Ukraine expected to invest US$4.0 bn in its air force over the forecast period

Wednesday 11 January 2012, Amsterdam

Ukrainian defense expenditure recorded a CAGR of 1.5% during the review period (2008-2012), reaching US$2.08 bn in 2012 and, over the forecast period (2013-2017), it is expected to grow at a CAGR of 6.4%, to reach an estimated value of US$2.86 bn in 2017. Ukrainian defense expenditure is primarily driven by the country’s ongoing tensions with Russia, the acquisition of new military hardware systems and participation in international peacekeeping missions. Despite an anticipated increase in the overall defense budget, military expenditure as a percentage of GDP is expected to decrease over the forecast period, from an average of 1.2%, to an average of 1.1% (reference see graph).

Although the Ukraine is expected to invest a total of US$12.78 bn in its armed forces over the forecast period, on average, only 14.6% of this total is expected to be invested in the modernization of the country’s defense equipment, limiting the opportunities available for both foreign OEMs and domestic defense companies. Additionally, despite Ukraine offering skilled labor at a lower cost than the majority of European countries, foreign OEMs are unable to make significant investments in the country’s defense industry due to the prohibition of FDI in defense.

Despite possessing both a strong technological base and skilled labor, the Ukrainian defense industry has so far been unable to produce modern technological hardware such as advanced fighter planes, submarines and warships. Instead, the growth of the country’s domestic defense industry has stalled as the majority of reforms to modernize the country’s defense industry have been postponed, while only 20% of state-run programs for the development of the country’s defense complex were implemented in 2010. As a result of these factors, Ukraine’s domestic defense industry is unable to improve its infrastructure and enhance its capabilities.

The growth of Ukraine’s domestic defense industry is also limited by excessive corruption and a lack of transparency in the country’s military procurement process. Corruption in the country frequently involves bribery of high level officials with discretionary authority over government policy and the sale of government assets or large government contracts, while lower level officials responsible for enforcing regulations are also often bribed. In addition, the country’s licensing and registration processes are so complex and time consuming that the costs of entering into the Ukrainian defense industry are significantly increased.