“We can do more”. How the Ukrainian defense industry lives and what prevents it from growing

The defense industry contributed 1.5% to the 5.3% growth of the Ukrainian economy in 2023, according to the Ministry of Strategic Industries. This share could be significantly higher, as the industry has the potential to grow, if only there is an inflow of new investment capital and regulatory issues are resolved.

Out of a defense budget of 2.2 trillion hryvnias in 2024, only 246 billion hryvnias, or just over 10%, is spent on the production and purchase of Ukrainian weapons. The rest of the costs are military salaries, food, and medical treatment.

Since the state budget for the next year envisages the same level of defense spending, it is likely that the Ukrainian defense industry will still have about 250 billion hryvnias, although in 2023 its volume was half that.

“Each Ukrainian weapon has its advantages and disadvantages, but it is extremely important that these weapons simply exist. And our military industrial complex has coped with this task very well,” notes military analyst Ivan Kyrychevskyi.

What is the strength of the Ukrainian defense industry and what prevents it from developing? This is what hromadske has analyzed.

What makes the Ukrainian defense industry strong?

The state-owned Ukrainian Defense Industry (Ukroboronprom) accounts for approximately two-thirds of the Ukrainian defense market, and private companies account for one-third.

In total, there are about 500 companies operating in the market, which means as many as 300,000 people are employed there. If we apply a comparison, there is approximately one defense industry employee for every three military members. And one of the country's largest employers, the state-owned Ukrzaliznytsia, employs 190,000 people.

The Ukrainian defense industry has one significant advantage over the defense industries of many other countries: weapons produced in our country can be tested in real war, in real combat operations.

Military personnel who use Ukrainian weapons share their impressions with manufacturers, which is how progress in this area is achieved.

“In six months, the enemy adapts to our weapons, so the technical solution dies. If the manufacturer does not communicate with the combat unit, it does not understand the situation. After such communication, the manufacturer must quickly change its product,” explains Taras Shandura (Ajax), deputy commander of the 92nd Separate Assault Brigade.

This is what adds to the advantages of Ukrainian weapons, because it is more difficult to communicate with foreign manufacturers. But this is not the only advantage.

“The Ukrainian industry is very strong in robotic systems, any automation of the army. We have a human-centered approach, so that robots, not people, fight whenever possible. Therefore, we should definitely rely on drones and robotic systems,” says Kateryna Mykhalko of Technological Forces.

The Ministry of Defense, together with the Ministry of Digital Transformation, which is also involved in the purchase of drones, has already contracted 1.8 million drones worth almost 147 billion hryvnias for 2024-2025. These include deep strike drones (Deepstrike Kamikazes), FPV Kamikazes, reconnaissance drones such as DJI Mavic, reconnaissance aircraft, wing drones, and attack copters.

Ukrainian manufacturers are capable of producing at least 20 types of reconnaissance drones, as well as most other types of drones.

Athlon Avia has been operating in the drone manufacturing market for over a decade and has participated in foreign tenders. Its flagship product is the A1-CM Furia drone, which has the function of conducting artillery reconnaissance. It is one of only two unmanned systems of this type in service with the Ukrainian Armed Forces.

“This is a regular artillery reconnaissance tool, so there is a demand for our products. Furia conducts artillery reconnaissance, accompanies and maintains firing, improving its efficiency,” says Artem Viunnyk, founder of the company.

“We are improving our existing products and developing new ones. We will continue to meet the army's needs for unmanned systems,” he adds.

Oleksii Babenko, CEO of Vyriy Drone, also told hromadske about the high demand for drones.

“Drones are in demand — they are purchased directly for the state, for military units, for volunteers. We are chosen because our drones have many innovations: guidance systems, special communications, and a low price, because we have more than 70% of Ukrainian-made components,” Babenko said.

The Ukrainian company Infozahyst also has a large assortment of drones, electronic warfare equipment, and secure communication technologies, but not all of these are in great demand. The most interesting of all Infozahyst's products is the Plastun tactical radio reconnaissance system. The company began supplying these devices to the Armed Forces in 2018.

“Plastun is a portable direction finder-radio receiver that allows to provide situational awareness of the enemy's combat order at the brigade level. Before these devices appeared, such information was provided by the higher headquarters, and there were problems with the completeness, reliability, and timeliness of the information provided,” explains Yaroslav Kalinin, Director of Infozahyst.

“Now we have a better understanding of the situation on the battlefield in terms of the electromagnetic spectrum, where the positions are located, how they move. But much depends, of course, on the skill of the chief of intelligence, the brigade and company that are subordinate to him,” Kalinin adds.

Progress in the Ukrainian drone manufacturing segment is quite rapid, in part due to the high level of competition among companies. For example, 17 manufacturing teams applied for the recent “inspection” held jointly by the Ministry of Strategic Industry, the Ministry of Defense, and the Ministry of Digital Transformation.

The government ministries wanted to see how capable Ukrainian manufacturers were of producing drones that could fight in swarms, i.e., unite in groups and act collectively to solve a combat task. 7 out of 17 teams presented this technology in their products.

However, the war is not only waged by drones.

“Private producers can, for example, make drones, take over the production of ammunition of various types, but what about heavy weapons, artillery, armored vehicles, aviation?” military analyst Ivan Kyrychevskyi shares his thoughts.

He cites the APCS-4 manufactured by the Malyshev Plant as a very good example of Ukrainian weapons. This armored personnel carrier is also called Bucephalus and it transports soldiers very well in the combat zone.

“It's a good vehicle, our military publicly praised it,” says Kyrychevskyi.

Unlike dozens of other private Ukrainian manufacturers, Ukrainian Armor specializes in armored vehicles, and has been operating in the arms market since 2015.

“We supply armored vehicles to almost all law enforcement agencies: The Ministry of Defense, the National Police, the National Guard, and the Security Service of Ukraine. Over the years of supply, we have been constantly cooperating with the military, which operates our equipment,” the company says.

During the full-scale war, Ukrainian Armor also developed an improved version of the Novator specialized armored vehicle. In 2023, the Novator 2 SAV was tested and is already being mass-produced and supplied to the Defense Forces.

Another novelty of the company is the Varta 2 armored vehicle with the Sich combat module, which was presented at a specialized exhibition in Poland.

In addition, the company produces and supplies a full line of mortars — 60 mm, 82 mm, and 120 mm caliber. The 120 mm mortar is the most popular among the military.

The company also launched ammunition production in 2023 in cooperation with several NATO countries.

“An additional advantage in today's warfare is fast service, to which our company pays considerable attention. We have formed field service teams that carry out routine repairs quickly and as close as possible to the combat line,” the press service of Ukrainian Armor said.

Foreign guests on the market

The development of the Ukrainian defense industry is also affected by competition with foreign manufacturers, which are quite active in setting up their production in Ukraine.

For example, the German defense company Rheinmetall plans to build four weapons manufacturing plants in Ukraine.

“The first plant is already in operation. The Ukrainian defense industry is our partner. Now we have a production plant and a service plant,” said the company's CEO Armin Papperger.

In 2025, a plant of the Turkish arms concern Baykar, which specializes in Bayraktar drones, is to start operating in Ukraine.

“We have completed 80% of the construction and are already ordering machines. The plant will be ready in August 2025,” said Baykar CEO Haluk Bayraktar.

Atlas Aerospace, a Latvian drone manufacturing company, has opened a research center in Ukraine. The American defense giant Northrop Grumman plans to produce medium-caliber ammunition in accordance with NATO standards in cooperation with the state-owned Ukroboronprom holding.

In addition, Ukroboronprom has agreed with the Czech company Ceska zbrojovka to produce rifles — again, based on NATO models. Canadian armored vehicle manufacturer Roshel plans to localize its production in Ukraine.

“It's good that major international players are ready to work with Ukraine and open representative offices here, not only in terms of defense but also in terms of economy. The more companies come to Ukraine, the stronger the country will be,” emphasizes Kateryna Mykhalko, Executive Director of the Technological Forces of Ukraine.

“Could more companies enter Ukraine if state regulation were improved? One hundred percent yes,” she adds.

For example, Infozakhyst, a Ukrainian private company that manufactures the Plastun radio reconnaissance system, is looking for foreign partners.

“We are building partnerships to ensure that Western companies' equipment is serviced and repaired in Ukraine and that our Defense Forces receive equipment with a minimum time frame,” says Yaroslav Kalinin, director of the company.

