Ukrainian arms manufacturers are increasing production, but face state sales challenges

According to the Minister of Strategic Industries of Ukraine Herman Smetanin, this year the domestic Defense Tech industry has grown significantly. At the same time, while state-owned enterprises were the main dominant of the domestic industry before the full-scale invasion, a lot of private companies appeared in the country during the war.

"In total, we have over 800 manufacturers of weapons and military equipment registered in Ukraine today. If we talk about the share of state-owned companies, it is about 12% of the total," said Smetanin in a speech at the Kyiv International Economic Forum (KIEF) on November 7.

In particular, the state-owned Ukroboronprom conglomerate doubled its production over the past year, according to the official.

"Thanks to this, we managed to become one of the 50 largest arms manufacturers in the world. We have never had such a result before," the minister said. "We see the dynamics that the company continues to grow. Let's hope that the good dynamics will continue this year."

Among the areas where Ukrainian weapons manufacturers have had successes, he named armored vehicles, electronic warfare equipment, drones, etc.

"This year and last year were the years of development of unmanned aerial vehicles, FPV drones, and deep strikes. Our manufacturers have shown very good results in increasing the tactical and technical characteristics of their products. We are currently seeing a very significant growth in the ground robotic systems sector," Smetanin said.

According to the minister, the production capacity of the Ukrainian defense industry for 2025 is at:

• More than 4.5 million units of UAVs;
• More than 20,000 ground robotic systems;
• More than 200,000 electronic warfare systems.

"Today, the production capacity in Ukraine reaches 1.3 trillion hryvnias ($31.4 billion). Unfortunately, Ukraine's budget cannot fully cover these costs. There is a part of the capacity that is still underutilized," Smetanin said.

Growth disease

Back in 2022, the government introduced a very important deregulation that made it possible for drone production to grow rapidly. At that time, the procedure for approval and operation was simplified, and later contracting. In addition, a defense technology cluster, Brave1, appeared in Ukraine, with more than 130 investors from more than 30 countries in its portfolio.

In general, market players recognize that Ukraine has created a very good space for start-ups and medium-sized companies.

"It's the companies that have become stable and need to grow that are still experiencing problems. When they enter mass production and have already successfully fulfilled not just one government contract but dozens of government contracts, they face the issue of rapid growth not only within Ukraine. It is important for them to build partnerships with international players," said Kateryna Mykhalko, Executive Director of the Technological Forces of Ukraine, an association of more than 40 defense industry entities, at KIEF.

Private producers call on the government to make the industry more predictable for entrepreneurs, introduce long-term contracts, learn how to finance very expensive developments, and allow the supply of products that are not in demand among the Ukrainian military to foreign markets.

"The industry's position is to open controlled exports of products that the state is not able to purchase or products that the Armed Forces of Ukraine do not need only to countries with which Ukraine has signed security agreements or that are members of the Ramstein coalition. This will be absolutely safe for our frontline," stated Kateryna Mykhalko.

State response

Last week, the Cabinet of Ministers supported the resolution "Some issues of financial state support for defense industry enterprises" developed by the Ministry of Strategic Industries. The preferential lending program for defense industry producers provides for an interest rate of 5%. The loan amount is up to 100 million hryvnias ($2.4 million) for working capital for up to 3 years and up to 500 million hryvnias ($12 million) for investment projects for up to 5 years.

Only those banks that have a top-secret facility will be able to provide preferential loans. As of now, these are state-owned Oschadbank and Ukreximbank. Rinat Akhmetov's FUIB is in the process of creating such a facility.

The funds received under the program can be used to develop, manufacture, repair, modernize and utilize weapons, military and special equipment, ammunition, their components and other military products used to meet the needs of the Defense Forces.

In September, the Verkhovna Rada supported the allocation of 263.4 million hrynvias ($6.4 million) to the Ministry of Strategic Industries to finance this program until the end of 2024.

Regarding arms exports, about a month ago, President Volodymyr Zelenskyy instructed the relevant ministries to develop proposals for arms exports.

"Some countries have already expressed a desire to buy Ukrainian missiles, drones, and other weapons. We do not rule out this possibility, but the decision will be made collectively at the level of the country's leadership," Defense Minister Rustem Umerov said at the time.

Where the money comes from and where it goes

According to Herman Smetanin, investors and companies coming to Ukraine are primarily focused on DefTech. This industry is the fastest growing in the country today and has the greatest potential for growth in the future.

"A year ago, almost none of the international partners were ready to invest in defense technologies. There were literally a few first-time investors – mostly British – who came in and looked at Ukraine as a country where they could invest in defense technology," Natalia Kushnerska, head of Brave1, said at KIEF. "Today, Brave1's portfolio includes more than 130 investors from more than 30 countries. Obviously, 80% of them are angel investors (risky investments at the early stage of financing – ed.)."

According to her estimates, last year Ukrainian DefTech raised up to $10 million. This year, the amount is expected to reach $50 million.