Build­ing up ar­mour:

Cur­rent state and plans in Ukraine's de­fense in­dus­try

The Ukrainian Week - - CONTENTS - Yuriy La­payev

This year, the Min­istry of De­fence has been al­lo­cated 64.4 bil­lion hryv­nias ($2.45bn) from the state bud­get, which ac­counts for al­most 2.49% of GDP (com­pared to 2.46%, or 55.9 bil­lion hryv­nias last year). What will this money be spent on? Like in 2017, it is safe to say that the mil­i­tary bud­get is only sup­posed to ad­dress the im­me­di­ate needs of sol­diers (salaries, new uni­forms and cater­ing). To­tal wage costs for ser­vice­men and women amount to 30.7 bil­lion hryv­nias. To be pre­cise, re­mu­ner­a­tion was in­creased for the sol­diers par­tic­i­pat­ing in the ATO at the be­gin­ning of the year: now a pri­vate on the first line of de­fence will re­ceive 14,500 hryv­nias ($535) a month, while his com­pany com­man­der will be paid 18,500 ($685). On Jan­uary 20, De­fence Min­is­ter Stepan Poltorak signed off on a con­cept for the re­form of food sup­ply to the Armed Forces. The first stage will switch in­di­vid­ual units to the new stan­dards, in ad­di­tion to ed­u­ca­tional and med­i­cal in­sti­tu­tions un­der the um­brella of the De­fence Min­istry. At this stage, it is planned to spend around 150 mil­lion hryv­nias ($5.5m) just on re­pairs and equip­ment.


How­ever, the army does not fight on ra­tions alone. One sen­si­tive is­sue is that of new equip­ment. The 2017 bud­get plans to al­lo­cate 6.5 bil­lion hryv­nias ($240m), or 10% of all the army's funds, to the de­vel­op­ment of weaponry and mil­i­tary equip­ment – a record amount for Ukraine. This is more than last year (4.5bn), and a larger pro­por­tion of the to­tal funding (10% vs. 7.7%). Un­for­tu­nately, it is not cer­tain that this money will be re­ceived in full: it was not pos­si­ble in 2016 be­cause ad­just­ments were made to gov­ern­ment pro­grammes. In ad­di­tion, when these amounts are con­verted into other cur­ren­cies (which is nec­es­sary for the pur­chase of modern units and com­po­nents abroad), the pic­ture is even less op­ti­mistic. For ref­er­ence, cur­rent NATO re­quire­ments set the level of funding for pur­chas­ing new weapons and com­bat train­ing to at least 30% of the de­fence bud­get. The lat­ter must by at least 2% of the coun­try’s GDP. In 2017, Rus­sia is plan­ning to spend about $48 bil­lion on its army. The Poles have al­lo­cated $9.6 bil­lion to de­fence. The USA re­mains the leader with a base mil­i­tary bud­get of $546.6 bil­lion for the 2017 fis­cal year, rep­re­sent­ing a third of the to­tal de­fence spend­ing in the world. How­ever, even with the lim­ited funding Ukraine of­fers, lo­cal de­fence com­pa­nies are con­tin­u­ing to work and im­prove, as the army can­not stop de­fend­ing the coun­try. Some mil­i­tary equip­ment is sold at pub­lic auc­tion through the Prozorro sys­tem (mostly for the Na­tional Guard and State Emer­gency Ser­vice), but most is pur­chased be­hind closed doors as part of the State De­fence Or­der. Based on data from UkrOboronProm (state-owned de­fence con­cern), 2.139 units of new and mod­ern­ized de­fence and mil­i­tary equip­ment were trans­ferred to re­cip­i­ents in 2016. New mod­els are be­ing de­vel­oped. The key in­no­va­tion projects in­clude the new cargo plane An-132, Hor­lyt­sia and Phan­tom as­sault drones, Taipan, Du­plet and Kastet com­bat mo­d­ules, and the new Mys­lyvets (Hunter) fire-con­trol sys­tem.

