This year is a key year for the reform of the state defense industry - the defense conglomerate Ukroboronprom. It is to be reorganized into two holdings with the working names "Defense Systems of Ukraine" and "Aerospace Systems of Ukraine", which will be engaged in research, development, production, and marketing. The first holding will unite all enterprises of the conglomerate that produce weapons and military equipment for the Ukrainian army and will thus strengthen the country's defense capabilities, whereas the second holding will unite companies that explore and develop space and aviation. And it's not just about the physical division of human resources, property, technology, cooperation and distribution ties, but about a deeper reform of a key industry. Especially for a country that opposes Russian aggression.
Director General of Ukroboronprom Yuriy Husiev, who was appointed to the new post in December 2020, disclosed the details of the defense industry reform in an interview with Ukrinform.
ABOUT LAST YEAR'S WORK AND THIS YEAR'S DEFENSE ORDER
Question: Mr. Husiev, the preparatory stage of the conglomerate's reform has coincided with a difficult period for Ukraine and for the whole world. Despite this, last year we managed to do a lot to rehabilitate many businesses so that after the reform they feel like important players in the market of military equipment and weapons, rather than a kind of "poor relatives"...
Answer: I will give you just a few figures. Production volumes at our enterprises increased last year to 102.2% compared to 2019. And this means an increase of 665 million hryvnias. For example, production indicators for armored vehicles improved by 40%, for radar systems by 23%. This despite the fact that 2020 was a crisis year in connection with the COVID-19 pandemic: defense budgets were reduced, international arms exhibitions were canceled, negotiations were switched to an online format, and so on. Despite this, Ukroboronprom's enterprises fulfilled the state defense order in 2020 in full. All contracts were implemented. In the future, we expect an increase in the share of the conglomerate's member companies in the state defense order, which is formed by the Defense Ministry, the Armed Forces, the State Border Guard Service, the National Guard, and other agencies. After all, last year this share, in my opinion, was quite "modest" - only 36%.
Therefore, visiting the Iskra enterprise in Zaporizhia last December, Ukrainian President Volodymyr Zelensky emphasized the need to consider increasing the share of Ukroboronprom's enterprises in the state defense order so as to provide Ukrainian defenders with our products. We have already held presentations of opportunities and promising developments of Ukroboronprom's enterprises for the General Staff of the Ukrainian Armed Forces and the command of certain branches of the Ukrainian Armed Forces of Ukraine. We have demonstrated, first of all, the latest developments, the latest models of military equipment and weapons.
For example, the Dozor-B armored personnel carrier, the Neptune missile system and the modified RPV-16 rocket launcher were added to the arsenal of the Ukrainian Armed Forces last year.
The 80K6KS1 radar for the BUK-M1 air defense system, the Vilkha-M missile system, the Bureviy multiple launch rocket system and the MiG-29MU2 fighter were tested in 2020.
These are not all the achievements of the member companies of the defense conglomerate. We have many more ideas about what we can offer, first and foremost, the Ukrainian Armed Forces, as well as our foreign partners.
Now we are changing our approaches to scientific and technical activities in accordance with modern challenges. We restarted the Council on Scientific and Technical Development and Innovations at Ukroboronprom, inviting scientists from the National Academy of Sciences, Kyiv Polytechnic Institute, and experts from leading think tanks. This will facilitate the preparation of strategies and programs for scientific and technological development at the enterprises of the state defense sector.
Question: Regarding the defense order... Does the current status quo in this area correspond to the tasks, functions and capabilities of the future renewed conglomerate?
Answer: The main thing for our team is to provide the Ukrainian Armed Forces with modern military equipment and weapons. First of all, it concerns the quality and timely execution of the state defense order. Our task, together with the team of the National Security and Defense Council, the Defense Ministry, the General Staff of the Ukrainian Armed Forces and the Ministry for Strategic Industries, is to form a strategic vision of how to increase the state's defense capabilities, how to ensure effective transformation of Ukroboronprom and the development of the conglomerate's enterprises. I have already suggested to the president, as chairman of the National Security and Defense Council of Ukraine, to consider at a special meeting of the National Security and Defense Council the transformation of Ukroboronprom and the defense industry strategy. We expect such a meeting to take place in February.
