Programs and Resources will Define a New Look for the Armed Forces and the National Defense Industry
Senior Deputy Secretary
National Security and Defense Council of Ukraine
«Homeland defense requires that we reset national defense industry into a new format»
Ukrainian defense industry is entering a period a major transformation that pursues a long-term aim of ensuring systemic technical modernization of the Armed Forces and other national security sector services by providing them with most advanced types of arms and military equipment. The overcoming of budget restraints and the start of the long overdue transformation are achievable goals, but only if the strategy of regulation, expansion and funding for the defense industry makes maximum use of proven market mechanisms where the emergence of a new, promising product is a result of a transparent, well-regulated and mutually beneficial cooperation among customers, developers and manufacturers of arms and military equipment, regardless of their form of ownership. This is just one of the key aspects brought up by senior deputy Secretary of the National Security and Defense Council of Ukraine, Oleh Gladkivsky, in an interview with Defense Express. The conversation took place exactly one year after Mr Gladkivsky was appointed chairman of the Interagency Commission on Military-Technical Cooperation and Export Control. In May 2015, Mr. Gladkivsky was appointed to head the Interagency Commission on the Defense Industry Affairs. As chairman of the two interagency commissions, Oleh Gladkivsky can exert a significant, if not key influence on the choice of targets – both internal (with respect to technical modernization of the Armed Forces) and external (with respect to export markets) -- to be achieved by the domestic defense industry.
The Interagency Commission on the Defense Industry Affairs took a lead in developing draft national programs on arms modernization and the defense industry modernization, both projected into 2020. What are the role and the status of these documents; what are the approaches underlying them?
There are simple strategic principles underlying the two programs that will shape a new look for arms and military equipment in our Armed Forces and for our defense industry. To be precise, this is a focus on the quality of the products being manufactured and marketed, and, of course, the creation of a competitive market.
In view of the new experiences - the annexation of the Crimea, the difficult initial period of fighting with the enemy, a change in the nature of combat engagements, an urgent need for a sufficient supply of arms and military equipment – all the key government programs related to the defense sector are being drawn up. Our challenge is to ensure effectiveness and efficiency of our Armed Forces and the national security system as a whole, at the level that would allow Ukraine to preserve its self-identity and statehood. This is a key condition on the basis of which various scenarios of action can be explored and, accordingly, the choices of priorities for military-technical and military-industrial policies can be made.
A draft of the State Program on Arms Modernization for the period from 2016 to 2020 has been completed and is now ready for the Cabinet of Ministers’ endorsement. I can say that the program is revolutionary in nature. In developing the draft document we did not have regard to budgetary constraints but took as a basis the needs of armed services and branches of the Armed Forces. The essence of the program is to shift emphasis, as soon as possible, from overhauls of technically obsolescent equipment (which we have to do now) to the upgrade and creation of new designs, and, on this basis, to embark on systemic technical modernization of the Armed Forces. The preceding comments apply equally to objectives of the State Program on the Defense Industry Modernization, a draft of which is being developed by the Ministry of Economy. The program regarding the defense industry must take account of the needs and requirements of the State Program on Arms Modernization on the one hand and, on the other hand, ensure modernization and growth of the defense industry as a real economy sector and a source of revenue from high-tech products.
What is the amount of minimum required budget for modernization and production engineering?
Of course, ambitions are associated with traditional restraints. Since the provision of all the requirements of the Armed Forces clearly exceeds the budgetary capabilities of the State, we are operating under the assumption that the minimum level of defense expenditure for Ukraine at this reference point of time should be 5% of the gross domestic product. We understand that forward-looking indicators of budget expenditure for both the arms modernization program and the defense industry modernization program 2016-2020 must be balanced with our ambitions, on the one hand, and on the other -- provide for a sufficiently dynamic pace of the Armed Forces growth and modernization effort, with due regard for different situation scenarios. So we are currently compiling a list of priorities, with due regard for the budgets and expenditures available, and for the types of arms, systems and equipment that are of priority importance for us.
Under such circumstances, the essence of the best suitable strategy for the defense industry modernization lies in soliciting non-government resources, private investment, both domestic and foreign; and in stimulating corporatization, equitisation and privatization within the industries -- or, to put it figuratively, opening the "black box" of the defense industry in order to provide new opportunities for qualitative improvements to be achieved within a short period of time. Here's the short-term challenge.
What are the other points of focus for the commission on the defense industry modernization? Are the Cabinet ministers in charge of finances and economy have to be convinced in the urgency of modernizing the army at the level as provided for by the arms modernization and defense industry modernization programs?