Changes in the Ukrainian de­fence in­dus­try are reg­u­lated by Cab­i­net of Min­is­ters De­cree No. 19-p, is­sued in 2016. This de­cree ap­proved the Con­cept for the State Pro­gramme to Re­form and De­velop the Mil­i­tary-In­dus­trial Com­plex un­til 2020. The main goal is to bring the Ukrainian de­fence in­dus­try to a modern level, which will en­hance not only the coun­try's de­fen­sive ca­pa­bil­i­ties, but also its com­pet­i­tive­ness on the in­ter­na­tional mar­ket. The first phase (2016-2017) of the pro­gramme iden­ti­fies the fol­low­ing key mea­sures: – pro­vid­ing Ukrainian mil­i­tary units with re­paired and

up­graded equip­ment

– set­ting up mass pro­duc­tion of new de­vel­op­ments, as well as the re­pair, prepa­ra­tion and moderni­sa­tion of ex­ist­ing weapons and equip­ment;

– in­tro­duc­ing an ef­fec­tive co­op­er­a­tion mech­a­nism be­tween the state and de­fence en­ter­prises in terms of de­vel­op­ing and pro­duc­ing weapons and equip­ment as part of the State De­fence Or­der

– sys­tem­at­i­cally re­form­ing the struc­ture of de­fence en­ter­prises, re­struc­tur­ing and cor­po­ratis­ing them in ac­cor­dance with modern in­ter­na­tional stan­dards – find­ing mea­sures and ar­range­ments for im­port sub

sti­tu­tion and the di­ver­si­fi­ca­tion of ex­port po­ten­tial – en­sur­ing the de­vel­op­ment of con­struc­tive mil­i­tary and tech­ni­cal co­op­er­a­tion with part­ner coun­tries in or­der to sup­ply Ukrainian mil­i­tary units with weapons and equip­ment that meet NATO stan­dards

If the pro­gramme is suc­cess­ful, the Ukrainian de­fence in­dus­try will be fully in­de­pen­dent from the Rus­sian Fed­er­a­tion by 2020, with a si­mul­ta­ne­ous in­crease in do­mes­tic pro­duc­tion of equip­ment and com­po­nents. In ad­di­tion, it is ex­pected that ef­forts to pro­mote Ukrainian equip­ment on the in­ter­na­tional mar­ket will be in­ten­si­fied. Apart from the above con­cept, the Gov­ern­ment of Ukraine ap­proved the medium-term State De­fence Or­der in Fe­bru­ary 2017. Such a pro­gramme was adopted in Ukraine for the first time and this is a very en­cour­ag­ing sign, as it sig­ni­fies the adop­tion of fixed rules for the near fu­ture that will help busi­nesses


to bet­ter find their bear­ings in the un­sta­ble Ukrainian econ­omy. The Or­der should en­sure the pre­dictabil­ity of gov­ern­ment ex­pen­di­ture, cre­ate con­di­tions for the equal use of ca­pac­ity at dif­fer­ent de­fence en­ter­prises and fa­cil­i­tate their de­vel­op­ment.


The prac­ti­cal im­ple­men­ta­tion of these mea­sures is a real chal­lenge for Ukrainian au­thor­i­ties. De­spite some real progress, the do­mes­tic de­fence in­dus­try still has many prob­lems. Not all com­pa­nies have been able to com­pletely do away with their de­pen­dence on parts from Rus­sia. In­deed, along­side the large num­ber of ar­moured ve­hi­cles that have been handed over to the Ukrainian Armed Forces since 2014, there is a prob­lem with com­bat he­li­copters. There is still no com­plete pro­duc­tion cy­cle for these air­craft, as ro­tor blades for the Mi-24, for in­stance, are pro­duced in Rus­sia. Some com­po­nents for ar­moured ve­hi­cles are also made in Rus­sia, which com­pli­cates their moderni­sa­tion. There have been cases of Rus­sian ma­te­ri­als used in the pro­duc­tion of weapons and mil­i­tary equip­ment – cer­tain al­loys are ba­si­cally smug­gled into Ukraine.

It is not al­ways clear how equip­ment is dis­trib­uted be­tween the de­fence agen­cies. It is sur­pris­ing that sol­diers on the front line drive around in old Soviet ZiLs, while the Na­tional Guard takes de­liv­ery of an­other batch of brand new ar­moured trucks. An eye-catch­ing re­cent piece of news was that the pa­trol po­lice unit in Sarny, Rivne Oblast was given an ar­moured per­son­nel car­rier and in­fantry fight­ing ve­hi­cle as ad­di­tional means of trans­port.

