Ukrainian military’s defense procurement troubles

BLUF: New procurement rules will allow longer-term contracts for strategic planning around manufacturing. But procurement remain jammed up due to reforms — and companies tell us negotiations are far behind where they were last year. Meanwhile, China may soon be restricting the supply of components to Ukrainian manufacturers. And: the Ukrainian legislature approved new tax benefits for producers of drones.

THE BIG STORY: THE BIG STORY: Ukraine’s military procurement is in trouble. Here is how the government plans to reform it.

Big changes are coming to the way that Ukraine will award defense contracts. 

More than $17 billion is expected to be spent on weapons and equipment in 2025 – an increase of more than $1 billion from the previous year. 

But contractors who sell EW and drones to the military complain about the way the government structures most of the contracts and does long-term acquisition planning. 

Just this week, the MoD and procurement agencies have adopted new changes to improve the process: permitting longer-term contracts, accounting for inflation across the term of the contract, and allowing for changes in the characteristics of products over the contract length.

The Ministry of Defense separated procurement responsibilities into two organizations in 2022 and 2023 after scandals, when certain importers inflated the prices of defense products.

The two agencies are the Ukrainian Defense Procurement Agency (DPA) and the State Logistics Operator (SLO). The DPA is responsible for the supply of weapons and equipment to the Ukrainian army, while the SLO is responsible for non-lethal procurement, such as uniforms, fuel and lubricants. 

A move towards more flexible contracting? 

Many of Ukraine’s defense contracts are short-term, one-year agreements. However, a significant number of companies report that the production cycle for their products takes longer than a year. 

Reform plans – prepared by Ukrainian deputies; the ministries of defense, economics and finance; and defense companies – include changes that will make two- to three-year contracts more common.

Among the changes was an initiative which will allow changing terms inside a long-term contract; increasing the price of the product due to inflation; or allowing changes to the characteristics of products. 

Resolution № 1275 was supported by the Cabinet of Ministers this Tuesday. It does not require additional approval from the president or Verkhovna Rada. 

The procurement process needed to be changed, said Maryna Bezrukova, director of the Defense Procurement Agency. The government and contractors need the flexibility to modify contracts to take into account inflation or other change orders, she said. 

The Ministry of Defense and other agencies are also in discussions to change the codification process, Bezrukova said. Codification ensures that the characteristics declared by the manufacturer are accurate and that the product itself is safe to use. 

Cabinet of Ministers Resolution 345 regulates public procurement and prohibits the DPA from purchasing uncodified weapons, which means even effective but non-certified weapons cannot be bought. 

Currently, the formal procedure takes up to 10 days, but preparation of all the documents could take months.

Delays in the defense procurement process as uncertainty on horizon

While the Defense Ministry is looking to reform procurement, several defense contractors report to Counteroffensive.Pro that agreements for their contracts with the Defense Ministry are on hold. 

Ineffective planning leads to situations where orders for next year are placed in December and January, leading to delays. Since the production process can take 4 to 6 months, which means that weapons from the concluded contracts will be delivered only in the Summer.

Kvertus, an EW company, is waiting on word for a new contract for a new electronic warfare system, Serhii Skoryk, CCO of the company told Counteroffensive.Pro. 

By this time last year, Kvertus was in negotiations with the MoD over their 2024 contract, but that process has yet to begin this year.

Defense procurement should have a more strategic view of future orders, said Maksym Subotin, CBDO at Armadrone, manufacturer of different types of drones. 

Recently, the firm fulfilled government contracts that they had signed two and a half months ago. To do that, they had to work in what they called a “turbo regime.” Before that, Armadrone worked with charitable foundations and military units directly, which was a smoother process in terms of deadlines and periods to fulfill contracts. 

As of the middle of December, none of the companies that we spoke to had received state orders for next year — a stark contrast with 2024 when all of them had inked deals. 

