"Monsters, Inc." How Zelenskyy is transforming the defence industry and how this will affect the course of the war

The full-scale Russian invasion brought not only the horrors of war to millions of Ukrainians. 24 February 2022 was also an occasion for Ukraine to rethink itself and find a rich trove of internal resources, ones that enabled the country to survive the first hours, days and weeks.

The state-owned Ukrzaliznytsia (Ukrainian Railways) was one such resource. In the days of greatest threat to the very existence of Ukraine as a state, it was Ukrzaliznytsia that prevented the country from collapsing, while private companies were mainly preoccupied with saving themselves. 

At that decisive moment, Ukrainian Railways transported people, supplies, equipment, and fuel tanks; in short, it did everything it could so that the frosty horror of the invasion would not numb the country.

The state concern Ukroboronprom [or Ukrainian Defence Industry; an association of multi-product companies in various sectors of the defence industry of Ukraine – ed.] is another such example. No matter how good Western weapons look on the battlefield now, in the first weeks and months of the war, the Ukrainian army drew down the largest volume of its own resources since the Second World War. It was not the M777 howitzer, the Caesar self-propelled howitzer, or the Leopard 2 tanks that determined the course of the war in the most difficult first battles.

Tens of thousands of Ukrainian defence industry engineers manufactured and repaired heavy equipment and produced the Ukrainian Stuhna anti-tank guided missiles and Neptune subsonic anti-ship cruise missiles under shelling and between missile strikes. And if it were not for these people, Ukraine might not have survived until the delivery of the first pieces of Western equipment.

On the eve of the second summer of the war, there is no doubt that the existence of Ukraine and its victory are largely tied to the speed and quality of the militarisation of the economy. 

And it is even more critical now, at the beginning of this path, for the Ukrainian defence industry to follow the path of civilised, transparent and predictable development.

Therefore, it is significant that the government’s attempt to launch the long-overdue reform of the Ukrainian defence industry – transforming the state-owned Ukroboronprom into a joint-stock company, a process known as ‘corporatisation’ – is taking place precisely in the spring of 2023. 

It is no less significant that in parallel with this process, in a manner typical of state administration, President Volodymyr Zelenskyy has created a new player with almost unlimited powers and a personal carte blanche from the president.

This player is a newly appointed Minister for Strategic Industries, Oleksandr Kamyshin. According to UP’s sources, he is the president’s protégé and is tasked almost single-handedly to ensure that the Ukrainian defence industry works at full capacity. By the time the corporatisation process is complete, factories will have to produce shells, equipment, and armour around the clock.

Ukrainska Pravda has learned how corporatisation will transform the Ukrainian defence sector, whom the president's protégé calls every morning, and whether there is a conflict between the old and new directors of the defence industry.

How Ukroboronprom woke up

The beginning of the full-scale war turned out to be a time of shocking transformation for the Ukrainian defence industry. In a single moment, several fundamental factors that shaped the life of this sector changed.

The first change – after 24 February 2022, Ukraine suddenly turned from an arms exporter into an importer. Before the Russian invasion, Ukrainian companies never bought weapons, only sold them.

For the industry, and especially for commercial companies that operate in the arms market, such a change of roles was nothing less than a shock. For the state-owned Ukroboronprom, it was a twofold shock. It is no secret that the main cash flows in the defence industry revolved around export contracts.

After the Russian invasion, all organisations that purchased and sold weapons, the so-called special exporters, were transferred directly from the Ukrainian defence industry to the Ministry of Defence. The main flow of money went via Ukroboronprom.

The second change – the volume of military equipment that needed to be produced for the Armed Forces of Ukraine, at factories that were unable to operate, increased many times over.

Military repair plants, for example, were at one point "hit by a tsunami" of damaged equipment that needed immediate repair. Instead of pursuing quiet work in the shops, management had to find ways to decentralise production quickly. After all, the old Ukrainian factories had systematically come under Russian missile fire since the first days of the invasion.

Over the past year, at least 150 strikes were observed at the defence company's facilities. Some factories were occupied, while others were damaged by missiles.

Industrial equipment that could be physically moved was dispersed by employees over the territory of Ukraine or taken to neighbouring countries. This complicated logistics and raised the costs of production of equipment.

Russian spies and forward artillery observers were repeatedly caught at defence facilities. Agents have even been found among managers. For example, a former health and health and safety engineer at one of the companies, who passed data on strikes and the location of military facilities to the Russians, is currently under investigation for treason.

Despite all the difficulties, Ukroboronprom now plays an important role in the defence industry. Some companies with unique specialisations have received their first specialised orders in several years and began to work at full capacity.

The output of military factories in various categories increased five- to eightfold. The state concern was replenished with about 7,000 new specialised staff, each of whom was checked by the security service.

