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Ukraine needs a military-industrial complex of its own

Back in 2015, when Volodymyr Zelenskyy was “just” a comedy star with the Kvartal 95 troupe, he joked on television that securing American military aid was “like installation of [a] new app on PC [personal computer]”.

“In the beginning it is all smooth and fast” but, when the “last percentage remains”, the process glitches — or so he laughed at the time.

Fast forward eight years, and that “joke” seems particularly unfunny. Zelenskyy, who now looks haggard in his role as Ukraine’s president, travelled to Washington this week in a bid to persuade Congress to back a $60bn aid package that the White House has pledged Ukraine, on top of the $44bn delivered in the past 18 months. 

But since Republicans are currently blocking this until they secure more funds for immigration reform, Zelenskyy emerged with a mere $200mn. 

White House officials think — or pray — that a deal will soon emerge. But even if it does, the picture is daunting. Military officials tell me that Russia, whose economy is now on a war footing, is expected to produce 2mn shells in 2024, and purchase more from North Korea. However, Ukraine will be lucky to receive 1.2mn shells in 2024, they say, since western military production systems are depleted, after years of neglect.

This implies that any Ukrainian offensive is unlikely to occur until 2025, or when production is ramped up. And that is before accounting for the risk that US aid might completely vanish if Donald Trump wins the 2024 election.

So far, so depressing. But this is not the whole tale. For even as Zelenskyy begged for US government support, his aides were engaged in a second battle that investors should watch. Namely, persuading western companies and financiers to back private sector military-tech partnerships inside Ukraine.

The raison d’être for this is that both the White House and Kyiv know that Ukraine urgently needs to develop its own military-industrial complex. In theory, Ukraine should be well placed for this, since it previously accounted for 30 per cent of Soviet defence industry and historically had good engineering talent, as Kateryna Bondar, a former defence ministry adviser, notes.

But in practice its Soviet-legacy production is stodgy and state-owned, its talent base under threat and the country has been surprisingly slow to ramp up modern capabilities — to the frustration of some western military officials and analysts. “The [Ukraine] economy has not been on a war footing and it needs to be,” one complained to me. 

Zelenskyy’s team is now racing to offset that criticism — and Washington is trying to offer support, mindful that this will be less politically controversial than direct aid. And this week the White House organised a conference between dozens of US defence companies and Ukrainian officials and entrepreneurs.

The aim is to create joint ventures between big companies while raising western investment for Ukrainian start-ups. Some Ukrainians, such as Bondar, hope a portion of western aid can be used for seed capital.

So far the only public “win” is a pledge to “prioritise co-production and technical data exchange”, as Jason Israel, a White House official, told a conference last week. However, Oleksandr Kamyshin, Ukraine’s minister for strategic industries, tells me that five partnerships around “do-it-yourself” air defence systems, blending old Soviet and modern western tech, have also emerged from the meeting.

Kamyshin is appealing for western venture funding. “We are trying to rebuild ourselves from being the bread basket of Europe to becoming the arsenal of the free world,” he says, noting that there are now more than 200 private “miltech” — military tech — groups emerging in Ukraine, many of which are focused on drones.

This pitch sounds fanciful. But not entirely. Defence-linked investments among American venture capital groups are growing at 16 per cent a year right now, according to PitchBook, and some western entrepreneurs, investors and defence industry executives see Ukraine as a useful site to develop and test products that can be sold elsewhere.

But enormous obstacles remain. One obvious one is that many western investors and businesses will not embark on production in a country under bombardment by Russian shells. And while this problem could be solved by placing production in places such as Poland, there are also export licensing issues. 

Another issue is that Ukraine’s miltech start-ups are small and often “driven by hobbyists”, rather than professional or experienced entrepreneurs, says one western investor who is scouring the landscape. And some of the country’s tech innovation — say, initiatives to cobble together Soviet and western kit — will not be easy to export.

The other issue is cash. Kamyshin says that the production of drones and other tech will potentially be 18 times higher next year than it was in early 2022. But he also says that the Ukrainian army only has funds to purchase half of this output at commercial rates. 

Some would-be investors think this problem will solve itself. “There is huge opportunity here — some people are going to make a lot of money,” says one US-based entrepreneur, who is funding Ukrainian drone start-ups. Others are more doubtful. Either way, the fight is on to turn Ukrainian innovation into credible business plans.

gillian.tett@ft.com

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