Will Ukraine Boost Its Defense Sector with Low-Interest Loans?

“We estimated the total demand for loans at Hr.10 billion ($238 million) for 16 companies out of 80 members in our association,” Serhii Honcharov, CEO of the National Association of Defense Industry Enterprises of Ukraine (NAUDI), told Kyiv Post. 

The Ukrainian defense industry waited for concessional loans starting from the second Russian invasion in February 2022. With this being a full-scale attack, Ukraine needed to establish mass-scale military production - and fast. 

In 2012, Ukraine was the world’s fourth largest arms exporter. In 2015, after Russia invaded Ukraine's Donbas in 2014, it was declared ninth and then downgraded to 12th place in 2019, according to the Institute of the Study of War.

“Ukraine’s defense industry as of 2023 employs 300,000 workers within about 500 different companies, of which almost 400 are private companies," the ISW wrote. 

Before Russia’s full-scale 2022 invasion, Ukraine mainly exported engines, missiles, armored vehicles and aircraft components, according to the Stockholm International Peace Research Institute (SIPRI) data on Statista. 

The country's defense sector boosted homegrown weapons manufacturing in 2024: electronic warfare weapons, unmanned aerial, naval, and ground vehicles, howitzers, ammunition, armored vehicles, bullets, mines. 

To reach the necessary production scales, companies need more financing – and more buyers who treat payments responsibly. 

Other Topics of Interest

Ukraine Must Join the Joint Expeditionary Force, and the UK Should Lead the Way

The UK has been a leader in helping Ukraine. But as inertia sets in and with Western support wavering, efforts must be redoubled. The JEF is a natural bridge to NATO.

How Can Low-Interest Loans Help?

The market interest rate for a business loan in Ukraine can reach or exceed 20%. In 2020, President Volodymyr Zelensky launched a program of preferential loans – the “5-7-9%” program where the state would underwrite the average 20% market interest rate for loans by charging enterprises a rate of 5,7 or 9%. 

Over the years it became the most popular loan type, but it was unavailable for Ukrainian defense companies. 

In September 2024, Ukraine launched financing to compensate for the market interest rate for arms manufacturers, decreasing it to 5%. The government will cover the majority of the interest costs, allocating money from the state budget to what is called the state agency Entrepreneurship Development Fund (Fond Rozvytky Pydpryemnitstva). 

A defense company can borrow from Hr.100 million to Hr.500 million hryvnia ($2.4 - $12.02 million) for up to three years, depending on the purpose of the loan and its eligibility for the program which can cover: development, production, repair, and modernization of weapons, military equipment, munitions, and other critical resources.

The government allocated Hr.263.4 million ($6.33 million) for this program in the state budget, according to the Ministry of Strategic Industries. For 2025, Ukraine’s government increased the amount to Hr.500 billion ($12.02 billion), the 2025 budget data says. Who will borrow the cash?

What are the current challenges faced by Ukraine's defense sector?

“About 20 companies from middle-size segments of the defense sector have submitted applications for low-interest loans, but newly created companies will also want them. They represent different segments,” a banking expert who asked to remain unnamed due to sensitivity of the topic told Kyiv Post. 

The amount of each loan varies from sector to sector. “Ukrainian drone manufacturers normally ask for a loan of no more than Hr. 3 millions, usually for buying equipment and operational capital,” a second banking expert who also asked to remain anonymous told us. 

How big are the companies eager to borrow more? 16 NAUDI members who applied for preferential loans have an annual income from Hr.1.5 billion to Hr.50 billion ($36.06 million - $1.20 billion), NAUDI’s CEO said. 

He said that loans for military purposes have been a sensitive issue for the government because it was afraid about leaks of secret information. If a company applies for a loan from a bank, it needs to file all information about its business: where it’s located, what the business model is, potential corruption issues.  

Not everyone is ready to be open afraid that if the enemy finds out the address of a drone factory and aims at it with a Russian ballistic missile, destroying everything. 

But the second banking expert told Kyiv Post that information about the location is still needed. 

It may be useful to see the actual location and make sure the company really exists. Ukrainian drone manufacturers, for example, create a network of European shell companies to buy components and hide their location, the second speaker said. 

“China allows Russia to buy its components for drones but bans operations in Ukraine. So, manufacturers create a network of European shell companies to buy components and hide their location.”

Honcharov believes a bank should only need the financial statements to see that the business is operating, without any need for to see its factories. “They want to see a secret place where the product is assembled, but what for? Banks are not engineers to see if we’re doing it right,” he said. 

The financial statements of Ukrainian companies are open for anyone to seedue to the launch of open data practices in Ukraine from 2015 – so it’s no secret to see how a particular company is performing on the market, he said. 

Banks do not need to see technical drawings they don’t to know where the business plans to install the equipment they bought.

Ukraine’s Ministry of Defense believes it should keep the prices of their procurements open – it decreases the risk of corruption. “We often disclose information that should not be disclosed. The next day some Ukrainian officials showed everyone the tank factory metalworking workshop,” Honcharov added. 

