This year, the defence and industrial complex of Ukraine (DIC) was supposed to undergo a real revolution. In the first year of his presidential tenure, Volodymyr Zelenskyi and his team announced their intention to introduce open procurements instead of the corruptive secret procedure of the government defence order and liquidate Ukroboronprom. The military concern had to be replaced with a new company based on successful international practices of the Organization of Economic Cooperation and Development (OECD). In particular, it was planned to create a professional supervisory board independent of politics of the management, introduce transparent anti-corruption procedures and so on. The icing of the cake was that the newly-created company could acquire the right to attract foreign capital for implementing projects in the sphere of defence with the view to modernizing its production.
At the same time, with the second year of the presidency of Zelenskyi coming to its end, reforms of the DIC remain on agenda still to be discussed in working groups.
The Ministry of Strategic Industries has just finished drafting regulations and the Ministry of Defence is still working on regulations needed to adopt the Law on Defence Procurements, though these very procurements had to be introduced in January of 2021. It was at that time when the legislation on the state defence order lost its effect.
The battle is going on in the sidelines of draft law No 3822 on the reform of Ukroboronprom regarding the body which will control financial flows of the future legal successor of the concern.
StateWatch expert organization suggests recollecting what the reform of the DIC lies in and what the team of Zelenskyi is supposed to implement in the near future.
Two years ago, following allegations of corruption within Ukroboronprom contracts brought against his close friend, Oleh Hladkovskyi, amid the presidential election, Petro Poroshenko sanctioned the resolution of the Council of National Security and Defence on Reform of the Defence and Industrial Complex and Higher Transparency of Fulfillment of the State Defence Order.
Such a document was long-expected for the whole sphere of the DIC as the decisions it specified were overripen.
Volodymyr Zelenskyi won the election, attacking his opponent with information about corruption in the army.
By irony of fate, the management hierarchy of the new president became responsible for implementation of the decisions of the Council of National Security and Defence made during Poroshenko’s tenure.
In particular, it involves the following objectives for the government:
Apart from it, the Law on National Security adopted in 2018 obliged the government to develop the Strategy of the DIC development.
In simple words, this is a fundamental document which specifies priorities of the defence and industrial policy, goals of the DIC reform and expected results in the view of current threats and challenges. Such a Strategy is developed upon the examination of the defence and industrial complex, which is also provided for by the decisions of the Council of National Security and Defence.
What has factually been done in the last two years?
The Ministry of Economic Development has conducted comprehensive examination of the DIC for the first time in the history of independent Ukraine. In particular, it analyzed the state, capabilities and readiness of the DIC to meet needs of weaponry, ammunition, military and special equipment in the sector of security and defence.
Such an examination was approved by the Cabinet of Ministers of Ukraine in May of 2020. Later, the document was worked on in the office of the Council of National Security and Defence, but was not approved. Even the newly-created Ministry of Strategic Industries made an attempt to accomplish the examination in the ‘air’ sphere. So, the process of preparation for the examination to be approved by the Council of National Security and Defence is still underway.
Following the examination, the Ministry of Economic Development drafted the Strategy of the DIC development. The document was aimed at boosting the efficiency of the defence industry by restructuring state-owned enterprises involved into production of weaponry and military equipment in Ukraine, specifying privatization of non-operative enterprises, as well as introduction of OECD standards of corporate governance at those enterprises which remain state-owned.
However, last September, with the defence and industrial policy being delegated to his establishment by the government in middle of the year, the vice prime-minister of strategist industries, Oleh Uruskyi, asked the Ministry of Economic Development to stop working on the document. As a result, the Strategy of the DIC development is still missing in the country.
“The strategy of development of the defence and industrial complex of Ukraine, which must include the unified and coordinated position regarding transformation of the state concern Ukroboronprom, has to be elaborated as soon as possible,” press-service quite unexpectedly cited Oleksander Danilov, secretary of the Council of National Security and Defence, last year, though, as it has already been mentioned, the draft document was ready several months before the release.
The problem of shipment of defence-oriented goods into the territory of Ukraine was out in the open air due to the scandal in connection with the circle of Mr. Hladkovskyi. As it turned out, in the fifth year of the war Ukrainian defence enterprises were still half-legally buying up spare parts in Russia because of their deficit.
Spoiler: the problem has not been resolved in the seventh year of the war.
In May of 2020, the Cabinet of Ministers submitted a necessary draft law on facilitation of import of constituent parts for defence-oriented goods to the parliament. However, the document has been at the stage of “familiarization” for almost a year.
The situation with defence procurements is a little bit better. In the first half of 2020, the Ministry of Economic Development, Ukroboronprom and parliamentary Committee on Security and Defence took leadership in elaboration of the needed draft law. The draft law came into force with the full political support of Volodymyr Zelenskyi in September. In fact, as it was mentioned before, the defence procurements have not yet been introduced.
