How Ukrainian export controls stifle defense innovation

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Current Ukrainian rules about the export of defense technology threaten to strangle the dynamic field in its infancy.

The sector promises to be a formidable part of Ukraine’s post-war recovery – if it can formulate the right rules around how to safely and effectively export its tech. 

Pressure is building up from both domestic Ukrainian defense companies and foreign partners to allow a more transparent and open export system. 

Multiple sources told Counteroffensive Pro that President Zelenskyy’s office is directly involved on this issue – and is the ultimate decision-making authority that proponents of reform will need to persuade.

Last week, when the President of Lithuania Gitanas Nauseda visited Ukraine to meet with President Zelenskyy, the Lithuanian asked Zelenskyy to ease export control regulations so that the two countries could cooperate more closely on co-production of defense technology, according to a source directly familiar with the matter.

And a few weeks ago, Andriy Yermak, Head of the Office of the President of Ukraine, convened a meeting at the President's Office to hear the Ukrainian defense industry’s concerns.

As it stands, the Ukrainian parliament is in discussions about updating export regulations, but this has not been formalized into a draft bill in Parliament yet. And recently, a working group was created to understand the cost-benefit analysis and what exactly an updated export reforms bill would include, though it remains unclear when this will be formalized into concrete legislation.

“The understanding that the defense industry needs state attention, and changes in the regulatory and legislative framework, has already reached the highest offices of this country,” said Halyna Yanchenko, a member of parliament and the chair of a new working group. “The parliament also has this understanding. The creation of our working group is a confirmation of this, so I think we have started to move in the right direction.”

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Ukraine’s defense industry is positioned to be one of the most powerful in the world, with the capacity to produce $20 billion worth of weapons each year, comparable to what the French defense industry sells abroad. But the obfuscated rules around taking these technologies abroad are stifling Ukrainian manufacturing capabilities. 

“We are getting inquiries from a lot of companies about setting up abroad and perhaps even doing R&D abroad. Business people, more than anything else, they want certainty,” says Daniel Bilak, a partner at the Kinstellar Law Firm. 

This means that Ukraine ends up losing out on manufacturing infrastructure, employment opportunities and tax revenues. Meanwhile, the companies that do remain within Ukraine struggle to access enough capital to unlock their true production potential. 

“From an economic standpoint, Ukraine has to deal with this. They have to come up with a regime that makes sense,” says Bilak.

Ukrainian defense technology has been developing at a dizzying pace, drawing attention not only from the Russians but from allies interested in learning lessons from battlefield feedback. 

But Ukrainian companies’ inability to export their products means that for many of them, their market size is restricted to a single customer — the Ukrainian government. Without a contract from Ukraine, they simply don’t have the means to keep production running.

“The priorities of our industry is to provide ammunition and weapons for AFU and other forces of national defense. But the demand is limited way below [our capacity for] existing production,” says Serhiy Vysotsky, VP of the National Association of Ukrainian Defense Industries.

Being able to export Ukrainian defense technology more freely would allow for more financial stability and continuity for the Ukrainian domestic defense industry.

“Exports will provide financial stability to our companies and additional positive impact on our economy. It’s a paradox, but if we are able to sell our products worldwide we will see additional tax revenue for the state at the level of an additional 2 billion USD in 1.5 years. So, we will be able to procure more weapons for AFU with this money.”

In a survey conducted by the Technological Forces of Ukraine, it was estimated that roughly 40 percent of manufacturers said that more than half of their capacities currently lay idle. 

The reality may be even more dire.

“Almost 70% don’t work to maximum production, because of government inconsistencies, and it’s unpredictable,” says Vladyslav Plaskin, CEO of PG Robotics, a Ukrainian drone manufacturer. “For bigger companies, the current situation is very bad, because if they haven’t planned for that moment when the government isn’t going to buy in the same way they used to, they make drones, but no one needs them.”

Many companies have already made the move abroad to avoid being dependent on Ukrainian government contracts.

“I’m not an optimist, I’m more of a realist. The law will be too late, and it will still need to be worked out,” says Plaskin. “Ukraine lost resources, lost people because of this. So they are destroying what they’re investing in — in their drone industry.”

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Although there is not an official law prohibiting the export of Ukrainian defense technologies, any companies producing military and dual-use goods need to obtain a permit from the State Export Control Service of Ukraine. 

Based on an examination by the State Export Control, Ukrainian companies are either granted or denied permission to export their products. According to the Law of Ukraine On State Control over International Transfers of Military and Dual-Use Goods, a company looking to receive a permit should begin by submitting the following documents:

• An application form

• A certified copy of the foreign economic contract for the export of the goods specified in the application

• A copy of the commission contract, order, et

• A certified copy of the certificate of the degree of secrecy of the good

• Original documents on obligations and guarantees of a foreign entity (the end consumer) in relation to imported goods in the form of an end-user certificate

• An international import certificate

After the submission of the application, the State Export Control Service will issue a permission or denial of export of goods in either 25 or 30 days — 25 for dual-use goods, 30 for military goods.

But permits to export are granted very rarely, making the export of military or dual-use technology for Ukrainian companies de facto impossible. The State Export Control Service did not immediately provide a comment, instead saying that under martial law, information on certain aspects of the export control system may be quite sensitive.

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It appears reasonable why Ukraine wants a monopoly on the procurement of weapons — it is existential for the state to have access to these technologies, and with a global competitive market consisting of wealthier customers, Ukraine could lose in a bidding war where their manufacturers are able to sell to better-paying customers. 

Bohdan Miroshnychenko, defense reporter at Ukrainska Pravda, suggested setting up a prioritization system in which manufacturers are able to sell their remaining capabilities after giving first pick of their units to the Ukrainian Ministry of Defense in order to retain Ukraine’s competitive advantage in an open market.  

“Most of the public criticism is of a completely different nature and has a completely different root,” said Yanchenko. “There is a fear at the political level that if Ukraine allows exports to be simplified as much as possible and allows exports of defense and dual-use goods, our partners who provide us with military assistance will not understand this.” 

Why should they continue to provide military aid packages to Ukraine, goes this line of thinking, if Ukraine is now trying to sell them the weapons they supposedly need?

“And the other source of fear before making a political decision is that Ukrainian society will not understand this — why we allow the export of weapons that we need for our own defense capability. This is a rather primitive thinking that does not include any understanding of market processes,” Yanchenko continues. “In the end, this is extremely beneficial for Ukraine, because these are products with a fairly high margin, and these are products that can bring quite a lot of revenue in Ukraine.”

Another frequent criticism rests on the idea that if Ukraine were to start exporting its highly valuable defense technologies, Ukrainian drones and other systems would make their way back to Russia, to be used against Ukraine or to be taken apart and studied, allowing Russia to build better defenses against them.

It’s not currently impossible for Russians to get access to Ukrainian drones — “they do it all the time, they shoot down our drones and they have a big manual, I think, with our weapons and our components,” said Miroshnychenko. 

Maxim Polyvyany, Director of the National Association of Defense Industry Enterprises of Ukraine (known as NAUDI), said that “exports [would] be carried out only to friendly countries, the list of which is determined by the Ministry of Foreign Affairs and military intelligence.” 

This “white list” of acceptable customers for Ukrainian defense companies would help mitigate the potential for adversaries to get a hold of our critical technologies. 

“I think that in fact most of the obstacles and discussions [regarding export reforms] are more related to general fears, misunderstanding on the part of the Western and our society. But this does not mean that you do not need to make the right decisions,” said Yanchenko. “It means that we just need to spend time and effort and communicate properly and adequately with our Western partners and with our own society.”

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