UkrOboronProm, the giant state-run holding company of over 130 defense enterprises, is a Soviet-style industrial monster that dominates the country’s military-industrial complex. It fiercely defends its business with the country’s armed forces.
But as official figures show, UkrOboronProm is no longer the dominant force it once was. Despite still having immense production assets, the concern today wins only around a third of the state’s defense procurement contracts.
Nevertheless, UkrOboronProm remains a highly privileged state-backed oligopolist in this deeply unreformed sector; it has the legal authority to set the export and import rules even for its own rivals, who are trying to break into the lucrative foreign markets — the major source of income for the Ukrainian arms industry.
Since its inception in 2010 under the government of former Prime Minister Mykola Azarov, UkrOboronProm has always been the main contractor in state defense procurement — and thus a rich goldmine — exercising highly centralized control over the country’s biggest defense enterprises, such as the legendary Antonov aircraft manufacturer, or the huge tank plants in Kharkiv, Lviv, and Kyiv, or the Mykolaiv Shipyard.
In 2017, the global military broadsheet Defense News ranked UkrOboronProm 62nd among the world’s biggest defense producers, with $1.075 billion in revenue — a 7 percent increase compared to the previous year.
But even after the 2014 EuroMaidan Revolution and Russia’s military intervention in Ukraine, the concern has remained stubbornly unreformed. Moreover, the key roles in setting the country’s defense production policy were assigned to political allies and long-time business partners of President Petro Poroshenko: Oleg Hladkovskyi, who in February 2015 became the first deputy secretary of Ukraine’s Defense and Security Council, and Roman Romanov, who was appointed head of UkrOboronProm in July 2014.
Monopoly or not?
Nonetheless, UkrOboronProm’s top management insist that the concern competes for government contracts on an equal footing with the private sector, and that its share of the defense procurement pie decreased from 67 percent in 2015 to 52.3 percent in 2016.
And in 2017, according to the concern’s then-director general Romanov, UkrOboronProm won just 32 percent of the state’s defense contracts, while the others were won by private businesses.
Ukrainian legislation defines a monopoly as an entity that has a market share of over 35 percent.
In response to a request from the Kyiv Post, Ukraine’s Ministry of Economic Development and Trade said UkrOboronProm’s average annual share of defense procurement in 2014–2015 fluctuated between 60 and 70 percent, while in 2016–2017, its share decreased to just under 50 percent.
“This approximate annual average figure is lower than those in previous years, as witnessed by the intense upsurge of the private sector and the increase of its role in fulfilling the needs of state contractors,” the ministry told the Kyiv Post.
On Feb. 14, the Cabinet of Ministers approved a new three-year defense procurement plan for 2018–2020, with Hr 21.3 billion ($807.9 million) earmarked for 2018 alone. However, it is practically impossible to independently verify how big a market share UkrOboronProm now has, as the details of the procurement act and its supplement are classified.
Children play on armored vehicles during the Power of the Undefeated arms exhibition in the central Kyiv on Aug. 23, 2017. (Oleg Petrasiuk)
Privileged status
Valentyn Badrak, the executive director of the League of Defense Companies of Ukraine, an association of nearly 50 private defense entities, says that even if it now does not formally violate antitrust legislation, UkrOboronProm exploits its privileged status for its own benefits.
“The concern often hijacks contracts over from private companies, even though it’s a waste of state budget funds,” Badrak said. “It does it just to win a contract away from a private business, and above all to get a full order book for its own companies.”
For instance, he added, in 2016, UkrOboronProm started developing a new unmanned aerial strike vehicle system called Horlitsya — despite the fact that the Ministry of Defense had already been purchasing tried-and-tested Furiya drones produced by the Athlon Avia company in Kyiv, which have been used in combat by the Ukrainian army in Donbas since 2015.
“In fact, that was just a waste of taxpayer money in order to get a contract for the Antonov Company, which is now responsible for the project,” Badrak said.
However, the fiercest battles between UkrOboronProm and its rivals are fought for the right to export Ukrainian-produced weapons overseas.
According to the Stockholm International Peace Research Institute (SIPRI), a reputable Sweden-based think tank, in 2011–2015, Ukraine was the world’s 9th biggest arms exporter claiming 2.6 percent of the global market.
And foreign sales are a lifeline for both private and state-run defense businesses.
As new UkrOboronProm head Pavlo Bukin told the Kyiv Post during a March 2 interview, the country’s entire arms industry remains heavily dependent on exports, and 85 percent of the state concern’s own income comes from its foreign contracts.
It is in the export and import business where UkrOboronProm uses its legal privileges to the full, and is in effect a monopoly, according to Viktor Plakhuta, one of the leaders of the Ukrainian Freedom Fund anti-graft watchdog.
“Under government decree No.1228, all Ukrainian companies are obliged to seek confirmation of all their import and export contracts with UkrOboronProm,” Plakhuta said.
“The concern can have a direct influence on values of the contracts, and the very existence of a deal for their potential business rivals. It is entitled to block any contract it finds unfavorable to itself.”
“But according the law ‘On Protecting Economic Competition,’ of 2001, activities that cause obstacles to other businesses as they come in and out of markets are also defined as abuses of monopoly.”
Under government decree No.1228, of the 25 companies authorized to make foreign sales, 16 belong to UkrOboronProm. Another in the list is the Rubalsky Kuznya shipyard, owned by President Poroshenko, which is licensed to access foreign markets through Jan.1, 2021.
“The conflict of interest is absolutely obvious,” Plakhuta said. “The control of the arms trade must be executed by a public authority, not a business subject that itself makes profits from sales.”
“That would only be fair to the other businesses in the country.”