The third change – the very nomenclature of the needs of the Armed Forces of Ukraine has changed. The defence industry had to learn quickly to produce new product samples and revive the production of projectiles and equipment that had not been produced for decades.

"You see, in the last 20-30 years, no one has produced ammunition of most calibres in Ukraine. It was believed that the weapons stored in warehouses since Soviet times would be enough for any war. But then some of the warehouses burned down, and the rest of the stocks were used in the full-scale invasion. And our factories had to quickly dig up old documentation and master the production of mines, projectiles, and so on," one of the top officials of the Ukrainian Defence Industry recounted in a conversation with UP.

Kamyshin, Husiev and the "old-timers": what is happening in the management of the defence industry

At the height of the war, those responsible for the work of the defence industry cannot say how successfully and effectively the state concern managed to cope with such fundamental challenges.

But it became clear that the leader of the president’s party in the Verkhovna Rada [Ukrainian Parliament - ed.], Davyd Arakhamia, and his friend Yuriy Husiev, the general director of Ukroboronprom, the state company that until now had been entrusted with the task of overseeing the work of the defence industry, were unable to cope with all the tasks the president entrusted to them. 

They saw the appointment of the ex-chairman of Ukrzaliznytsia, Oleksandr Kamyshin, as Minister for Strategic Industries as interference in their territory. On the one hand, Kamyshin was expected to ensure, at government level, that all the needs of the defence industry were met. On the other hand, the very fact that Zelenskyy needed to appoint someone specifically for this function, in what was already a hands-off government, speaks to the president's dissatisfaction with the results of the work of the existing team.

A UP source in Zelenskyy’s immediate circle confirmed that Kamyshin, "one of the best state managers, was engaged by the president to help the defence industry work at its full potential."

The appointment of Kamyshin was accepted cautiously by other players in the defence industry. Another sign of this was the vote on 21 March 2023 passing the government resolution to start the corporatisation of Ukroboronprom. It was introduced and voted on the same day that Kamyshin was appointed. However, the law on the corporatisation of Ukroboronprom itself had been adopted in the summer of 2021, but was simply not implemented.

"Kamyshin appreciated this 'hello'. But he managed to put the resolution on pause for a month. During that time, he made only one amendment: he made the Ministry of Strategic Industries the governing body of the defence industry. Now the concern will not be managed directly by the Cabinet, but through Kamyshin’s Ministry," UP’s source within the new minister’s entourage told us.

He added that Kamyshin himself is not interested in politics at all. He has a task from the president – to increase the number of weapons produced.

"Everything that can be measured in items, tonnes, units, must be increased many times over. This is Kamyshin's task. He will definitely not be going after corrupt people. We have eight anti-corruption bodies, let them do it," said a UP source close to Kamyshin.

Formally, the new head of the Ministry of Strategic Industries would have to work with the state concern’s businesses through Husiev's team. But according to UP’s sources, he is now focused on building a parallel system of direct communication with every head of defence businesses.

"Now Kamyshin starts the day at 8:20 am by making direct calls to all the ‘old-timers’ who manage the factories. You should have had this many shells manufactured yesterday, but they made half as many: what's the matter? And when the old-timers feel that they are under daily control and that someone needs their work, then everything starts to ramp up. Within a month, production in some places had increased manifold", a UP source said.

After the projectiles, the minister's focus will shift to armoured vehicles, and so on in key areas of production.

At the same time, Ukroboronprom confirmed that the kind of parallel manual management system which the new minister is trying to build does not interfere with them in any way.

"Now we are not in competition with Kamyshin. He really helps in many ways. Things that used to get lost in the Cabinet are now voted on and passed very quickly. We try to complement each other, not compete. Plus, we are focused on real corporatisation. The first joint venture has already been created by one of our assets and a Western partner," the UP’s source within the leadership of Ukroboronprom told us off the record.

There are already many examples of decisions being accelerated with the appointment of a new minister. Most of the decisions are secret and cannot be made public.

But, as UP’s contacts explained, thanks to Kamyshin, for example, the Headquarters of the Supreme Commander obliged the Ministry of Defence first to buy all the ammunition from Ukrainian factories, and only after that to consider imports..

"When factories received long-term guaranteed domestic contracts, they began to lower the price. Some have already done so, while some who do not yet understand the new rules of the game will do so soon. And these savings provide additional resources for increasing the number of our own weapons," said UP’s source at the Ministry of Strategic Industries.

How do they get rich? Key projects in the defence industry

In general, the work of Ukroboronprom now covers several activities.

The first and main one is repair, modernisation, restoration or production of new military equipment. Ukroboronprom factories work with Western, trophy and Ukrainian vehicles.