ABOUT CONCEPT OF DEFENSE INDUSTRY REFORM, FATE OF FLAGSHIP ENTERPRISES
Question: Mr. Husiev, a month ago you signed an order to begin the corporatization of Ukrobronprom. Does this mean that progress has finally been made in solving the problem of inefficiency of this "monster," which we have been talking about for at least half a decade?
Answer: Corporatization is part of a major transformation of Ukroboronprom by creating modern self-sufficient holdings with an effective corporate governance system. This will help implement joint projects with international partners, ensure a transparent transfer of technology, and produce high-quality weapons, primarily for the Ukrainian Armed Forces. There are also additional opportunities to attract financial resources, rehabilitate enterprises, preserve and strengthen labor collectives, and solve other problems that have accumulated over the past years and decades. The adoption of bill No. 3822, which will become the foundation for transformation, will help to successfully implement the reform, which already started last December. I asked the president of Ukraine to define this bill as urgent for consideration by the Verkhovna Rada. We have the full support of the head of state. By the way, I have already presented to him the concept of reform and a roadmap for its implementation. There is an understanding both at the level of the government and in the concerned committee of the Verkhovna Rada headed by MP Oleksandr Zavitnevych.
During his visit to Zhytomyr Armored Plant, Oleksandr Mykhailovych [Zavitnevych] reaffirmed that the parliament could consider this document at first reading in early February. This means that we will wait for its final adoption in March-April. The task set by the president of Ukraine on the transformation of the state conglomerate will be fulfilled by the middle of the year.
Question: The reform of Ukroboronprom envisages that 65 most promising enterprises will join a new state holding. And what will happen to the rest? After all, almost 120 business entities were part of the conglomerate before the beginning of the reform. Up to 30 enterprises completely stopped their operation, went bankrupt, or abandoned the production of defense products in favor of consumer goods. That is, the fate of two or two-and-a-half dozen remains uncertain…
Answer: Ukroboronprom includes 137 enterprises. Twenty-one of them are located in the territories temporarily occupied by Russia. Ukraine will definitely return them. But at the first stage of reform, we are counting on the capabilities of factories and design bureaus located in the territories controlled by Ukraine. Sixty-five companies will form a new holding company with the working name "Defense Systems of Ukraine," which in turn will be divided into six sub-holdings. We also plan to include special arms exporters that will help sell products.
A separate aerospace holding, uniting three sub-holdings, will be formed. Ukraine has a powerful aerospace industry. At the end of last year, the president visited the Antonov State Enterprise, which for the first time since the country's independence received a state order for three An-178 aircraft for the Ukrainian Armed Forces.
As for the plants, which, so to speak, "did not find themselves" in the new conditions... At the end of 2020, the government decided to transfer 17 enterprises of the conglomerate to the State Property Fund for further privatization. These are enterprises that have not de facto fulfilled orders for the national security and defense sector of Ukraine for many years and have nothing to do with the defense industry. Their effective privatization should also be part of the future transformation. As a result, Ukroboronprom will cease to exist in the form in which it was formed in 2011.
And, of course, the transformation involves the development of export potential and the presence of our country in the global arms market. It is necessary to strengthen the positions of domestic special arms exporters and enterprises of Ukroboronprom in foreign markets. After all, it means working capital for producers, additional funds for the state defense order, and support for the national currency. Of course, this means jobs, timely salaries for tens of thousands of Ukrainians, and in the future, this means opportunities for international cooperation after the corporatization of Ukroboronprom. I am convinced that Ukraine has a huge potential to expand its presence in international arms markets. The president set the task of significantly increasing exports of products of member companies of the state conglomerate this year.
Question: Compared to the previous concept of Ukroboronprom's reform, the approach to the specialization of sub-holdings has changed somewhat. Probably, this was a reaction to criticism that outside the new structure (and, accordingly, outside the defense order) there could be such areas as artillery systems, high-precision weapons, ammunition, cybersecurity systems?
Answer: Undoubtedly, all reasonable remarks have been taken into account. We are already working on the formation of the first industry associations. In particular, at a meeting of the conglomerate's board of directors we approved the concept of creating the sub-holding "Radar Systems" and even held a public discussion of what this structure should be like. Its flagship enterprise will be the already mentioned Zaporizhia-based Iskra. Radar Systems will obviously be the "first swallow" in the structure of "Defense Systems of Ukraine" with quality corporate governance.
