Production is growing, and sales are stalling: why Ukrainian gunsmiths face obstacles in the domestic market

Ukrainian media highlight the trend: against the background of the increase in the production of weapons by domestic manufacturers, the state is unable to fully ensure their sale. The Ministry of Defense and law enforcement agencies can to contract only a third of what Ukrainian military factories can actually produce.

The situation is determined by several factors. On the one hand, the growth of the needs of the defense sector leads to an increased demand for weapons and equipment, on the other – financial and logistical restrictions do not allow the state to purchase the entire volume that can be produced. As a result, part of the production capacity turns out to be idle, which creates risks for the development of enterprises of the defense complex, which depend on constant orders to maintain stable operations.

In response to this problem, the national government is considering the possibility of exporting Ukrainian weapons to partner countries. President Zelenskyi commissioned The Ministry of Defense to prepare proposals for potential arms deliveries to allies who are part of the “Ramstein Group” – an international coalition created to coordinate military support for Ukraine. Given that many of them are interested in strengthening their defense capabilities, cooperation on the export of Ukrainian arms can be mutually beneficial.

This decision has several important advantages for Ukraine. First, the increase in export contracts will allow to support production capacity and ensure a stable profit for the Ukrainian “defense”, which is highly dependent on government orders. Secondly, expanding cooperation with partners will strengthen strategic ties between the countries and contribute to the financial stability of Ukrainian defense enterprises.

In general, if Ukraine can realize this export potential, it will not only compensate for the limited opportunities of the domestic market, but also provide long-term support for the defense industry in wartime.

The dynamics of the development of domestic Defense Tech

Herman Smetanin, Minister of Strategic Industries commented, that domestic Defense Tech has grown significantly this year. “This and last year were the years of development of unmanned aerial vehicles, FPV drones, deep strikes. Our manufacturers have shown very high results in increasing the tactical and technical characteristics of our products. Currently, we are seeing very significant growth in the ground robotic complex sector”, – remarked Smetanin For him in words, the production capacity of the domestic defense industry in the coming year may exceed 4.5 million units of unmanned aerial vehicles, 20 thousand ground robotic systems, 200 thousand means of electronic warfare.

“Today, the production capacity on the territory of Ukraine reaches 1.3 trillion hryvnias. Unfortunately, the budget of Ukraine cannot fully cover these expenses at the moment. There is a part of the capacity that is not yet loaded”, – noted Smetanin

Situation of the Ukrainian defense industry

Previously, the industry was dominated by state-owned enterprises. Thus, the state-owned company traditionally remains at the forefront of the market”Ukroboronprom”, which recently entered to the 50 largest world arms manufacturers, taking 49th place in the Defense News rating. The company doubled its production volumes: the company’s turnover increased by 72% to $2.207 billion.

“Ukroboronprom” is a strategic producer of weapons and military equipment in Ukraine and a powerful employer: more than 54,000 workers are involved in the company’s work. The company cooperates with foreign partners, concluding agreements on joint production and development of defense technologies.

For example, a year ago “Ukroboronprom” and the German company Rheinmetall created a joint venture for the maintenance and repair of armored vehicles, as well as for the joint production and development of new weapons and military equipment.

However, the active involvement of the private sector in the defense industry has been noted in recent years. More than 800 Ukrainian companies are engaged in the production of military equipment, and only one in eight of them is state-owned. This indicates a significant expansion of private production in the defense sector, which allows diversifying the country’s production capabilities and more efficiently meeting the needs of the Armed Forces.

What has changed in the regulation of the defense industry

Two years ago, domestic “defense” underwent significant deregulation, which stimulated the active production of drones. In particular, the procedures related to the admission of drones to operation were simplified, which allowed for rapid adaptation and expansion of the use of these technologies in the fields. Later, the contracting process was also eased, which contributed to the rapid provision of military drones.

A year ago, almost none of the international partners wanted to invest in Ukraine’s defense technologies. Only a few early investors, mostly from England, began to consider such a possibility. An innovative defense technological cluster was created in Ukraine Brave1, aimed at the development and support of new defense technologies. Brave1 has united around itself more than 130 investors from more than 30 countries, and 4/5 of them are so-called “angel investors” who are ready to invest money at the early stages of project development. This significantly expands the capabilities of Ukrainian developers in the field of military technologies and contributes to the development of the industry of unmanned systems.

Last year, Ukrainian startups in the field of defense technology attracted investment with a volume of up to $5 million. This year, this amount increased to $25 million, and, according to forecasts, it may reach $50 million by the end of the year. The increase in investments indicates the growing trust of investors in Ukrainian developers. The average size of investment rounds increased from $500,000 in 2023 to $1-3 million in 2024.

Consequently, Ukraine has created favorable conditions for the development of young companies and medium-sized businesses in the defense sector. Startups have access to the support they need, allowing them to confidently grow in this sector. However, stable companies that have reached a certain level and are ready to expand their production face challenges on the way to scale.

According to Kateryna Mikhalko, executive director of the “Technological Forces of Ukraine” association, companies that have already completed dozens of state contracts and are seeking to scale up need international cooperation for further growth. That is why it is so important to build partnerships with foreign companies in order to gain access to new markets and resources.

Private manufacturers in Ukraine are asking the state to create more stable conditions for the development of the defense industry. They strive to conclude long-term contracts that will give confidence to investors and entrepreneurs. This will help the business to plan its work for several years ahead, which is important for the development and increase of production.

Another important step is state support in financing expensive developments. New defense technologies require large investments, which private entrepreneurs cannot always provide. The state could help by financing promising projects that will strengthen the country’s defense.

State support of the domestic defense industry

In September, the Verkhovna Rada approved changes to the State Budget, providing for the allocation of UAH 263.4 million for the Ministry of Strategy and Industry. These funds will be used to finance a new budget program for the reimbursement of interest on loans for defense industry enterprises. The program enables producers to receive credits under 5% per annum. The maximum amount of the loan will reach UAH 100 million for replenishment of working capital for up to 3 years and up to UAH 500 million for investment projects for up to 5 years. The rest of the loan interest will be covered by the state budget. These financial resources can be used for the development, manufacture, repair, modernization and disposal of weapons, military and special equipment, ammunition and other military products necessary for the needs of the Defense Forces of Ukraine.

The program is available for enterprises of the defense-industrial complex, which the Ministry of Strategprom recognized as critically important for the functioning of the economy in a special period. This initiative is expected to boost the production of weapons and military equipment, which is important for strengthening the country’s defense capabilities.

Tetyana Viktorova