Af­ter the re­cent mas­sive ex­plo­sion in­ci­dent at the mil­i­tary stor­age fa­cil­ity in Balak­liya, Kharkiv Oblast, that de­stroyed a good por­tion of Ukraine’s ar­tillery am­mu­ni­tion, the is­sue of sup­ply­ing Ukraine’s Armed Forces with do­mes­ti­cally pro­duced am­mu­ni­tion came to the fore again. At a re­cent brief­ing, De­fence Min­is­ter Poltorak said that "the Gov­ern­ment has adopted a con­cept for the cre­ation of am­mu­ni­tion plants in Ukraine". Al­though there is no in­for­ma­tion about this con­cept on the Cab­i­net web­site – it is more likely that the min­is­ter was re­fer­ring to the Na­tional Se­cu­rity and De­fence Coun­cil de­ci­sion to start "a tar­geted state pro­gramme to cre­ate and de­velop the pro­duc­tion of am­mu­ni­tion and spe­cial chem­i­cal prod­ucts by 2021" – the over­all in­ten­tions are sound. Even de­spite the fact that they seem very de­layed, com­ing dur­ing the fourth year of an armed con­flict. Even de­spite the fact that for sev­eral years the coun­try's top of­fi­cials have been talk­ing about the need to build a new am­mu­ni­tion fac­tory to re­place the oc­cu­pied one in Luhansk. In­deed, back in Jan­uary 2016 the head of UkrOboronProm Ro­man Ro­manov said that "this year, as we promised two years ago, you will get the first in­for­ma­tion on the car­tridge man­u­fac­tur­ing plant that will pro­vide for our army and coun­try". Be­fore this, in Oc­to­ber 2015, then-Prime Min­is­ter Arseniy Yat­se­niuk promised that Ukraine would have a new plant in one year's time. "Next year, a pro­duc­tion line of am­mu­ni­tion for small arms will be opened," the of­fi­cial gov­ern­ment por­tal quoted Yat­se­niuk as say­ing. Who knows how many more brief­ings, prom­ises and con­cepts there will be be­fore the army fi­nally gets its own am­mu­ni­tion, but this calls into ques­tion our abil­ity to solve the de­fence in­dus­try's more com­plex is­sues.


Nev­er­the­less, there is good news from the Ukrainian de­fence in­dus­try's end users. In com­par­i­son with the be­gin­ning of the ATO, the quan­tity and qual­ity of equip­ment supplied to the army is grad­u­ally in­creas­ing. This goes for both over­hauled Soviet equip­ment and new mod­els. In­deed, com­pany com­man­der in the 72nd Mech­a­nised Bri­gade Cap­tain Ser­hiy Mi­siura, also known as blog­ger Cap­tain Price, stated that he re­cently re­ceived sev­eral pieces of equip­ment fol­low­ing re­pairs and was pleas­antly sur­prised by the qual­ity of the work. Ac­cord­ing to him, his com­pany has 100% of re­quired mil­i­tary equip­ment, while neigh­bour­ing units are at around 8090%. A sim­i­lar opin­ion is shared by one of the most well­known air­mo­bile units. The chief of staff of one of the bat­tal­ions ex­plained that new equip­ment ar­rives in small quan­ti­ties, but reg­u­larly. Al­though the sol­diers, of course, want more, the weapons they have are suf­fi­cient for car­ry­ing out com­bat mis­sions; the bri­gade al­ready has some units fully equipped with new APCs. The of­fi­cer also noted man­u­fac­tur­ers' ac­tive work with users on the ground – the ve­hi­cles are con­stantly be­ing im­proved. As an ex­am­ple, he men­tioned the re­place­ment en­gine for the BTR-3 ar­moured per­son­nel car­rier that greatly en­hanced the re­li­a­bil­ity of the ve­hi­cle as a whole. The prob­lem with the sus­pen­sion of the Spar­tan APC was solved in a sim­i­lar man­ner – af­ter the first flawed ve­hi­cles that sim­ply could not with­stand the load of the ar­moured body­work (partly caused by mis­use due to a lack of APCs at the start of the war), new batches started to take into ac­count the mil­i­tary's con­cerns. The new Skhval com­bat mod­ule also re­ceived pos­i­tive feed­back from para­troop­ers. Among the prob­lem­atic is­sues, in his opin­ion, is the lack of de­cent train­ing cour­ses for driver/me­chan­ics. Some­times, the un­pro­fes­sional ac­tions of ser­vice­men can lead to the break­down of even flaw­less equip­ment, es­pe­cially since to­day's ar­moured ve­hi­cles are more com­plex than their Soviet coun­ter­parts, with elec­tron­ics and aux­il­iary sys­tems. The Lviv Ar­moured Ve­hi­cle Fac­tory is at­tempt­ing to solve this prob­lem in its own way. A spokesper­son ex­plained that, in ad­di­tion to the ac­tual re­pair of equip­ment, plant ex­perts in­vite crews to visit for train­ing, joint tests and prob­lem solv­ing. This al­lows them to keep in touch with the mil­i­tary and pre­vents dam­age to equip­ment due to a lack of ex­pe­ri­ence.