“It's impossible to close the market, fence yourself off and still receive high-quality, state-of-the-art products. I'm very positive about the fact that there will be new facilities here,” he says.

We can do more and better

Yet despite the positive factors for the development of the Ukrainian defense industry, there are still many constraints on its path. It is possible to increase the volume of weapons production in Ukraine many times over, but this is impossible without solving the current problems of the industry.

85% of Ukrainian companies that are members of the Technological Forces of Ukraine association have either already relocated abroad or plan to do so in the future.

The fact is that in 2023, the Cabinet of Ministers set the rate of return for Ukrainian defense companies at 25%. But this percentage can only be charged to production costs, meaning that no more than 25% of the final price can be added to the actual cost of production. For example, the costs of renting premises, new developments and research are not included in the profitability calculations. This reduces the overall profitability of such a business.

“All the developments are done with the companies' own funds, and there are very few resources, because the international market [i.e., the possibility of exporting] is closed. Accordingly, there are no market conditions,” says Kateryna Mykhalko of the Technological Forces of Ukraine.

President Volodymyr Zelenskyy recently said that he was considering opening up exports if the needs of the Defense Forces were met by 100%, but so far he has not been very supportive of this idea — in fact, he has even criticized it at times.

“We are in favor of controlled exports of surplus weapons. That is, everything that the state cannot contract and buy should be authorized for sale in a country friendly to Ukraine, such as the Ramstein and NATO countries. This would relieve the financial burden on companies, make it possible to bring foreign currency into the country and, accordingly, produce one type of weapon for the Ukrainian army cheaper than it is now,” says Kateryna Mykhalko,

Another important problem is annual contracts. In today's realities, defense contracts are signed at the beginning of the budget year. After going through all the procedures, companies can start production only in June, which leads to downtime in the industry.

Moreover, the production cycle must be completed and the finished products delivered to the Ministry of Defense by the end of the budget year — these are the rules. At the same time, some types of equipment take much longer to produce.

“Defense planning and our military-industrial policy hinder the development of defense. We see manual control rather than a balanced systemic policy. Some companies are shutting down, and there are no contracts for 2025 because there is no state budget yet,” says Artem Viunnyk of Athlon Avia.

This makes it extremely difficult for companies to purchase the necessary components in Europe. Such purchases can take 3-6 months, meaning that they should have been made in June of this year to start production in the new year. Now it's November, and most of the purchases have not been made, says Viunnik.

“Even the approximate volume of defense procurement for 2025 is unclear, and for some reason, state procurement operators do not share it with us,” he adds.

“Technological Forces of Ukraine advocates for predictability of defense procurement. This means that contracts should be signed for several years in advance, preferably for two or three, and they should be transitional — this should be a classic practice for a state customer in the defense sector,” emphasizes Kateryna Mykhalko, Executive Director of the association.

“Unfortunately, all the talk about three-year contracts has remained just that, talk. As of today, no budgetary obligations have been taken under any three-year contract. That is, in fact, these agreements are worthless,” says Ukrainian Armor.

Oleksii Babenko of Vyriy Drone reminds that while Ukrainian components for production are subject to a 20% value-added tax, foreign components are not.

“It would be easier if we had equal conditions with Europe and China, because when we buy Chinese components, we don't pay VAT,” says the top manager.

He also suggests transferring all types of defense procurement to the format of electronic tenders, as the Ministry of Digital Transformation and the State Special Communications Service are now partially doing for the purchase of drones.

Yaroslav Kalinin of InfoZahyst adds that the fact that the Ministry of Digital Transformation is in charge of drone procurement indicates problems with the relevant procedures at the Ministry of Defense.

The Ukrainian Armor company cites the lack of long-term planning, inaccessibility of credit, inability to raise funds, and excessive bureaucracy as the main challenges hindering the industry's development.

“The process of putting new models into service is still unacceptably long and bureaucratic. In fact, only the field of unmanned systems received simplified conditions during the war, which was the main reason for the rapid development of the industry,” the company's press service says.

Yaroslav Kalinin, head of Infozahyst, also recalls the classic pressure on business, such as unexpected audits. He adds that all of this creates a less than favorable investment climate in the defense industry, making it impossible to raise free money for development, create new products, and conduct initiative research.