Evaluating the Impact of Low-Interest Loans on Ukraine's Defense Sector

The government decree regulating the concessional loans requires a bank to have access to the state’s secret information. Only two Ukrainian state banks have been granted – Oschadbank and Ukreximbank. 

Ukraine’s largest private bank PUMB is also applying to take part in lending to the military, but the bank had not received approval at the time of publication.

“PUMB is currently working on meeting the criteria set for banks under this program,” PUMB’s press service told Kyiv Post, in answer to a request for comment.

The low profit margin for arms manufacturing companies is one of the key reasons why the business model is seen as a risky venture. 

Ukraine’s law limits a maximum 25%profit margin for drone and electronic warfare companies and while there are currently no limits set for other segments there is anxiety it might become limited, Honcharov said. 

He added that the average profit margin for Ukraine’s defense market varies from 4% to 15-20%, referring to internal NAUDI data. 

Oschadbank has worked with the defense sector for 18 years, its Deputy CEO for Corporate Business Yurii Katsion wrote in reply to Kyiv Post. But the war has reshaped it dramatically, creating lots of smaller greenfield companies instead of post-soviet state-owned giants. 

“During the period of full-scale war, the number of enterprises has increased dramatically and the average level of experience in the industry has become significantly younger. There are a lot of startups,” Katsion wrote.

This creates another problem for the market, common among Ukrainian companies – the absence of previous financial activity in the statements, making it difficult for banks to predict the company's income in future periods isn’t a new problem. 

State financing is key potential risks when financing defense through loans

Zelensky’s “5-7-9%” program brought cheap loans for the market but had one flaw. Compensation based on funds allocated from the state budget.  If the state forgot or was unable to pay the difference in the interest rates, banks would not pay for the loans themselves and demanded the businesses should pay the full 20% interest rate instead of the anticipated lower 5-7-9%. 

Honcharov is afraid defense companies might face the same problem. “This is a well-known practice in Ukraine when people borrow money for the long-term and then the state says, “Well, you know, we no longer have money, work out these things by yourself now,” he said. 

At the same time, companies are not unable to pay. The total amount of hryvnia loans under the low rate against the higher market rate were comparable, according to June 2024 estimates by the Centre of Economic Strategy (CES). 

Businesses borrowed Hr.101 billion ($4.09 billion) at the low rates and Hr.104 billion ($4.2 billion) at higher market rates between January and May 2024, CES estimated. 

Increased defense investment is an enemy for bank’s ESG policy, but there is no other way

“The [defense] business niche is already attractive, and after the hot phase of the war is over, export opportunities will open up for some types of products,” the press service of Ukreximbank optimistically told Kyiv Post. 

Ukreximbank was used as Ukraine’s specialist defense state bank for years. 

But a speaker in one of Ukraine’s large western subsidiaries in Ukraine does not share the same joy – military projects in a western bank portfolio is against any ESG standards that are a must-have if Ukraine is to reach European standards. 

Honcharov shares this thought: “I am not even sure that western banks rush to borrow money from any defense company because it opposes ESG policies.”

Export, mentioned by Ukreximbank, is also a tricky issue. Russia started a full-scale war that became the largest and deadliest conflict in Europe since World War II – Ukraine needs a lot of resources to defend itself and not allow itself to be overcome by the enemy. 

But after three years of war, Ukraine’s manufacturers found out they lack buyers more than they lack resources for to finance companies. 

Ukrainian state institutions purchasing military goods and equipment from Ukraine’s private manufacturers often delay invoice payments, which makes cooperation difficult. 

“Ukraine’s Ministry of Defense has been delaying invoice payments for an individual NAUDI member for more than a year,” Honcharov told Kyiv Post. 

Selling production abroad can help arms companies earn up to $15 billion a year, Politico wrote referring to information from Ukrainian lawmaker Halyna Yanchenko.

But it won’t be a magic solution – Ukrainian manufacturers will need to meet the standards of export markets to find new clients, a challenge that can’t be solved overnight. 

Lack of pledge may also stop Ukrainian defense companies from funding

Greenfield Ukrainian arms manufacturers that were established after the start of the war may also lack sufficient assets for collateral against a loan.

And it might be a bigger problem than ESG and financial statements all together, according to Honcharov. “The bank may ask for collateral of a billion hryvnias against a half billion loan,” he said. 

Which would be easier for defense state companies that have plentiful land and premises on their balance, but difficult for drone manufacturers that don’t have large quantities of unused assets. 

Ukraine has a solution to the problem – increasing portfolio guarantees. Another program launched during COVID in 2020, it became a savior for businesses situated within 50-100 kilometers (30-60 miles) from the frontline, enabling them to get access to bank financing, the PUMB CEO Serhii Chernenko said in 2023 during a panel discussion at the Kyiv International Economic Forum. 

Katsion from Oschadbank believes eligibility for state guarantees should be enhanced for companies in the defense sector. If the government raises the eligible amount of profit a company could earn to receive the guarantee, it will open the doors for larger loans and remove the need for a gigantic collateral.