Goodbye Ukroboronprom, hello Ukrainian Defense Industry

The Ukrainian Defense Industry emerges as the successor to Ukroboronprom, with a mission to significantly boost the production of ammunition and military equipment. According to Liga, the state-owned defense conglomerate Ukroboronprom ceased to exist as of 28 June 2023 and has been succeeded by the joint-stock company "Ukrainian Defense Industry" (UDI). The sole shareholder of the new company is the state, represented by the Cabinet of Ministers, with a charter capital of UDI amounting to 237.07 million UAH ($8.5 million). The General Director of UDI is Herman Smetanin, who previously headed the Malyshev Plant. This choice of director, who for the first time is involved not in trade but weapons production, "will be the right signal to the entire industry that it is seen and that all productive ones will be encouraged," according to a source of Ekonomichna Pravda in the government. Smetanin will face several important tasks as the new head of "Ukroboronprom" - to increase the production volumes of all necessary types of weapons, to complete the reform of the defense industry, and to "clean up the industry from corruption," Ekonomichna Pravda writes. As for the structural reform of the defense industry, Smetanin, as the new head of "Ukroboronprom," will have to reduce costs and staff of the management structure by at least 20%, as even without production costs, the maintenance of the concern currently costs at least 450 mn UAH ($12.2 mn) per year. Ukraine's Minister for Strategic Industries Oleksandr Kamyshin outlined the next steps in the transformation of Ukroboronprom, which include staff transition, property transfer, and the formation of a supervisory board in accordance with the standards of the Organization for Economic Cooperation and Development. He further stated that UDI has the task of significantly increasing the production of ammunition and military equipment.

• The reform of Ukroboronprom involves its transformation into a joint-stock company, with 100% of the shares belonging to the state;
• The joint-stock company will also act as a corporate center, responsible for the transformation of member enterprises and attracting investments;
• The reform will divide 119 enterprises into prospective ones and those that have lost their significance for the defense-industrial complex;
• 26 enterprises will be transferred to the State Property Fund;
• 65 enterprises will become the basis for five specialized sub-holdings: armor, aircraft repair, high-precision weapons and ammunition, radar systems, and marine systems; the rest will become part of an aerospace holding or will be directly subordinated to the corporate center (e.g., special exporters).

As Defense Express reports, the previous director of Ukroboronprom, Yuriy Husiev, was dismissed because he did not carry out this very same reform on the ineffective state structure embroiled in corruption scandals, despite promising back in 2020 to transform it into "holding companies" operating according to "OECD principles of corporate governance and transparency." Husiev has also faced criticism for not ensuring the mass production of Ukrainian weapons that could now be employed against Russia. Particularly, the readiness level of Sapsan, a Ukrainian operative-tactical rocket complex that could launch much-needed ballistic missiles with a range of at least 400 km, was much lower than promised: this project is only at the development stage despite promises to be at the front in May 2023, Defense Express reported. However, one of Husiev's achievements was to establish the effective work of the concern in the first months of Russia's full-blown invasion. While the armed forces had not yet received the first batches of Western heavy weapons, Ukroboronprom repaired equipment to defend Kyiv. Ukroboronprom's enterprises have been under Russian missile strikes since the first day of the invasion. Despite this, thousands of vehicles were repaired and its plants expanded their staff by 10,000 people over a year and a half. As well, he managed to establish from scratch the production of ammunition of scarce Soviet calibers: 82, 120, 122, 125, and 152 mm. In the first year of the invasion, they were produced in small quantities. Western shells were more attractive to the Ministry of Defense because they were cheaper and more effective for the army than those produced at the Ukroboronprom plants.

First batch of 122-mm shells made by Ukraine’s defense enterprise abroad arrived to the frontline

It was only in 2023, with the assistance of the new head of the Ministry of Strategic Industries, Oleksandr Kamyshyn, that the company managed to negotiate more or less large orders with the Ministry of Defense and scale up production. Now the concern produces tens of thousands of shells per month, Ekonomichna Pravda writes. Husiev is also criticized for not managing to establish the large-scale production of drones, drastically needed by the Ukrainian Army, despite the availability of certified designs. The Ministry of Defense and volunteer foundations still prefer private manufacturers. A popular drone project of Ukroboronprom is an unnamed kamikaze drone, which is allegedly capable of hitting targets at a distance of 1,000 km. However, there have been no orders from the Ministry of Defense for these drones. The concern produces them at its own expense and supplies them to the armed forces, according to Ekonomichna Pravda. The drones are supposed be a multifunctional platform that could drop explosives, carry an electronic warfare station, reconnoiter the territory, or self-destruct. Currently, only the first mass-production batch of the drones has been manufactured and they work only as kamikazes.

Successful use of domestic drone with 1,000 km range reported by Ukroboronprom

Husiev was also reportedly responsible for Ukraine's long-range missile program, which has not delivered any tangible results, although, admittedly, the entire topic is shrouded in secrecy. On a positive note, Ukroboronprom did establish a joint venture to build and repair tanks with the German arms maker Rheinmetall, the first such project in Ukraine's history.

Researcher: Ukraine will build its own long-range missiles. If the West allows.

Ukrainian Defense Industry's new head, the 31-year-old Smetanin, will inherit a huge structure, where he will not only have to integrate himself into the management of dozens of strategic enterprises but also effectively implement an important corporatization reform that could give the Ukrainian defense sector a second wind, Ekonomichna Pravda sums up. In this, he faces not only the need to manage damaged Ukroboronprom enterprises, many of which were destroyed by over 150 Russian missile, bomb, and artillery strikes or were under occupation for a long time, but the changing landscape of the Ukrainian defense industry. If earlier, Ukraine had pursued the path of defense isolationism like North Korea or Iran, now Western defense giants are entering the playing field. And it is unclear how Ukraine can compete with productive and successful enterprises like BAE systems, whose 93,000 workers in 40 countries made $25.7 bn in 2021. Over the same period, all of Ukroboronprom's enterprises, with their 70,000 employees, made only $0.75 bn, according to Defense Express.

"In other words, the list of tasks and conditions for reforming Ukroboronprom, but for real, is much more complicated than they were before. And the reform of the state defense industry is only one vector of work, as there is an even more important task of providing the Armed Forces of Ukraine with weapons and military equipment," Defense Express writes.