According to a survey of Tech Force in UA, 75% of private companies didn’t have any negotiations with the government to get contracts for next year as of early December.

Will the DPA and the State Logistics Operator be merged?

Finally, there remains significant uncertainty over whether the Defense Procurement Agency and the State Logistics Operator will be merged into one agency. 

In September, Defense Minister Rustem Umerov said that the two organizations would be merged after the appointment of members of their supervisory boards. 

“Our strategy is to hold a strategic session and merge all agencies into one, according to NATO standards,” said Umerov. “A kind of Ukrainian Defense Forces Agency, which will have procurement, logistics, measurement contracts, and efficiency in accordance with NATO.”

The Supervisory Boards of both the DPA and the SLO were appointed on October 11 and have been functioning for several months. Since then, no additional statement from Umerov was made.

Maryna Bezrukova, director of the Defense Procurement Agency, waved off suggestions that it would happen. 

“I will tell you in short, there are no plans to unite the agencies,” Bezrukova told Counteroffensive.Pro.

Earlier this month, the head of the DPA, Arsen Zhumadilov, said that there was no decision to merge the procurement agencies. Only the Ministry of Defense can make such a decision; agencies do not have such powers.

BUSINESS LUNCH TOPICS: What our reporting shows!

1. Will China's new drone export limits impact Ukraine’s defense efforts?

China’s trade dispute with the U.S. may affect Ukraine’s defense situation, reports Bloomberg. Chinese manufacturers are restricting exports of important drone parts like motors and controllers, which in the longer term could make it harder for Ukraine to get necessary technology. 

For now, there hasn’t been a noticeable shift in the market in obtaining components from China, said Andrii Taganskii, COO at Odd Systems, an FPV drones and optics manufacturer, and Yevhenii Suhinin, CEO of Ptashka drones. 

“Next week, we’ll be ordering another batch of components from China, and I’ll be able to provide more details then. However, we have not only a Plan B but also a Plan C,” said Andrii Taganskii.

Oleksandr Barabash CTO of Falcons LLC, the miltech startup producing
software and hardware for defense, noted that their company began actively working on China-proofing their supply chain a year ago when they first contemplated possible export bans. “However, a complete change could significantly affect the price of drones — by up to 25 percent,” said Oleksandr Barabash.

Counteroffensive.Pro contacted the Chinese Embassy in Ukraine, but have not received a response.

2. Verkhovna Rada supported changes on tax laws for defense companies. 

Verkhovna Rada supported proposed changes to draft law №12266. They include zero taxes for importing components for producing ammunition. Also, they expand tax exemption for maritime and ground drones and the length of the zero taxation policy.

3. What are the main challenges of sanctions policy against Russia?

Western countries do not have a single sanctions instrument that could destroy the Russian Federation's military-industrial complex. That’s because Russia itself does not have a single vulnerability, said Denys Hutyk, Executive Director of the Economic Security Council at the European Defense Industry conference on Friday. 

Further, foreign agencies do not have enough resources for such research and sanctions compliance monitoring, Hutyk argued. 

"Almost a year has passed since sanctions were imposed on Russian manufacturers of Lancet drones. During this time, Russia has managed to purchase components for mass production," said Hutyk.

The conference was organized by the Group of European Conservatives and Reformists of the European Parliament in collaboration with the We Build Ukraine Foundation. 

4. Double Tap Investments has introduced new strategic partners

Double Tap is an investment company based in Finland and focused on Ukrainian defense tech startups. They announced the addition of three strategic partners: Markku E. Rentto, Niclas Ahlström, and the Voipio family to join them.

“The Ukrainian army fights hard. Your spirit is stronger, and your hearts are bigger than the enemy’s. But in the end, a bigger economy wins the war. The USA`s and Europe’s economies are bigger than Russia's. Double Tap will do what we can to involve Western investors and economies to back up Ukrainian bravery.” said Jan-Erik Saarinen, CEO of Double Tap Investments to Counteroffensive.Pro.

