We should prevent that Ukraine becomes an arms hub

As the war in Ukraine drags on, Western support is helping the country rapidly build up its arms industry, aiming at a higher degree of independence from Western military aid. With significant government funding and a focus on innovation, Ukraine is ramping up its production, especially of drones. This guest blog explores Ukraine’s approach, the role of international support, and the long-term dangers of an expanding arms sector infamous for corruption and exports to highly problematic destinations.

Guest blog by Josephine Solanki

Government investment in the arms industry

Since Russia’s full-scale invasion in 2022, Ukraine has invested heavily into its arms industry, with the goal of becoming more independent from Western military aid. The Ukrainian government is working on its ‘Strategy for Innovative Development of Ukraine until 2030’ which particularly aims to support the arms industry. Moreover, the Ukrainian Startup Fund, overseen by the Ministry of Digital Transformation, has become the country’s largest angel investor, supporting over 350 startups, a lot of them developing military technology. The government has also launched the platform ‘Brave 1’ with the stated objective of ‘promoting collaboration between all stakeholders’ in the arms industry.

This seems to be bearing fruits: In 2023 alone, Ukraine’s arms industry produced three times more weapons and equipment than in 2022, with expectations that the number will increase sixfold in 2024. According to Defense Minister Rustem Umerov, by August 2024 the government had already spent $7 billion on arms, which had earlier been announced as its entire procurement budget for 2024. 1.5% of Ukraine’s 5.3% GDP growth in 2023 came from the arms industry, a share which is expected to more than double in 2024.

A focus on UAVs

The strategy of expanding the arms industry is particularly focused on Ukraine becoming a global leading producer of comparatively cheap Unmanned Aerial Vehicles (UAVs), with the “Army of Drones” project involving nearly 200 companies that locally produce drones. Over 90% of the drones currently being used in the war are Ukrainian-made, according to Digital Transformations Minister Mykhailo Fedorov. The stated goal for 2024 is to manufacture one million UAVs in total to fight the Russian invasion.

Structures facilitating international investment

Ukrainian arms companies are keen to attract foreign investors and a number of structures have been set up in the last few years to facilitate such investment. Many foreign arms companies are interested. In September 2023, the first International Defence Industries Forum (DFNC1) was held in Kyiv. This brought together 252 companies from over 30 countries that manufacture weapons and military equipment. The Forum has established the Alliance of Defence Industries, which 116 arms companies from 24 countries had joined by September 2024. The first forum was followed by a number of similar events held in different European countries throughout 2024, which were often used to conclude arms production deals.

Another structure is the Ukraine Industrial Base Support Working Group which is part of the international Ukraine Defense Contact Group (UDCG), an alliance of more than 50 countries coordinating the ongoing donation of military aid to Ukraine. The Working Group ‘[c]oordinates efforts to advance a robust Ukrainian industrial base that provides materiel for urgent needs, contributing to Ukraine’s long-term security and economic resilience’. It also facilitates partnerships between Ukrainian and US companies.

Furthermore, the Ukrainian government has launched “ZBROYARI: Manufacturing Freedom”, a global fundraising initiative aimed at attracting donations from national governments for Ukrainian arms production, which had received $671.3 million by September 2024, which is however much below the stated goal of securing ten billion US dollars this year. The contributions stem from Denmark, Canada, UK, and the Netherlands, with a decision on a $2 billion contribution from the US still pending.

NATO and EU support

It is one of NATO’s goals, already proclaimed back in 2016, to build up Ukraine’s arms industry. At the NATO summit in July 2024 then Secretary General Jens Stoltenberg announced ‘We have taken further steps to deepen Ukraine’s interoperability with NATO, bolster Ukraine’s defence industry and enhance cooperation on innovation.’

The EU too is supportive. In September 2024 the ‘EU Defence Innovation Office’ was opened in Kyiv, which among other activities will provide Ukrainian arms companies with information about access to EU programmes and potential funding opportunities. This aligns with the EU’s Defence Industrial Strategy (EDIS), adopted in March 2024, a key focus of which is to support the Ukrainian arms industry. The strategy further proposed that Ukrainian arms companies would be able to participate in the EU’s defence support programme, in joint procurement, and be supported in building capacity and cooperation with the European industry. The EU, in an effort led by Denmark, has also provided €400 million from frozen Russian assets to finance Ukrainian arms companies.

Why is the build-up of the Ukrainian arms industry problematic?

Ukrainian arms companies are lobbying the government to allow the export of weapons abroad, something which is currently forbidden due to the ongoing war and would require legislative changes. The Ukrainian arms industry has the capacity to produce arms worth $20 billion a year, but is currently producing arms worth $6 billion due to funding constraints by the Ukrainian government.

“Weapons made in Ukraine and tested in real combat are of interest to many countries around the world. Ukrainian manufacturers could have queues of buyers and contracts for years to come if arms exports were not blocked,” said Ukrainian MP Halyna Yanchenko in Politico, arguing in favour of allowing exports.

Arms exports from any country are problematic, but even more so in the case of Ukraine: The country is infamous for high levels of corruption in the arms industry that fuel legal and illegal arms transfers to highly problematic destinations. Despite having official export regulations in place that are comparable to EU standards, Ukraine has been known for exporting to countries that fall under an arms embargo, such as South Sudan between 2006 and 2008. It has also been used as a transit country for exports to countries under an arms embargo.

Because of that, it is possible that in the long-term Western arms industries might start using Ukraine as a starting point for exports that are deemed too problematic for their own countries. This could be done through setting up joint ventures with Ukrainian firms that are then used to circumvent export controls. Whatever the defense needs of Ukraine, we need to address the risk that building up a Ukrainian arms industry leads to uncontrolled arms exports by Ukrainian and western arms industries, fueling wars and conflicts in the rest of the world. The only way to prevent this from happening would be strict regulations, which in the current climate of militarisation frenzy are unlikely to materialize.

Individual countries and companies’ concrete investments

• Czech republic
• • At the Eurosatory arms fair in June 2024 Ukraine signed a joint production agreement with subsidiaries of the Czech company Colt CZ to produce ammunition and rifles.
• Denmark
• • In June 2024, the Danish government signed a memorandum on the purchase of weapons and equipment from Ukrainian manufacturers, becoming the first NATO member to agree to such an investment.
• France
• • At the Eurosatory arms fair in June 2024 Thales signed a memorandum on the establishment of a joint venture in Ukraine that will repair and modernise equipment for electronic warfare, communications, air defence systems and radars.
  • Other agreements were signed with the company Hexadrone on the joint production of UAVs, as well as with French companies Exail and Arquus.
• Germany
• • In June 2024, the first joint venture between Ukraine’s state-owned arms conglomerate Ukroboronprom and German arms giant Rheinmetall commenced operations. This facility focuses on the repair of armoured vehicles. Rheinmetall aims to build at least four factories in Ukraine.
• Netherlands
• • In March, the Netherlands and Ukraine signed an agreement on security cooperation that also mentioned that ‘The Netherlands will work with Ukraine to contribute to the development of Ukraine’s defence industrial base.’ It specifies that this contribution will involve developing a strategic cooperation roadmap on the arms industry, identifying funding sources, addressing production bottlenecks, as well as Dutch investment and financial assistance.
  • The Netherlands has allocated €60 million for the purchase of drones for Ukraine. Of this amount, €17.5 million will be spent on Ukrainian-made maritime drones.
• Sweden
• • In August 2023 Ukraine and Sweden said they would jointly produce CV90 infantry fighting vehicles in Ukraine. They have also discussed the production, repair, and maintenance of VS90s in Ukraine.
• Turkey
• • In February 2024, the Turkish arms company Baykar began constructing a factory in Ukraine (Kyiv region), with completion expected within a year.
• United Kingdom
• • In October 2024, BAE Systems secured a contract to maintain and repair L119 Light Guns in Ukraine, following the establishment of a local legal entity in Ukraine.
• USA
• • In July 2024, the first foreign representative office of Ukraine’s state-owned arms conglomerate “Ukrainian Defense Industry” (UDI, also Ukroboronprom) opened in Washington, DC.
  • The MITS (Might) accelerator was launched in Kyiv, a collaboration between Ukrainian and US partners: MITS provides startups with US$200,000 in investment.
  • Northrop Grumman recently signed an agreement with UDI to produce NATO-standard medium-caliber munitions. In addition, Boeing and Ukraine’s Antonov Company signed a memorandum of understanding to collaborate on unmanned systems, including training, logistics and the maintenance of drones.
  • The US and Ukraine are jointly developing the FrankenSAM project, a hybrid air defence system consisting of missiles and launchers that are not intended to be used together.
  • Ukraine is currently waiting for the final decision from the US on the allocation of $2 billion from the Defence Enterprise Fund to the ZBROYARI: Manufacturing Freedom initiative.
• Private Funds
• • The Ukrainian Freedom Fund (UFF) and D3 Venture Capital Firm have committed around US$50 million to support Ukrainian arms industry startups.
  • The Green Flag Ventures Capital Fund, led by American entrepreneur Justin Ziff and his partner Deborah Fairlamb, has announced an investment in Ukrainian Karadag Technologies.

Josephine Solanki, Transnational Institute. Nov 7 0224

This guest blog is an outcome of the Stop Wapenhandel Arms Trade Research Lab.