Ukraine can produce much more weapons. What is needed for this?
Translation of a post in Ukrainian liberal media: Military industrial progress and its financial limitations / the positive example of Israel / the idea of military industrial integration with the EU
The original (28 December 2023) was published here, on Economic Truth, a sub-publication of Ukrainian Truth, the premiere Ukrainian liberal publication.
The domestic defense industry is significantly increasing production. To realize its full potential, there is a lack of financing, personnel, and effective interaction between the state and business.
"They produce nothing, the Ukrainian defense industry will soon cease to exist," Russian President Putin said in June. Domestic defense plants are like Ukraine's air defense system: they have already been destroyed three times in Russian military operations, but their capacity is only growing.
Western partners are reducing the supply of equipment to the Ukrainian Armed Forces, while Russia is increasing its spending on the war by 70%. It is becoming clear that from 2024 on, Ukraine will rely more on its own weapons production. This is not just a matter of the "million drones" promised by Zelenskyy. The political leadership should also think about classical weapons: armored vehicles, ammunition, missiles, air defense, etc. All of this is in the context of limited time and funding.
The enemy produces military equipment in shopping centers and even bakeries. The Russians are rapidly modernizing their developments for the needs of the front line and putting all innovative ideas on the assembly line, even if they were invented by Ukrainian engineers.
The Russian defense industry is a large-scale state system with enormous financial capabilities. It can only be resisted by another system that works much more efficiently even with fewer resources. Ukraine has no choice but to transform its own defense industry into such a system.
What Ukraine produces
During the first months of the great war, Ukrainian gunsmiths survived under fire and moved to safe places. Those who managed it faster invested and built new production chains. When it became clear that military plants were capable of operating under Russian missiles, the attitude towards the defense industry changed: the state increased orders and began investing in capacity expansion.
However, the equipment for weapons production is expensive and specific: procurement of individual machines can take two years. Therefore, the defense industry began to show the first results only in the second half of 2023.
The state-owned Ukroboronprom [Ukrainian Defense Industry] increased its arms production by 92% over the year. Despite the constant missile threat, state-owned enterprises are exceeding production targets. The production of new types of weapons has begun: self-propelled artillery, ammunition, kamikaze drones, etc.
Domestic enterprises produce several analogs of Russian "Shaheds". For example, as part of the Black Box project of the Come Back Alive Foundation, private companies are assembling kamikaze drones that have caused $900 million in damage to Russia. Ukroboronprom has launched mass production of the Liutiy UAV. It is known that it is produced in dozens per month and has already had a combat flight at a distance of up to 1,000 kilometers.
Hundreds of Stugna anti-tank missiles are produced every month. Water drones for hunting Russian ships are mass-produced by several companies. Ukrainian producers of the Bogdan self-propelled artillery system can produce a dozen vehicles a month.
FPV drones, reconnaissance drones, and electronic warfare systems are being produced by dozens of companies and hundreds of engineers. The restoration and production of armored vehicles continues. The number of Ukrainian armored vehicles produced has probably exceeded 1,000.
Ukrainian designers are working on several projects for domestic air defense: it is planned to combine launchers, radars, and missiles from different systems. More and more information about the missile program is becoming available. The Defense Ministry hints that it will order the latest “Coral” anti-aircraft missiles from Luch Design Bureau.
Despite the successful first steps, the domestic defense industry covers only a small part of the needs of the front line. The government is confident that in 2024 it will be able to increase arms production many times over. However, there are several obstacles to overcome.
Where to get the money
In 2024, the Ministry of Defense will allocate UAH 265 billion for arms procurement. First, this is 25% less than in 2023. Secondly, most of these funds will be used to purchase imported equipment.
Fortunately, not only the Ministry of Defense, but also the State Special Communications Service, the National Guard, the Security Service of Ukraine, city councils, foundations, and individual military units order weapons. In 2024, the State Special Communications Service alone will spend more than UAH 43 billion on drones, which it will receive from the redistribution of the so-called military personal income tax.
In total, $3 billion will be spent on the purchase of Ukrainian weapons in 2024. This is three times more than in 2023, but it is not enough. According to the Minister of Strategic Industries Oleksandr Kamyshyn, the budget money is enough to utilize only half of the Ukrainian defense industry's capacity.
The purchase of only "a million FPV drones" will cost about $500 million. Contracting for a year of Bohdan air defense systems at the current production rate will cost another $200 million. In addition, the state needs to buy domestic ammunition, missiles, unmanned systems, and assemble and repair armored vehicles.
Israel once found itself in a similar situation. The country sought to develop its own defense industry, but did not have the funds to do so. Then the country's authorities agreed with the United States that 25% of their military aid (hundreds of millions of dollars annually) could be converted into shekels and spent on the purchase of Israeli weapons.
