OPINION: Ukrainian Defense Industry, Finally, Is Reforming

The Ukrainian authorities have finally gotten around to addressing key reform for the domestic defense industry, which during the years of independence has suffered many times due to corruption and inefficient management. Russia’s war against Ukraine further demonstrated the need for immediate change. A lot of domestically produced weapons are needed because supplies from partners aren’t always sufficient and don’t always cover all the needs of Ukraine’s Armed Forces (AFU).

So, the reform of the main state defense concern Ukroboronprom (Ukrainian Defense Industry) – an enterprise that unites the components of the defense industry – has now become a priority.

Ukroboronprom was created in 2010 to regulate the efficiency of management in the defense industry and provide the Armed Forces of Ukraine with the necessary weapons. But the organization has become an ideal place for laundering state funds. The scale of corruption has been astounding.

In 2019, the then Prosecutor General Yuriy Lutsenko reported that over 5 years (since 2014) as a result of offenses at the enterprises of the state concern, losses amounted to more than Hr. 350 million ($9.5 million).

In 2021, the Ukrainian parliament supported the law reforming the concern and corporatizing it. But the political will to carry out the reforms only manifested itself in the second year of Russia’s full-scale invasion.

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President Volodymyr Zelensky’s team entrusted Oleksandr Kamyshin with this mission. He was moved from the position of chairman of the board of the Ukrzaliznytsia company (Ukrainian Railways), where he had proved himself and gained the trust of the president.

Oleksandr Kamyshin. Photo by Suspilne media

In March 2023, Kamyshin was appointed Minister of Strategic Industries, where reform of Ukroboronprom became a priority task for him.

The first step toward implementing the reform

On June 27, the first step towards the corporatization of Ukroboronprom was taken. Zelensky fired the general director Yuri Gusev, who had held this position since the end of 2020.

Kyiv Post sources from the president's entourage said that the main complaint against Gusev was the slow process of production of Ukrainian military equipment and shells.

The public also has questions about the defense industry. But, according to the Kyiv Post source, during the war, Ukroboronprom can’t publicly report how many weapons Ukraine produces. This information is classified.

The day before Gusev was fired, Ukroboronprom officially admitted that part of the missile program, developed on the instructions of the president, had not been completed.

Yuri Gusev. Photo by press service

Despite these claims, the most likely reason for Gusev’s dismissal was the conflict with Kamyshin.

“From the very beginning, their personalities did not match. Gusev did not perceive Kamyshin as his leader. And Kamyshin did not see him as a team member. In addition, the minister began to build tactics, according to which all achievements were characterized with him, and bad news and indicators with Gusev,” – says the Kyiv Post source.

Having the trust and mandate for changes from the president, the minister was able to block access of the general director of Ukroboronprom to Zelensky, so that there would be no second guessing.

Kyiv Post reached out to Gusev and Kamyshin for comment, but they have not responded to the request.

The former general director publicly supported the reform of Ukroboronprom. As he recalls in his post-dismissal column for the publication Ukrainian Pravda, "the order to start corporatization of the concern was one of the first" during his tenure.

According to preliminary information, Gusev may be appointed ambassador of Ukraine to the Czech Republic. Andrii Yermak, the head of the President’s Office, could not confirm or deny this information. “We hope he will remain in the presidential team,” he told Kyiv Post.

Immediately after Gusev’s release, Ukroboronprom was liquidated, and the joint-stock company Ukrainian Defense Industry was created in its place. Herman Smetanin, the 31-year-old director of the Malyshev Kharkiv Transport Machine Building Plant state enterprise (which specializes in the production of armored vehicles), became the new head.

Challenges and risks

"A young, progressive leader. He made his way in the defense industrial complex from an engineer to a plant manager," – is how Kamyshin characterized Smetanin.

Herman Smetanin

Smetanin has three main tasks:

- increase the production of ammunition and military equipment;

- build an effective anti-corruption infrastructure in the company;

- to transform "Ukroboronprom".

Smetanin has not yet commented on his appointment. Ukrainian parliamentarians are waiting for him to meet with them, and they want to learn more about the plan to reform the joint-stock company.

Hlib Kanevsky, head of the expert organization StateWatch, believes that with the new appointment, Smetanin and Kamyshin should be given 100 days to evaluate their work, understand what works and what doesn't,and their draw conclusions.

A Kyiv Post source from the president's entourage also agrees with him. “Zelensky trusts Kamyshin; he likes the minister as a manager. We will monitor him and his work.”

It will also become clear over time whether Kamyshin and Smetanin will be able to work together, and whether they share the same vision for Ukroboronprom’s reform.

Because in addition to increasing the production of ammunition and military equipment, which is necessary in wartime, it is important to destroy all the corruption schemes that have been working there for years.

In 100 days, it will be clear whether the new leadership wants to carry out effective anti-corruption work or lead corruption.

“Ukroboronprom has always had funds,” Kanevsky tells Kyiv Post.

“Accordingly, it became the object of interest of various political groups, which tried to appoint their representatives to various positions. Not necessarily for management positions, it could be, for example, directors of production, directors of international trade, etc.”

Further, schemes were developed to launder state money: import of military goods, and various spare parts for military equipment at inflated prices through offshore companies, and not directly from manufacturers or suppliers.

To reduce the scale of such schemes, competitions for certain positions were introduced. Smetanin also participated in the competition in 2020. Having passed all stages honestly, he was appointed the director of the plant.

“It can’t be said that after 2019, corruption in Ukroboronprom disappeared. It definitely became less, it was even with the example of Smetanin that a person without connections was able to build a career as a manager in a concern,” Kanevsky believes.

Hlib Kanevsky. Photo by StateWatch

Therefore, the new head of the joint-stock company must quickly take everything under his control, because the temptation to create new corruption schemes is growing, especially during wartime. Currently, Ukroboronprom has many orders for weapons for the army, and there is a budget for this.

Risks will arise from the future privatization of some properties of the concern. It’s also necessary to monitor that all legal procedures are followed.

Having overcome corruption risks, the next step will be to build a transparent company with a supervisory board. And also reporting of Ukroboronprom to society. Because, as already mentioned, there were many complaints against Gusev due to the lack of reporting on the work done and the weapons produced within the limits of what can be publicly reported.

“Smetanin and his team should develop such a reporting system so that he can show society what results they have achieved over a certain period of time,” Kanevsky says. “So that he can be sure that if any resources are invested in drones, then these drones are actually built. And that the Armed Forces have these drones on the battlefield.”

And this is just the beginning. What exactly the future of the defense industry of Ukraine will be is still difficult to predict. But a lot depends on the first steps being taken now.

Reform of the defense complex is necessary for Ukraine to integrate into the NATO security system. If these changes don’t lead to another struggle for spheres of influence or corruption, Ukraine has every chance to become a world leader in the defense sector.