The draft law No 3822 on reform of Ukroboronprom was registered in the parliament at the beginning of July of 2020. The document was drafted in close cooperation with the Ministry of Economic Development, the concern and members of the specialized committee on defence. However, the vice prime-minister Oleh Uruskyi was willing to refine upon the draft law after its registration.
The exact time for the law to be adopted remained unknown for the reason of the ongoing war for control over financial flows in the DIC.
Under the first version of the draft law, the main authority controlling the company is a joint stock company which is to be created after Ukroboronprom. It was done in order to avoid single-handed management of the DIC enterprises by any minister.
In particular, the Cabinet of Ministers is assigned powers to approve the Articles of Incorporation of the new company. The document specifies competence of all management bodies of the company and procedure for making decisions, procedure for creating its supervisory board, selecting and terminating powers of its members as well as procedure for appointing the director general.
However, the last version of the draft law specifies a bit different management model. Along with the Cabinet of Ministers, the Ministry of Strategic Industries has been determined as the management entity, with its chief, Oleh Uruskyi, having initiated numerous changes in draft law No 3822 in order to eventually gain control over enterprises of the defence and industrial complex.
It is not a secret that Oleh Uruskyi has been seeking to gain control over Ukroboronprom for a long time. It was his establishment that the top management of the concern accused of pressure. It was Mr. Uruskyi who unsuccessfully initiated the transfer of Antonov Company and other aviation companies from the concern into his own direct management.
As of the end of March of 2021, the draft law is being prepared for the second reading.
The non-adoption of the law hinders any transformation of Ukroboronprom into a modern company. For example, the supervisory board of the concern remains a political quasi-management body which, if compared with OECD practices, does not enjoy neither independence not powers. It might be for this reason that not a single representative of partnering states has been engaged into its work since the decision of the Council of National Security and Defence came into effect in 2019.
The only foreigner in the Council, the American, Anthony Tether, was appointed under the tenure of Petro Poroshenko three years ago.
Generally, since Mr. Zelenskyi won the election, 9 people were appointed to the Supervisory Board of Ukroboronprom, with two of them occupying their positions for the last 4-5 months and 5 occupying their positions for less than 12 months. For example, political figures such as David Arakhimia were members of the board for only 3 months. On October 7, 2019, the President Volodymyr Zelenskyi included Andriy Yermak into the Supervisory Board, who was in that position for 8 months.
At the end of the last year, the current acting Minister of Energy, Yuriy Vitrenko, was combining his position in Naftogas with membership in the Supervisory Board of Ukroboronprom for 3.5 months.
Despite the rapid rotation of members of the Supervisory Board, the management of the concern fulfilled in full all tasks assigned to Ukroboronprom by the Council of National Security and Defence.
January of 2021 witnessed the first audit completed in the history of the conglomerate in consistence with the international standards and financial accounting for 2018. The document is available online.
Results of the 2019 audit will be published this year, with 2020-2021 audits also planned.
Following the triage-analysis of all enterprises of the concern, 16 state-owned companies were transferred to the State Property Fund for privatization. These companies have not been producing anything for the army for a long time. Some of them, being inoperative, were the dead weight in financial statements of the concern.
All non-secret procurements of the enterprises of the concern Ukroboronprom have been transferred to the Prozorro platform since January 1, 2020. In the first calendar year, following such a decision, the total concern procurements savings made up 657 million hryvnas.
Therefore, an unbiased look at the situation will enable us to see that, as of March of 2021, Ukraine created another ministry which is fully in charge of the DIC. However, examination of the DIC has not been approved yet, which, in turn, results into the lack of the DIC Strategy. The relevant law missing, the reform of Ukroboronprom also cannot be launched. Not a single defence procurement has been conducted so far.
All statements and steps in terms of the reform of the DIC in the last two years can be characterized as good intentions which are about to bear results. The President, Volodymyr Zelenskyi, does not leave any room for doubt about his sincere support of transformations in the defence sector. Nevertheless, one mistake in management has been impeding all endeavors.
This mistake lies in the creation of the Ministry of Strategic Industries last year. Though there were only five people working at the newly-established ministry at that moment, including the minister and deputy ministers, it was allotted the powers to form the defence and industrial policy that the government had previously deprived the Ministry of Economic Development of.
For this very reason, namely due to the lack of resources and experts in the specialized ministry, the DIC still does not have its Strategy as a roadmap for development, Ukroboronprom is waiting for the draft law on its reform, and defence procurements are suspended.
At the same time, irrespective of what is going on in Ukraine, the threat in the Eastern front has not disappeared.
Therefore, StateWatch has elaborated recommendations to eliminate the outlined impediments on the way of the Defence and Industrial Complex:
Time flies. So, at the end of this year we will be able summarize what the team of the President has done in the DIC during 2021.