5. Kvertus has integrated EW systems on armored vehicles

The biggest threat for armored vehicles on the battlefield are FPV drones. One way to protect them is dome-shaped electronic warfare systems that jam signals within a 100-meter radius. 

Often, military personnel assemble and install such EW systems on vehicles themselves, but mistakes are frequently made in the details. For example, it is common to encounter cases where Chinese components from AliExpress fail to meet the stated specifications, mechanics position antennas incorrectly, or fail to securely attach the EW system to the vehicle. Additionally, drones are increasingly operating across a wider range of frequencies, making high-quality countermeasures heavier, more complex, and more expensive.

Kvertus became the first to officially integrate its electronic warfare system, KRAKEN, into Ukrainian armored vehicles. The system can jam signals across eight of the most commonly used frequency bands, covering 95% of enemy drones. It is activated with a single button on the vehicle's control panel.

The device is powered simultaneously by the vehicle’s battery and an additional battery, which can sustain the dome's operation for several hours while in motion. 

Currently, Kvertus customizes the integration of its technology for each specific vehicle model. The serially produced armored vehicles Novator and Novator-2 by the company Ukrainian Armor are already reaching the front lines, equipped with their own EW dome systems. Next year, similar systems will also be implemented in other serially produced Ukrainian armored vehicles.

In Collaboration with CENTRE UA – Ukrainian orders/legislation we’re tracking: 

Cabinet of Ministers Resolution No. 1291 of November 12, 2024

Status: Enforced

Allows military personnel to transfer between units via "Army+" app, an experimental project that will be operational for two years.

This streamlined electronic system minimizes procedural delays traditionally associated with personnel transfers, while mitigating risks of corruption.

ON THE MOVE: Professional movement, promotions and industry news.

Know someone in the defense tech space who has made a professional move? Drop us a line at [email protected]! 

• Mercy Corps, a global non-governmental, humanitarian aid organization, is hiring a communications manager in Kyiv.

• Former Ukrainian General Oleksii Kotov has joined DataDriven’s Expert Council, bringing expertise to the Defense and Aerospace sectors.

30 SECOND ELEVATOR PITCH:

The Life Without Mines team has been developing a drone-based mine detection system for over 1.5 years. The main idea of the project is to survey a given area using various sensors and transmit a map of identified anomalies to sappers, as well as indicate detected UXOs (unexploded ordnance) in augmented reality mode. 

“Our goal is to create a sensor, as we call it, ‘Dream Sensor,’ that will specifically detect explosive substances, primarily plastic mines, which no device in the world can detect today. This sensor will also allow sappers to ignore all metal-containing debris, thus significantly speeding up their work,” said Oleh Vinogradov, CEO and co-founder of Life Without Mines. “We are seeking $300,000 in funding for the R&D.”

MUST READS:

1. Ukraine has successfully tested the new Ruta missile, announced President Volodymyr Zelenskyy.

2. New detailed information about the Peklo missile has been published. It has GPS and inertial systems. Ukraine has produced 100 missiles in the last three months.

3. Ukraine has developed a laser system Tryzub to counter Russian drones, said Colonel Vadym Sukharevskii, commander of The Unmanned Systems Forces.

4. New TOKKO attack drones resistant to enemy electronic warfare will be permitted  for use on the frontline.

5. The M113 armored personnel carrier has been equipped with a new Ukrainian combat module.

6. Licensed assembly of Czech BREN 2 assault rifles has started in Ukraine.

7. The Ministry of Defense transferred more than 1.2 million drones of various types to the Defense Forces in 11 months of 2024.

8. Foreign electronic components have been found in the Russian drone Fenix. Among them were components from the Netherlands, USA, Switzerland, China.

9. Ukrainian startups Swarmer and HIMERA were nominated for the Future Unicorn Award in the dual use category in DIGITAL EUROPE 2025.

Thanks to our media partner: