Ukraine's growing arms sector thwarted by cash shortages and attacks

[April 19, 2024]  By Max Hunder

KYIV (Reuters) -Hundreds of Ukrainian businesses making weapons and military equipment have sprung up since Russia's full-scale invasion, but some are struggling to fund production and all are afraid of being targeted in intensifying Russian missile strikes.

Owners say they have pumped in their own cash to survive and moved locations at their own expense to stay ahead of Russian intelligence. They are now urging the government to cut what they describe as excessive red tape around its arms purchases.

Several also want to be allowed to export, arguing that the government is unable to buy all of their output.

According to Ukraine's strategic industries minister Oleksandr Kamyshin, the potential annual output of the military-industrial complex now stands at $18-20 billion.

Ukraine's cash-strapped government can only fund about a third of that, the minister told Reuters in an interview. That compares with $120 billion of military aid received from allies throughout the war, most of it in equipment rather than cash.

"We have the biggest fight in a generation ... If you look, for example, at NATO-caliber artillery shells, the production capacity of the U.S. and EU put together is lower than our needs," said Kamyshin.

Many of Ukraine's large, state-owned defense enterprises fell on hard times after the collapse of the Soviet Union. Now the war has triggered a resurgence in the private arms sector.

According to his ministry, the number of defense manufacturers has more than doubled since the invasion. Private enterprises now number about 400 to the 100 state-owned ones, although the latter still provide the most production capacity.

To resolve cash shortages, Ukraine is asking foreign partners to fund its defense production. On Tuesday, Denmark made the first such pledge of $28.5 million.

RED TAPE

Some manufacturers say they are struggling to raise funds, a problem compounded by a government procurement process that they complain is slow and cumbersome.

"The first threat that makers come up against when they start working is the bureaucracy of the military sphere and of purchases," said Vladyslav Belbas, CEO of Ukrainska Bronetekhnika (Ukrainian Armor), one of the few Ukrainian manufacturers making armored vehicles and artillery shells, among other products.

Belbas cited the fact that the defense ministry only places orders for the current year, hampering makers' ability to plan for the long term.

Four manufacturers making various weapons highlighted a range of issues: waiting for months to find out if the state was interested in buying, being bounced between departments in the defense ministry and armed forces, and having no assurances of future sales to help them plan production.

The defense ministry did not immediately respond to a request for comment on the complaints. It has previously said it is building "a new architecture" for defense procurement, and appointed a new chief for the agency responsible for weapons purchases earlier this year.

Employees check the exterior of a Novator armoured personnel carrier at a production facility of the 'Ukrainian Armor' Design and Manufacturing Company, amid Russia's attack on Ukraine, in an undisclosed location in Ukraine April 9, 2024. REUTERS/Valentyn Ogirenko

Private investment has primarily been driven by domestic entrepreneurs, who often say they are driven by patriotism rather than profit.

A source in Ukraine's government, who spoke on condition of anonymity to discuss sensitive issues, said private investment was not evenly spread.

"Everyone wants to invest in sexy stories like drones, but nobody wants to go into something difficult like (artillery) shells."

One way to raise money is to grant licenses for companies to export products that would otherwise go unbought by Ukraine due to the lack of financing.

Three manufacturers told Reuters they would like to see export licenses being granted, provided the manufacturer had unused capacity not covered by orders from Ukraine.

Kamyshin said that was not feasible: "It's fair for manufacturers to demand to either contract their capacity to the full or give them the possibility to export ... but this position does not have political support, so we are looking for financing for our enterprises so that all production remains in Ukraine," he said.

DANGEROUS BUSINESS

Aside from financial difficulties, making weapons in Ukraine during a full-scale war is fraught with risk.

When Reuters visited a factory of Ukrainian Armor, the head of the plant, who gave his name as Ruslan, agreed to speak only if his face was not shown to protect him from becoming a target of Russia's intelligence services.

The factory, which employs around 100 people and makes armored vehicles and mortars, was in the process of being wound down and moved to another location.

Ruslan said this was because a bigger premises was needed to accommodate more staff, as well as to make it harder for the Russians to find the factory. Some arms manufacturers move locations as often as every three months for security.

"From the (manufacturers) I speak to, not one private company received (state) compensation for relocation," said Ukrainian Armor's Belbas.

Another problem faced by manufacturers is the threat of power cuts, as Russia pounds energy infrastructure while Ukraine is running out of air defense munitions to protect its skies.

"In 2022-2023, we did not have electricity for two-thirds of our working hours – of course, under such conditions it is very difficult to manufacture anything," Belbas said.

The government source said that manufacturers currently had no issues with power supply, and that if mass power cuts did have to be implemented then they "will be switched off last".

(Reporting by Max Hunder; Editing by Mike Collett-White and Philippa Fletcher)

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