The resilience of the Ukrainian people has been truly inspiring. Ukrainians are currently at the forefront of Europe’s defense and the international community has compelling reasons to continue supporting the country. At the same time, recent events in the US Congress have underscored the importance of Ukraine moving toward greater self-reliance in defense and reducing its dependence on others.
With this in mind, Ukrainian President Volodymyr Zelenskyy convened an international defense forum in late September, gathering hundreds of Western defense industry executives in the Ukrainian capital to explore opportunities for partnership and joint projects. Zelenskyy sought to engage all stakeholders, both domestic and foreign, in the task of enhancing Ukraine’s defense industries and increasing self-sufficiency in defense production. This approach is undoubtedly the most effective way to address the enduring threat facing the country. The development of a vibrant, efficient, competitive, modern, and large-scale Ukrainian defense industry is of critical importance for the country’s future.
It is worth underlining that today’s Ukraine finds itself compelled to allocate tens of billions of dollars to defense spending. This situation is likely to persist for many years to come, regardless of developments on the battlefield. Ukrainians did not choose this predicament, but the necessary development of the country’s defense industry does present opportunities for economic growth and technological innovation. It is imperative for Ukraine’s security and further progress that this challenge is addressed as effectively as possible.
While Ukraine is rightly seeking to learn from the experience of its partners, the recent conference in Kyiv helped highlight areas where Ukraine itself can and should take steps to improve its prospects of attracting defense sector partners. Baykar was among the conference participants, reflecting the longstanding strategic cooperation between Ukraine and Türkiye. This collaboration dates back to well before the onset of the full-scale invasion and continues to thrive.
On February 3, 2022, just 21 days before the invasion, the Turkish and Ukrainian governments signs an intergovernmental framework agreement on cooperation in the fields of technology and aviation. This agreement paved the way for a commitment by Baykar to invest in a new Ukrainian facility for unmanned aerial vehicles (UAVs) which will focus on manufacturing along with research and development. Baykar has committed to investing USD 100 million in this ambitious project. Construction began on June 1, 2023, with the state-of-the-art facility expected to be ready within one-and-a-half years.
Partnership with Baykar will allow Ukraine to achieve a range of strategic objectives. Once construction of the Kyiv region facility is complete, Ukraine will possess all the necessary capacity to produce the entire Bayraktar series of UAVs domestically. A team of highly skilled Ukrainian technicians and engineers initially numbering at least 300 will have a central role to play in this breakthrough for Ukraine’s defense industry. This project highlights the huge potential for Ukraine of cooperation with international defense sector partners.
What steps can Ukraine take to attract more companies like Baykar? I have identified a series of essential reforms that reflect our own experience and also incorporate the feedback I encountered among participants of Ukraine’s recent defense sector conference, many of whom have extensive experience of working in Ukraine.
One-stop-shop for defense sector investments
I recommend building on the experience of the Ukrainian government’s UkraineInvest investment agency to establish an authorized state institution to support investment projects specifically in the defense industry. This should be a one-stop-shop (“single window” format) capable of serving as a comprehensive solution for anyone looking to invest in Ukraine’s defense and aerospace industries, and able to act as an honest intermediary between investors and the government.
This agency should establish basic requirements for investors. It should also offer guidance to help investors navigate their way through the necessary state decisions, regulations, permit processes, and other obligations. In order to be effective, a dedicated defense industry investment agency should also operate with maximum transparency in line with key performance indicators. It must undergo regular audits and should report to both the government and directly to the office of the president. This would send a very positive signal to potential investors.
Cutting through red tape
Ukraine could benefit from streamlining existing authorization procedures regarding defense sector imports, exports, services, and permits for potential foreign investors. At present, only a relatively small number of Ukrainian companies have the necessary authorization, while the licensing process remains very lengthy and bureaucratic, even in wartime conditions.
Simplifying this process for potential investors is extremely important in order to facilitate the rapid development of Ukraine’s aerospace and defense sectors. Simplified procedures could be restricted to certain categories or offered with time limitations. One specific proposal would be to simplify the process of receiving import permits for component parts to ensure the production, maintenance, and repair of defense goods in line with Ukraine’s national security requirements. This could take the form of switching to a system of issuing open permits with additional reporting to the authorized state institution. Meanwhile, the reporting mechanism for export of military and dual use goods would remain unchanged.
It would also be helpful to streamline the issuance of permits for the temporary export of components for their repair within the framework of warranty obligations. Ideally, this could be done on the basis of supply contracts from the end user without needing to obtain the appropriate permits from the authorized Ukrainian state institution. Similar simplification would be welcome when it comes to obtaining permits for the temporary import of equipment while establishing production facilities during the initial stages of investment projects.