A com­mon prob­lem for all the armed forces is a lack of mo­tor ve­hi­cles. On the front­line, there are not enough all-ter­rain ve­hi­cles to trans­port per­son­nel and cargo, tow trucks, mo­bile re­pair shops and med­i­cal ve­hi­cles. Over­all, the ve­hi­cle fleet of mil­i­tary units, al­though re­cently up-

dated, still suf­fers from a large deficit of modern heavy equip­ment of var­i­ous types. There is also a prob­lem with light ve­hi­cles, es­pe­cially in small units at the pla­toon and com­pany level scat­tered across the front. They are sim­ply not as­signed to such units, be­cause the old Soviet con­cept stip­u­lated that only higher com­man­ders should have a jeep. Long stays in the ATO zone raise a num­ber of every­day is­sues that could eas­ily be solved by an off-roader. Per­haps, in time the Ukrainian army will be able to af­ford this "not a lux­ury, but a means of trans­porta­tion". Mean­while, with the help of vol­un­teers, a whole host of old cars, some­times not cleared by cus­toms, are be­com­ing mil­i­tary "by vo­ca­tion".


The above prob­lems can be solved in dif­fer­ent ways. In­deed, ac­cord­ing to Au­toKrAZ Gen­eral Di­rec­tor Ro­man Ch­er­niak, giv­ing pri­or­ity to do­mes­ti­cally pro­duced over im­ported equip­ment could sig­nif­i­cantly im­prove the sit­u­a­tion. Most de­fence agen­cies abroad pre­fer prod­ucts made in their own coun­try and in ten­ders to sup­ply equip­ment lo­cal man­u­fac­tur­ers get pref­er­ences (from 10 to 20%) rel­a­tive to other sup­pli­ers, even those that have an as­sem­bly fa­cil­ity in the coun­try. In ad­di­tion, ac­cord­ing to Ch­er­niak, when pur­chas­ing ve­hi­cles it should be a manda­tory con­di­tion to or­der ad­di­tional units (en­gines) and other spare parts (15-20% of the ve­hi­cle price) in or­der to en­sure high-qual­ity and ef­fi­cient re­pair and main­te­nance work. He con­sid­ers train­ing ses­sions for the client's lead­ing spe­cial­ists crit­i­cally im­por­tant (even if the equip­ment had been supplied be­fore). In this way, the client's ex­perts main­tain a re­la­tion­ship with the man­u­fac­turer. This also makes it pos­si­ble to track changes that oc­cur to the ve­hi­cle con­struc­tion in ser­vice, iden­tify weak­nesses in a timely man­ner and make de­sign im­prove­ments.

An­other step that would al­low the Ukrainian de­fence in­dus­try to de­velop prop­erly is a change of own­er­ship at the en­ter­prises. In the US, the ma­jor­ity of de­fence en­ter­prises are pri­vate: there is com­pe­ti­tion be­tween them, al­low­ing the cus­tomer – the Army – to get the best prod­ucts at the most af­ford­able price. The cur­rent sys­tem in Ukraine lim­its the abil­ity of pri­vate man­u­fac­tur­ers to par­tic­i­pate in the cre­ation of new weapons – in prac­tice, the state dis­crim­i­nates against the pri­vate sec­tor of the de­fence in­dus­try, which is not con­ducive to its de­vel­op­ment. In ad­di­tion, a pri­vate man­u­fac­turer must agree the ex­port of its prod­ucts, prices and right to sign a con­tract with its own ri­val – UkrOboronProm. The few pri­vate en­ter­prises in the de­fence field that cur­rently ex­ist in Ukraine get no sup­port from it and ad­di­tion­ally have their profits lim­ited to 1%, which is not con­ducive to the de­vel­op­ment of pro­duc­tion or costly re­search and de­vel­op­ment.

