Regulation of Purchase, Export/Import of Weapons and Military Hardware in Ukraine. Features and Ways of Improvement

The war of the Russian Federation against Ukraine, the occupation of Ukrainian territories and the consolidation of Russian and mixed (created from mercenaries based on the Russian core) groups on them creates a steady trend of military threat to Ukraine. Given the power of a hostile Russia and the Kremlin's use of the full range of impacts on Ukraine, it is the creation of a proper system of military deterrence based on technological advantages (along with other counteraction mechanisms) that provides Ukraine with the opportunity to further develop under all-round pressure and aggression.

Preface

The war of the Russian Federation against Ukraine, the occupation of Ukrainian territories and the consolidation of Russian and mixed (created from mercenaries based on the Russian core) groups on them creates a steady trend of military threat to Ukraine. Given the power of a hostile Russia and the Kremlin’s use of the full range of impacts on Ukraine, it is the creation of a proper system of military deterrence based on technological advantages (along with other counteraction mechanisms) that provides Ukraine with the opportunity to further develop under all-round pressure and aggression. This situation requires significant improvement of the system of re-equipment of the Armed Forces of Ukraine and other military formations, as well as corresponding areas related to dual-use weapons and technologies. These areas include, first of all, the regulation of purchases of weapons and military hardware within the framework of the State Defense Order, as well as the regulation of export / import of weapons and military hardware in Ukraine as a form of receiving foreign exchange earnings and defense, and dual-use technologies by defense enterprises.

In addition, world practice shows that in general, the production of weapons and military hardware in Ukraine is important not only for the security sector of the state, but also for the growth of the economy as a whole, improving the international image of the State. This is due  to three key factors primarily:

  • firstly, the Defense industry, or defense-industrial complex (defense industry) is a high-tech sector, and its development is the hallmark of the state (such as the ability to produce aircraft or launch vehicles);
  • secondly, the development of the defense industry provides for the exchange of modern technologies in the market and a tangible impact on the international arena (this is the modern experience of Turkey, South Africa, and Poland);
  • thirdly, over the past two or three decades, the trend of “spillover” of defense technologies into the civilian sector and civil technologies into the defense sector has significantly gained momentum (for example, such a technological achievement as the recovery of materials by spraying was first used to restore the blades of the fighter engine, and then was used in the modernization of bulldozers).

This report explores the specifics of regulating the purchase, export/import of weapons and military equipment in Ukraine by analyzing existing procurement practices and the state of the procurement management system.

І. CURRENT PRACTICE OF WMH PURCHASING AND EXPORTING

А. Features of regulation of WMH procurement for the needs of the Armed Forces (AF) and other military formations of Ukraine

Ukraine, despite the considerable potential of the defense industry and serious national traditions, has been on the path of losing this heritage for a long time. Key issues remain the management of the Вefense industry, the use of private sector initiatives, attracting foreign and private investment, and the privatization of part of the complex. At this time, there was an impressive imbalance in the development of the defense industry, due to the fact that the conditions in the middle of the complex are not transparent, too knowledgeable and focused mainly on state-owned enterprises.

The most negative consequences of this are the uncompetitive conditions for private enterprises and the unattractiveness of the Ukrainian market for foreign companies. According to the Ministry of Economic Development and Trade (MEDT), 95% of the WMH nomenclature is purchased under the State Defense Order (SDO) without competitive procedures.

It should be noted that the situation with the Ukrainian Defense Industry is paradoxical: according to all canons, billions of dollars of investment should be poured into the Ukrainian Defense Industry in two years of war, but, contrary to logic, the government has not made any real steps to form a new system of military-technical policy of the State. Ukrainian philosophy rearmament, and, accordingly, the system of WMH procurement has certain limitations – due to the sufficient resource, restraint of foreign (particularly Western companies) regarding technology transfer and sales of Ukrainian WHT, and actually only a partial willingness of the Ukrainian authorities to deployed military-technical cooperation (MTC) with foreign countries and WMH import as part of (MTC). So, after the above-mentioned restrictions, it is based on the supply to the Armed Forces of Ukraine and other armed groups of all that National Defense enterprises are able to develop.

At the same time, a significant part of the State Defense Order (SDO) is sent to the Ukroboronprom group of companies. However, it is worth noting that recently (especially with the beginning of the Russian war against Ukraine) the number of private enterprises, which by the end of the first decade of the Millennium numbered no more than four dozen, has increased three times and already exceeds the number of state-owned enterprises of the defense industry. According to official data, if in 2015 more than 60% of SDO were accounted for by Ukroboronprom, in 2016-only 38%. In officially provided figures – “Ukroboronprom” mastered in 2016 UAH 4.4 billion of UA 13.5 billion. At the same time, it is worth noting that the country has a system of hidden lobbying, in particular, a certain number of private enterprises that are owned by representatives of the Government, or “specifically” controlled by it. In addition, there are at least a dozen private entities that have proven their ability to produce a competitive and rare product range. In addition, quite often the cost of the same work in a state enterprise is much more expensive than in a private one. In particular, according to unofficial information, the cost of the same tank modernization in 2016 was estimated by the state enterprise at UAH 17 million, while in private – only UAH 7 million.

At the same time, another feature of the Ukrainian Defense Industry is that it is not able to provide the lion’s share of the needs of the AFU, and in the most important range of military equipment and services (in monetary terms, this is at least 60-70%). Thus, Ukraine has never produced and does not produce combat aircraft, air defense systems, ship-borne weapons, strike and operational-strategic and operational-tactical unmanned aircraft systems (UAS), combat helicopters, a significant part of aircraft-controlled weapons, the vast majority of ammunition, small arms, and much more. And this means that the choice of how to provide the Defense Forces (the AFU and other formations) with these needs should be decided by an interdepartmental body, taking into account the list of priorities clearly derived by the General Staff of the AFU, the reasoned conclusions of the Institute of General Designers and the Scientific and Technical Council (the latter can be formed from Directors of Defense enterprises, economists, leading profile scientists).