Last December, Commander-in-Chief Valerii Zaluzhnyi said that he needs 300 tanks, 600-700 infantry fighting vehicles and 500 howitzers to be able to restore the borders of 23 February 2022. Ukroboronprom also worked on fulfilling this order, restoring military equipment that had been kept in storage for years.

"The equipment was literally gathering moss. It might have been standing there without treads for 20-30 years. We restored everything and made it combat-ready," said the UP’s contact at the company.

According to Ukroboronprom, there are field brigades that repair equipment as close as possible to the front. Ukroboronprom claims that more than 3,000 units of armoured vehicles were repaired by these field brigades alone.

Minister of Defence Oleksii Reznikov announced the other day that his Ministry will buy modern Ukrainian T-84 Oplot tanks from Ukroboronprom, which until now were mass-produced only to fulfil orders from Thailand.

According to Radio Svoboda, in 2019 Ukroboronprom was not ready to supply T-84 Oplot tanks for the Armed Forces of Ukraine because the equipment was dependent on Russian components. However, according to UP’s sources, over the past year the tank was redesigned and replaced with Ukrainian components.

The second critical area of activity is the production of drones. The war with Russia created a considerable need for drones. However, the field of UAVs is still one of Ukroboronprom’s weak points.

There are no new orders for the Spectator drone, and the "Ukrainian Bayraktar" Sokil-300 is still in prototype stage. Currently, the Ministry of Defence, the Ministry of Internal Affairs and charitable foundations prefer drones made by private manufacturers, so Ukroboronprom has not received any contracts.

At one of its facilities, Ukroboronprom is producing a new kamikaze drone capable of covering a distance of 1000 kilometres. The company said that they make these UAVs at their own expense and send them to the front for free.

According to the design, this drone should be a multifunctional platform that could drop explosives, carry an EW (Electronic Warfare) station, scout the territory or self-destruct.

According to UP’s sources, few of these drones have been produced. So far, they only perform the kamikaze function and are already hitting Russian military facilities.

The third area of Ukroboronprom’s activity, of which the management is the most proud, is the production of projectiles. The shortage of ammunition at the front is especially severe in Soviet-calibre shells, which neighbouring countries have run out of almost completely.

All attempts to begin production of these types of ammunition in Ukraine since 2014 have been unsuccessful. In 2018, $8.3 million was stolen to purchase equipment for the production of projectiles. The money went into the account of the dubious American firm Gray Fox Logistics (GFL), which did not deliver any machinery.

Later, Ukroboronprom did buy the machinery, but it did not receive any orders. Instead, the Ministry of Defence ordered projectiles from the private company Rubin-2017, which is associated with the Ukrainian Armoured Vehicles private limited company and the former member of the Ukrainian Parliament Serhii Pashynskyi.

The Rubin company supplied ammunition of poor quality and then sued the Ministry of Defence for the money paid.

Ukroboronprom was able to establish serial production only after the start of the full-scale war, which took only half a year. Now the concern produces ammunition of 82, 120, 122, 125 and 152 calibre.

This ammunition is produced in cooperation with foreign countries. Ukroboronprom promises that after the end of the war it will disclose the form of that cooperation. The characteristics of the projectiles are also classified, so no one knows what their quality is.

UP’s sources have indicated that Ukroboronprom produces tens of thousands of rounds of ammunition per month. But production will scale up, in particular thanks to new orders from the Ministry of Defence that were recently agreed.

The fourth area of Ukroboronprom's work is the missile programme: Neptune anti-ship missiles, Vilkha MLRS and other projects.

Examples of these are the Hrim-2 complex of Ukrainian Iskanders. On 12 May, the Russian media stated that Luhansk was fired upon with these Ukrainian missiles. The Hrim-2 has been designed in Ukraine for quite some time. According to the UP’s sources, the relevant departments have been working on it very actively in recent months. However, Ukroboronprom itself refuses any hint of comments regarding this missile project.

Another important sector in which the concern is involved is humanitarian demining, that is, the final certified demining of the territory after the end of hostilities.

Last year, one of Ukroboronprom’s enterprises received a licence from the Ministry of Defence for humanitarian mine clearance. Unlike foreign operators, Ukroboronprom does not demine land for free, but on a commercial basis.

The concern claims that sappers clear the territories almost at cost price. Currently, the number of sappers includes about 30 people, but by the end of the year it may increase to 100.

Ukroboronprom is still opaque in its management, and this prevents the main arms manufacturer from being effective in the long run. During the war, this is a matter of life and death for Ukraine, and so reform of the concern is urgent.

From Yanukovych's toy to a joint-stock company

Ukroboronprom in its current form is the brainchild of former President Viktor Yanukovych.

In 2010, state defenсe enterprises were gathered under one umbrella and assigned a single management. The goal was to concentrate all financial flows in one pair of hands.