Offering investment incentives
To attract more defense sector investment, Ukraine should consider offering investors a range of incentives and preferential terms. These could include import tax waivers, corporate income tax reductions, VAT exemptions, and personal income tax exemptions for employees. A straightforward approach could include a tax-free period for investments of five years, followed by a unified tax structure accessible through a “single window” via the respective state investment agency. It would also be very important to clearly define any incentives with potential investors and secure government approval before making any decisions to implement investment projects.
Adopting industrial park legislation
International investors would be attracted by the finalization and adoption of exhaustive regulations governing the establishment and operation of industrial parks in Ukraine. This legislation should ideally be similar to the Turkish model, where industrial parks are directly managed by the Ministry of Industrial Technologies. Implementing the Turkish model would provide potential investors with direct access to the central authorities responsible for state policy regarding industrial parks.
Government support for infrastructure expenses
In order to attract foreign investment into the defense sector, the Ukrainian authorities should consider developing special procedures to compensate investors for infrastructure-related expenses arising from connecting to existing transport and utilities networks. This should cover a significant share of the investor’s costs related to electricity, gas, and sewage connections for the period required to launch the investment project and begin production.
Aligning investments with procurement plans
Once martial law comes to an end in Ukraine, the volume of international investment in the country’s aerospace and defense industries will depend heavily on procurement prospects, which must be consistent with the long-term plans of Ukraine’s Defense Ministry. Defense sector contracts should provide for five-year production schedules and allow for the possibility of attracting local investments during the execution of government contracts.
Digitizing licensing procedures
It would make sense to transfer all licensing mechanisms for the import and export of defense sector goods and services to a digital platform that will make it possible for applicants to monitor and control the entire process of registration and permit issuance online. This should be done via a platform operating on the “single window” principle. Digitizing this process would offer a range of advantages. Crucially, it would increase efficiency while reducing the risk of corruption.
Efficient surplus land allocation
Land is crucial for most categories of investment, especially the kind of significant manufacturing initiatives that the Ukrainian defense sector is currently seeking to attract. One potentially effective step would be to allocate surplus land owned by the Ukrainian Defense Ministry for defense sector investment projects. Sites could be provided with clear terms spanning from 30 to 50 years. Additionally, it would be important to streamline the allocation process for land plots to ensure that it does not exceed six months.
Simplified work permits and mobilization exemptions
It would be advisable to simplify the current work and residential permit process for investors and foreign personnel in order to reduce bureaucracy and delays to a minimum. Likewise, it would be beneficial to simplify the current procedures for occupational deferment and exceptions from mobilization for defense industry employees. This would help investors to secure and retain a skilled workforce, ensuring continuity, consistency, and quality of output.
Ensuring international promotion
Ukraine would benefit from establishing a dedicated agency or department within the relevant government body to actively promote Ukrainian aerospace and defense products at the international level. Additionally, it would be worthwhile to explore the provision of financial and administrative support for Ukrainian defense industry enterprises with strong export potential.
Incentives for national manufacturers
Ukraine should consider granting certain incentives and preferences to national manufacturers of defense products during government tenders. At the same time, this would need to be approached with a high degree of transparency in order to reduce corruption risks while supporting the growth and development of the Ukrainian defense sector. Consideration should be given to moving toward market pricing and reducing government control over local manufacturers to avoid their relocation outside Ukraine, which often results in delays and complications in manufacturing processes.
Baykar experts estimate that the most effective way to implement these proposals would be via the adoption of separate legislation designed for defense sector investment projects. Existing legislation does not fully take into account the specifics and sensitivities of the defense industry. In our opinion, Ukraine should look to develop new legislation with the working title, “On investment activity in the defense industry of Ukraine.”
Baykar has already played a pioneering role in the evolution of Ukraine’s defense sector, securing bilateral support for the implementation of a major investment project to develop and produce UAVs in Ukraine. During project implementation, our company encountered insufficient adaptation of Ukrainian legislation in the field of defense industry development to meet today’s challenges. Based on this experience, we believe Ukraine requires a separate legal framework if the country wishes to attract significant international investments into the defense sector.
This should include precise legal definitions of the procedures to initiate investment projects in Ukraine’s defense industry, along with clearly explained regulations, preferences, and incentives for foreign investors. An effective legal framework must also ensure transparency regarding the procurement of defense products, and should envisage a reduction in state control over the economic activities of defense enterprises with foreign investments.
Implementing these reforms will require collaborative efforts from the Ukrainian government, industry stakeholders, and international partners. The process will be challenging and will depend to a significant degree on the necessary political will in Kyiv. However, the potential gains should be clear to everyone. If these measures are implemented, Ukraine would succeed in creating attractive conditions for the wider involvement of foreign investors in the country’s defense industry. The steps outlined in this article represent a road map toward a more self-reliant and economically developed Ukraine with a robust defense sector capable of addressing long-term national security threats effectively.