To this problem we should add the already mentioned lack of resources and the existence of a special fund, which most often does not work. For example, in mid-2016, the Minister of Defense of Ukraine Stepan Poltorak announced a possible underfunding of defense needs in the amount of 6.5 billion UAH., in this regard, according to unofficial information, with which about UAH 500 million were transferred from SDO to the maintenance of the AFU personnel.

Consequently, the system of procurement and method of formation and execution of the SDO is dependent on the system fault in the construction of the Ukrainian power triangle “AFU (development)—Defence enterprises (effective use of possibilities) — WMH export/import (effective state involvement in the global arms market)”. Namely, until now, Ukraine has not got rid of the old principle, when at the top of the triangle were exactly the income from the export of military equipment, and not the development of the AFU. In particular, in de facto wartime in Ukraine, there is a situation where some modern military vehicles are primarily sent for export, and only then – to the AFU. For example, this situation has developed with the supply of new tanks “Oplot”. And only in January 2017, the Cabinet of Ministers of Ukraine made a decision to manufacture new aircraft, guided missiles and tanks “Oplot” under the State guarantees (for the first time in the history of Ukraine) for the benefit of the Armed Forces – within SDO.

Another area of tension is the signs of a conflict between the Military Department and the Ukroboronprom group of companies. One of the elements of the existing construction of the procurement system is the order of the Military Department through the Ukroboronprom group of companies (or rather, through special exporters that are part of it). As well as the already mentioned artificial lobbying, which itself became a consequence of “manual control” of the security sector. In particular, many experts are convinced that the development of the National Guard of Ukraine (NSU) and special forces of the national Police KORD, is organized much better (and at great cost) than the AFU (although only the AFU is now on the contact line with the enemy in the East of Ukraine). However, the lack of transparency with procurement tenders and the lack of proper oversight (parliamentary and democratic civil control over the procurement sphere) created the conditions for abuse. A typical example is the case when 10 armored vehicles “VARTA-2” purchased in May of current year for the needs of the special forces of the National Police KORD were rejected and sent to the manufacturer for revision. At the same time, this military equipment was purchased for public money from the company “Ukrainian Armor”, which does not have its own production facilities. Moreover, NGU signed a contract for the supply of 40 more vehicles “Varta-2” – on unprecedented and unprofitable conditions for the country of 100% prepayment. Thus, UAH 286 million were paid from the State Treasury for the delivery of this equipment.Oddly enough, according to unofficial information, despite such impressive technical problems of the AV “Varta” and despite the failure of the enterprise “Ukrainian Armor” to fulfill its obligations, at the end of 2016, the NGU signed a new contract with it for additional deliveries of 39 more vehicles until the end of March 2018. Under the State guarantee! In addition, experts consider the cost of one vehicle (approximately UAH 7 million 150 thousand) somewhat overstated.

But such a situation, as with the engineering firm “Ukrainian Armor”, consists only around enterprises whose ownership is associated with influential politicians or officials. In particular, many media outlets pointed to the direct connection with the company “Ukrainian Armor” of people’s Deputy Sergiy Pashynsky (for example, Fedor Oryshchuk, in the article of the news Agency “Commander-In-Chief” ” Two hours with Sergiy Pashynsky. Unpublished interview”, 01.02.2016). The rest of the private sector enterprises of the Defense Industry live on their own and increasingly rely on the export of weapons, since the opportunities of private owners in the field of supplies for the AFU/NGU remain ephemeral. Until 2017, the benefit was provided to state-owned enterprises without special explanations and taking into account the WMH quality. For example, the Ministry of Defense of Ukraine (MDU) at the time has choosen the tactical combat wheeled vehicle (TCWV) “Dozor-B” mainly because its developer and manufacturer are State-owned enterprises. Although “Ukroboronprom” assured that the State “Lviv Armor Vehicle Factpry” (the main manufacturer of the CAM “Dozor-B”) is ready to produce more than 100 armored vehicles of this type every year, only 10 of them are got into the AFU… At the same time, the private SPE “Praktyka” demonstrated an updated armored vehicle “Kozak-2”, which was also tested for resistance to explosions in accordance with NATO standards (a blow equivalent to 6 kilograms of TNT). The results of the tests have demonstrated a high level of fighters protection. It is interesting that the Ministry of Internal Affairs purchased 70 AV “Kozak”, while the MDU did not make such a decision. So, in terms of non-transparent solutions, this looks like the result of artificial lobbying, without taking into account the qualities of armored vehicles.

Initiatives in the field of development of new and modernization of existing WMH become doubtful in such conditions for private owners. Here is a rather revealing episode from the life of the Defense industry, in fact, typical in the conditions of “manual control” of the security sector. In August 2016, AvtoKrAZ openly accused the presidential adviser Yuriy Biryukov of lobbying the interests of Petro Poroshenko’s business partner, first Deputy Secretary of the National Security Council Oleg Gladkovsky. (Biryukov, in particular, insisted on the low quality of products and the failure of the delivery dates of vehicles for the MDU, which AvtoKrAZ associated with the planned purchase of vehicles for the Army from the Bogdan Corporation.) By the way, in Ukraine there are already more than a dozen modifications of military vehicles, and no one has yet remembered the unification.