Ukraine can also apply for such conditions, but in this case the donor will be the European Union, not the United States. The bloc is currently developing a joint defense strategy. The failure of the plan to produce 1 million rounds of ammunition for Ukraine suggests that the capacity of their defense industry does not cover real needs.
In November, European Commission President Ursula von der Leyen announced her readiness to include Ukraine in the EU's defense strategy to meet Kyiv's needs for military equipment. The idea of financing orders for Ukrainian companies with European funds has already been discussed at a high level.
However, it is not an easy task to integrate into the EU defense industry and gain the trust of European officials. To do this, reforms need to be accelerated: form an independent supervisory board at Ukroboronprom, demonstrate zero tolerance for corruption, and create more joint ventures with Western companies, adopting their connections and management methods.
Scaling up production
Economic theory says that large long-term contracts make it possible to make products cheaper through bulk orders and optimization. This is called "economies of scale" and it is extremely important in the defense industry. Many Ukrainian companies find it difficult to achieve this effect for several reasons.
The first is that the Ministry of Defense cannot pay 80% of the advance payment to everyone, as manufacturers want. Less working capital ties hands and does not allow for optimization of supply chains.
This contradiction can be resolved by launching a program of preferential lending for manufacturers. According to Vladyslav Belbas, director of Ukrainian Armor, companies can currently take out loans at only 20% per annum. Prime Minister Denys Shmyhal announced the idea of including arms manufacturers in the preferential lending program "5-7-9%" in the summer, but the relevant changes have not yet been implemented.
The second reason is that the supply cycle for some parts can take up to 12 months. To plan effectively, manufacturers should at least know how much product they have to ship at the end of the year.
To do this, the Ministry of Defense should return to long-term order planning. The surveyed EP manufacturers agree that the Ministry has increased the duration of contracts over the past year, but many companies still do not have a planning horizon for the next year.
The third reason is that the state is unable to fully utilize domestic factories and at the same time prohibits the sale of weapons abroad. Partial opening of arms exports is an unpopular decision, but it will allow military enterprises to earn more, optimize their operations and invest in development on their own.
Meanwhile, the Russians have kept arms exports open. Their military factories still receive billions of dollars in revenue from sales on the global market, which helps them develop their technologies and reduce the cost of products for the state customer. With proper planning, Ukraine can do the same.
"I am sure that at some point we will have to open the market and allow our defense companies to export. This will happen after the victory, but if we find an acceptable solution, we will do it earlier," Kamyshin said.
The fourth reason is a shortage of personnel. Taras Chmut, head of the Come Back Alive Foundation, said that one domestic defense company failed to complete a contract because it could not find operators of computer numerical control machines. Almost all arms manufacturers have faced this problem.
To solve this problem, it is worth sending engineers, designers, mechanics, and welders from the front to defense plants. So far, the military leadership is not considering this option. In the meantime, the situation on the labor market may become more complicated, as a new wave of mobilization is being prepared starting in 2024.
For its part, the Ministry of Education should retool technical and higher education to train as many specialized personnel for military enterprises as possible.
Innovations on the assembly line
Ukrainian engineers are able to find innovative solutions for asymmetric warfare: FPV and maritime drones are proof of this. The only question is the speed of technology implementation and mass production.
In order to put a development on the assembly line, the Defense Ministry must issue an operational permit and, before that, conduct a series of tests and inspections. Due to uncertainty and bureaucratic obstacles, the ministry only allowed 21 new domestic developments to be put into service in the first year of the great war.
In 2023, the Ministry of Defense significantly shortened procedures, launched the Accelerator, and allowed the Brave1 cluster to begin the certification process. The result is a sevenfold increase in the number of new developments.
According to the Ministry of Defense, in 2023, 155 samples of Ukrainian equipment were approved for operation, of which 34% were aviation drones, 8.3% were armored vehicles, 3.8% were electronic warfare, and 1.9% were ground robots.
Since the beginning of the great war, the state has almost stopped giving money for new developments, and this has had an unexpected effect: 80% of defense companies began to finance development out of their own pockets, and the industry has seen a significant increase in the number of effective project managers and investors.
To accelerate the birth of innovations, the Ministry of Defense should start funding priority developments together with business. For example, the electronic warfare means mentioned by Commander-in-Chief Valeriy Zaluzhnyi. Currently, the Ministry does not plan to increase spending on research and development (R&D). Since 2022, it has been allocating UAH 3 billion annually. This means that the R&D budget is being reduced in line with inflation.
The issue of formulating the Defense Ministry's request for new developments is also unresolved. Designers often do not understand what characteristics the military needs and, most importantly, what products the state will buy.
The technological race at the front is accelerating. Equipment can lose its relevance after two or three months of use, so detailed communication between the military and manufacturers should be simple and efficient.