"Managing corruption schemes at a single defence company is much more convenient than at many, because you need to appoint your own people to each one, monitor their loyalty, and look for sources of leverage. It was easier to create Ukroboronprom with a single manager, who is easier to control," said Ukrainska Pravda’s corporate management consultant, Oleksandr Lysenko, one of the authors of Ukroboronprom’s reform concept.

The scheme worked. The first head of the concern was a member of the Ukrainian Parliament representing the Party of Regions, Dmytro Salamatin, who is now accused of having embezzled $23.87 million from the concern and of committing treason.

"Ukroboronprom was officially called a concern, but this is not entirely correct. A real concern is a voluntary association of companies that jointly protect their interests on the market. Its members are autonomous.

In the case of Ukroboronprom, state-owned companies were forcibly brought under one umbrella, and the head of the concern was given unlimited powers to change directors. At the same time, the head of the concern is chosen purely on a political basis," Lysenko explained.

The unclear structure of the concern, which was either a parent company or a state agency, scared off investors. Western creditors could not entrust their funds to a structure with a questionable management system.

All this would slow down the innovation and development of companies. Many enterprises are still alive thanks to specialised staff who have remained since Soviet times. The average age of workers at the concern is 50+ years. Most companies simply cannot provide competitive salaries for young and talented engineers.

It became clear that the concern needed changes. After President Yanukovych fled Ukraine and the war began in 2014, every effort was focused on the reform of Ukroboronprom. However, the next president, Petro Poroshenko, never dared to destroy this "ring of sovereignty" or even change it. Instead, he appointed his own people to Ukroboronprom, who were also involved in corruption scandals.

In the first years of Zelenskyy's administration, the government began planning reforms on the corporatisation of Ukroboronprom. However, in practice, the vertical, politicised management system did not disappear.

Ukrainska Pravda’s sources indicated that at the end of 2021, Ukroboronprom, at the request of government authorities, extended the contract of Serhii Bychkov, director of the Antonov state-owned company. The authorities paid no attention to the corrupt background of the Bychkov team because the director was needed to fulfill the state order for the construction of the An-178. As a result, it was Bychkov's managers who lost a number of aircraft, including the An-225 Mriia, and prevented the National Guard from entering the airfield in Hostomel a month before the full-scale invasion by Russia.

Another source of Ukroboronprom’s leverage is its ability to get part of the profits from one company and issue subsidies to others. On the one hand, thanks to this tool, strategic companies were kept afloat and saved from bankruptcy. On the other hand, this creates great scope for manipulation, because the principles of distribution of funds among the different enterprises are not transparent.

Ukroboronprom believes that it makes sense to have defence companies under one umbrella. The concern not only redistributes money to "problem" enterprises but also provides legal support and lobbies for their contracts at the highest level.

The question is, what form should the interaction of the concern’s management and its enterprises take in the future in order to be effective and start "playing big".

This is why corporatisation has now begun. The idea is to give the concern the status of a joint-stock company. Now Ukroboronprom will officially become the parent company of state defence companies and will be called the "Ukrainian Defence Industry".

The manufacturing companies will be turned into market players, and the archaic status of "state enterprise" will be removed.

According to Lysenko, Ukroboronprom will have a supervisory board of 6 members, half of whom are independent. They, not politicians, will choose a new CEO.

Since the management of Ukroboronprom will be under the control of the supervisory board, it will have more incentives to engage in effective management. And transparent reporting will give everyone the opportunity to evaluate the activities of the directors.

There will still be room for corruption after the reforms are completed, as in any state-owned company. However, it will be easier to control "schemers" and inefficient managers.

The newly appointed minister, Kamyshin, is not very concerned, according to sources within his entourage, with the details of the corporatisation of Ukroboronprom. 

"The guys in the trenches don't care about the corporate structure. They are interested in the number of mines and shells that we will ship to them, and that there is a truck to transport it all. During the past year of war, Ukrzaliznytsia did not come a step closer to unbundling. Did anyone die because of it? No. The same will happen with Ukroboronprom," one of the members of his team explained.

Currently, Ukroboronprom has taken only the first step toward corporatisation, and it still remains imperfect in terms of management. A full launch of the reform will require political will and take at least a year.

However, in future, such structural changes will definitely be beneficial. After all, Ukroboronprom is launching joint ventures with Western arms manufacturers who want to be able to put their trust in Ukrainians as their business partners.

Recently, it became known that Ukroboronprom is opening the first joint venture with the German concern Rheinmetall for the construction, maintenance and modernization of armoured vehicles. The new venture will start working from the middle of July this year. And this, as Ukroboronprom assures us, is only the first tryout. There is more to come.

Roman Romaniuk, Bohdan Miroshnychenko, Ukrainska Pravda

Translators: Sofiia Kohut, Elina Beketova, Violetta Yurkiv

Editor: Monica Sandor