-term procurement planning and a steady flow of orders to manufacturers. This would allow companies to forecast production volumes and invest in growth. Ensuring a stable pipeline of contracts would enable enterprises to plan effectively and provide the motivation to expand their manufacturing capacity.
The development of Ukraine’s defense industry is impossible without reforming the contracting system — only then can manufacturers count on stability and predictable financial flows. A long-term contracting framework with the state as the main client is something defense companies have long been waiting for. It’s also exactly what could unlock domestic investment from private players in the sector.
One of the key support measures for Ukraine’s defense industry should also be direct government investment — particularly through targeted funding programs for new developments. This would help strengthen the sector’s R&D capabilities and accelerate the rollout of innovative products. Loan programs also play an important role. Last year, the government introduced a preferential loan scheme for arms manufacturers, offering a 5% annual interest rate. But so far, its impact remains limited: in the first quarter of this year, only 463 million UAH in soft loans were issued. Given the number of companies in the industry and their actual needs, this is, unfortunately, just a drop in the ocean. That’s why continued work with the banking sector, ministries, and agencies is crucial. We need to dig into state budget execution data to find ways to channel more funding into affordable loans for defense producers.
It’s also crucial to support domestic defense companies in building international partnerships. This opens up new opportunities for growth — European investments often come with the potential for innovation development and expanded production capacity. All of this contributes to the overall financial stability of the sector. While collaboration with certain countries and technology sharing can drive both broad-based growth in the defense industry and progress in specific areas. Moreover, international partnerships are key to boosting the global competitiveness of Ukraine’s defense sector. They bring in additional investment, raise transparency standards, and improve the efficiency of enterprises and funding procedures.
It is known that Ukraine continues to receive arms supplies from international partners under the so-called “Danish model” — a system of EU security loans that allows member states to fund military procurements for Ukraine. The Ministry of Defense is actively working to expand this mechanism and scale up the Danish model. That’s why it’s essential for Ukraine to continue its consultations with European partners in order to forge new agreements with european countries on co-financing arms purchases from Ukrainian companies within this framework. By increasing EU funding tranches for procurement from Ukrainian manufacturers, the country’s defense industry will gain crucial investment needed for its further development.
Defense exports are another key solution — and one that depends entirely on the state. Ukrainian manufacturers lack the funds to scale up production, modernize equipment, or launch new divisions.
Attracting the necessary working capital to the sector could enable the launch of controlled exports of defense industry products.
Certainly, the issue of arms exports needs a comprehensive approach — one that brings together the perspectives of the Ministry of Defense, the government, industry players, and national security experts. It’s a major strategic decision that pave the way for launching new defense production lines in Ukraine, creating thousands of jobs, and attracting billions of dollars in investment into the defense sector. A controlled export system would give manufacturers a way to sell more of what they’re already making — which means more stability for the entire sector and a strong foundation for future growth.
Without overcoming bureaucracy and corruption, it is impossible to count on investments or the rapid development of the Ukraine’s defense industry.
The sector needs streamlined procedures, along with the introduction of automation and digitalization of certain processes. Some simplification is already underway: for instance, the Cabinet of Ministers recently adopted Resolution No. 763 “On the implementation of an experimental project for the production, procurement, and supply of ammunition.” This move simplified the import process for explosives and other ammunition components. The changes made it easier to import explosives, initiation systems, and explosive-containing devices for manufacturers that don’t currently have state contracts. This model could also be applied to other procedures. For example, it is known that there’s a pressing need to unify technical requirements for UAVs. This would help create uniform standards for evaluating manufacturers’ products and simplify the public procurement process.
In addition, it’s worth implementing open and transparent tenders in areas where this does not threaten national security or defense capabilities. Involving independent experts in evaluating bids would help improve and fine-tune the new processes. And of course, we need regular, high-quality audits and tighter oversight of defense projects under state contracts to eliminate even the possibility of malversation.
Ukraine’s defense industry is growing and evolving, but as a strategic sector crucial both for national security and the country’s GDP, it must receive strong support from the state. What’s needed is a robust, systemic approach that positions the defense sector as a true national development priority. This should ensure the removal of key obstacles that currently hinder progress and prevent the industry from reaching its full potential. We need a resilient and competitive defense industry, and therefore solving the sector’s most urgent problems must become one of the state’s top priorities right now and immediately.