The US demon­strates an­other ap­proach to the op­er­a­tion and de­vel­op­ment of its de­fence in­dus­try. There, al­most a third of the de­fence bud­get is spent on weapons ac­qui­si­tion pro­grams, namely on re­search and de­vel­op­ment work, as part of the state or­der (De­fense Ac­qui­si­tion Sys­tem). In ad­di­tion, the US Min­istry of De­fense has in­tro­duced two pro­grammes to at­tract small busi­nesses into de­fence pro­cure­ment: SBIR (Small Busi­ness In­no­va­tion Re­search) and STTR (Small Busi­ness Tech­nol­ogy Trans­fer). With these pro­grammes, US fed­eral agen­cies make it pos­si­ble for even small re­search com­pa­nies to bring their de­vel­op­ments to mar­ket. It is thanks to dis­cov­er­ies from small busi­nesses un­der the SBIR and STTR pro­grammes that the US re­tains its lead­er­ship in the field of mil­i­tary in­no­va­tion. The De­fense Ad­vanced Re­search Projects Agency (DARPA) sup­ports the projects, but of­fi­cially the SBIR and STTR pro­grammes are co­or­di­nated by the gov­ern­ment Small Busi­ness Ad­min­is­tra­tion (SBA). This agency man­ages ex­tra­mu­ral funds to­talling 2.5% of re­search bud­gets. It is in­ter­est­ing that, ac­cord­ing to the US De­fense De­part­ment, more than 50% of funding is al­lo­cated to com­pa­nies with up to 25 em­ploy­ees and a third to busi­nesses with up to 10 peo­ple. More­over, the prin­ci­ple is to se­lec­tively tar­get in­di­vid­ual projects in­stead of in­tro­duc­ing com­mon ben­e­fits or dis­counts. There­fore, at the start-up stage, a project can re­ceive a grant of up to $100,000 for a pe­riod of six months. Af­ter eval­u­at­ing the tech­ni­cal ad­van­tages and op­por­tu­ni­ties of the project, win­ning com­pa­nies re­ceive funding of up to $1 mil­lion for two years to con­tinue de­vel­op­ing their idea, based on results from the first phase. Dur­ing this time, the de­vel­oper con­ducts re­search and eval­u­ates the idea's com­mer­cial po­ten­tial. The key is that at this stage the gov­ern­ment does not im­pose any re­quire­ments on the de­vel­oper re­gard­ing li­cences, mil­i­tary ac­cep­tance pro­ce­dures, qual­ity con­trol or ac­count­ing. In other words, de­sign­ers can fo­cus on their own ideas in­stead of bu­reau­cratic prob­lems. The third stage is launch­ing the prod­uct, and the in­ven­tor re­ceives all in­tel­lec­tual prop­erty rights to their prod­uct. The state does not spend pub­lic money here ei­ther – the de­vel­oper must find funding him­self from other gov­ern­ment agen­cies or the pri­vate sec­tor. Thanks to the SBIR pro­gramme, the US has man­aged to lower the cost of up­grad­ing mil­i­tary equip­ment; cur­rently, around 55% of the state de­fence or­der is ful­filled by small busi­nesses. In such cir­cum­stances, even small busi­nesses are able to com­pete with in­dus­try giants such as Boe­ing or Lock­heed Martin, who in turn are forced to re­duce their ap­petites and op­ti­mise, which ul­ti­mately makes mil­i­tary equip­ment cheaper. As an ex­am­ple, we can look at the price of the fifth-gen­er­a­tion mul­ti­role fighter Lock­heed Martin F-35 Light­ning II. Ac­cord­ing to the Amer­i­can an­a­lyt­i­cal pub­li­ca­tion De­fense One, the cost of one air­craft fell from $279 mil­lion in 2007 to nearly $97 mil­lion in 2017.

The Ukrainian de­fence in­dus­try has huge po­ten­tial, how­ever it re­quires a modern ap­proach to man­age­ment and im­ple­men­ta­tion of new tech­nolo­gies not only on the shop floor, but also in the of­fices. Con­stant con­tact be­tween man­u­fac­tur­ers and users, trans­par­ent pro­cure­ment sys­tems and com­pe­ti­tion rather than cor­rup­tion – this is the univer­sal recipe for a home-grown de­fence in­dus­try, proven by time and many coun­tries.

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