I don’t think there is anybody in Ukraine who needs to be convinced in the importance of modernization of the army and the defense industries, in a situation where foreign forces are present on our soil and a hostile state is supporting the armed insurgents by supplying them with weapons, equipment and ammunition. But the problem is that, over the years, there has been a system evolving that was specifically designed so that sensible ideas could not be implemented by virtue of the presence of formalized procedures, regulations, binding decisions, directives, standards and so on. This needs to be changed. For example, there is an urgent need to move to three-year or five-year cycles in planning for arms development and procurement programs, and, as a result, to change the format of the budgeting and reporting system. I would stress that this problem is rooted in the specifics of the global economic model adopted by Ukraine, where there is the dominance of commercial capital rather than industrial capital.
For growth and expansion, industrial capital indeed needs a strategy resting on long-term projects and programs. This is the basic foundation where industrial business is built on, and arms development and procurement programs are no exception but rather an emblematic example. Not only such innovations need to be introduced by Cabinet decisions but, more important, they should be legitimized legislatively so to preclude any possibility of rollback.
Besides this I intend to initiate a decision that would allow all the companies compliant with our national export control regulations to have export authorization for their products and, consequently, for the services related to maintenance, repair, overhaul and upgrade of their own products. This step is directly linked with the increasing popularity of some of Ukraine’s high-tech products such as Antonov aircraft or guided missiles by Luch Design Bureau, and with the emergence and further promotion of new brandname products produced under common brand name of "Made in Ukraine. The long-term result will be increasing interest of industries for producing competitive products.
Can it be said that this is part of a plan to set up individual clusters - armored vehicles, precision weapons, radar equipment etc -- within the Ukrainian defense industry, and that each of these clusters, which will be comprised of specialist firms in a certain discipline, will be given significant rights and capabilities to operate independently both on the domestic and export markets?
Yes, such a strategy is under consideration, undergoing analysis and discussion.
Does it mean that at the next stage, which is corporatization and equitization, the Government will retain some stakes in companies, while the remainder of the shares will be offered for sale and subsequently used for soliciting strategic investment in some or other cluster of industries?
It’s exactly so! This is what makes me want to employ both the arms modernization and defense industry modernization programs as a unique opportunity to change the overall format of the national defense industry where there will be a higher level of engagement of both domestic actors -- government-owned as well as privately owned – and international partners. I will do what I can to see that the investments that we have mobilized and will continue to mobilize are so structured to suit our priorities on the one hand, and that investors have long-term assurances in the framework of the programs in which they are partners, on the other hand.
What are the time limits set for implementing this approach?
I hope we will be able to do this within a year.
It so happens that, when it comes to imported procurements, our military authorities – the Ministry of Defense and the General Staff – are using approaches that are different from those employed by authorized arms dealers acting under the aegis of Ukroboronprom. Why is it so?
There are two aspects to this issue. The first is war. And we need this discrepancy eliminated as soon as possible. Second is that we're saying to all suppliers of certain types of equipment: yes, at the initial stage we will buy finished products from you, but please check with your governments, your company executives if they are ready to transfer technology and set up production in Ukraine. This is the number-one criterion. My mission as head of the two commissions is to bring new technology into Ukraine. That same vision is shared by Ukroboronprom, which, being a government stakeholder, is keen that foreign companies should enter our market, set up production facilities and manufacture products here in Ukraine. This will be beneficial both in terms of a substantial saving of resources and the joint development and production with our partners of the types of weapons and military equipment required by our Armed Forces.
Can you give examples showing that our appeals for foreign companies to transfer technology to Ukraine fall on fertile ground?
Such examples do exist, and they are demonstrative. But I wouldn’t like to talk about them out loud, because, unfortunately, we are at war, and many countries have to take this factor into account as required by their respective licensing systems. For me personally, progress in our defense industry modernization effort is closely linked to joint development of weapons systems with our partners, especially as we are moving towards a European model regarding how the defense industry is structured and operated. But the common European model, so to speak, differs from country to country depending on national traditions, budgets, relations of ownership etc. Some countries carried out a full privatization reform, while others, such as Poland, on the contrary, opted for the consolidation of the defense industries under the umbrellas of state-run holding companies. We are summing up this experience to be better able to deal with the challenges we are facing. And for me it is vital that we must convert the available capabilities and opportunities into new products and new businesses directly related to growth of arms production and modernization of the defense industries.