Question: Tell us about the possibilities of cooperation, joint activities - both on a permanent basis and as part of individual projects - between different sub-holdings, as well as with private businesses, possibly foreign businesses…
Answer: We have a great need to unite the efforts of private producers, our international partners and the capacities of state-owned enterprises, which will be reorganized into joint-stock companies in the process of transformation of the conglomerate. I am convinced that work on all mutually beneficial programs and projects launched today will be continued. This also applies to the establishment of the joint production of combat drones. We can talk about avionics, about many other promising things. These are new perspectives and opportunities for mutually beneficial cooperation with international partners, as well as with domestic private manufacturers of weapons and military equipment. First of all, this applies to foreign partners who have the experience and components needed for Ukrainian aircraft, for our armored vehicles, for many other projects. I am convinced that the corporatization of the conglomerate will create a new window of opportunity for such cooperation.
We have already created a project office inside Ukroboronprom. It is just working to implement projects for the production of combat drones and other equipment and weapons as part of international cooperation.
ABOUT MONEY, FINANCIAL AUDIT AND FIGHT AGAINST CORRUPTION
Question: Mr. Husiev, you mentioned in the press that an audit of the conglomerate's financial activities was completed at the end of December. A public presentation of its results will take place soon. Could you share some numbers and considerations with Ukrinform readers?
Answer: We are currently preparing to publish the audit results. In addition, we are introducing a system of constant and regular audits at Ukroboronprom's enterprises and at the conglomerate as a whole. The process of property inventory continues. This is necessary, among other things, for further effective corporatization of the state conglomerate. First of all, we should acquaint the supervisory board of Ukroboronprom with the results of the audit.
Question: What struck you most when you read this report?
Answer: You will learn everything after the publication of the results. For now, I will say one thing: in order to ensure a tangible result for the whole country from Ukroboronprom's reform, much more still needs to be done.
Question: By the way, about unpleasant things. Like every branch of the Ukrainian economy, and the entire system of government, Ukroboronprom inherited such a shameful phenomenon as corruption in enterprises. Before the New Year, for example, law enforcement officers reported fraud with Ukroboronprom's lands in Kharkiv... What are you planning to do so as not to take this "suitcase" with you to the future of the reformed holding?
Answer: A few important things. About what we are doing now and what we are planning to do in the future. We are introducing a lie detector test for all managers of Ukroboronprom's enterprises. I also decided that all employees who join our team as a result of open competitions should take a lie detector test. The conglomerate also signed a memorandum of cooperation with the National Anti-Corruption Bureau of Ukraine. We are planning to deepen cooperation with other anti-corruption institutions in order to promptly respond to any corruption risks and possible abuses. A modern effective system of corporate governance will contribute to this. After all, the reform envisages the creation of supervisory boards, a system of personnel selection through transparent and clear procedures.
My personal position is zero tolerance for corruption. No "collective guilt." We are ready to cooperate with all law enforcement agencies checking information about possible corruption risks at Ukroboronprom's enterprises.
ABOUT WHO OR WHAT CAN HINDER REFORM
Question: You have already mentioned some terms – regarding the formation of the legal field, the creation of the first industry business units and more. Finally, could you summarize what should be each of the stages of this reform? What will happen to each of the sub-sectors of the domestic defense industry, and what will happen in the future to Ukroboronprom itself?
Answer: I have already said that Ukroboronprom as a state conglomerate should cease to exist in 2021. This will happen after the approval of legislative initiatives, which we have already discussed with you. Modern holdings will be created. This will be preceded by a certain transition period, when the procedures for their formation are approved, the algorithm of corporatization is determined, etc. I am convinced that the result of this work will be an effective management system, deepening cooperation with international partners, obtaining and developing new technologies, creating high-quality models of weapons and military equipment.
Question: What or who can hinder this process?
Answer: The fact that the president believes in this reform so much and supports our desire to implement it shows that we can easily overcome any obstacles as one team. It does not matter whether this is a debate in parliament or, perhaps, government decisions. I think we have enough arguments to convince both the people's deputies and government officials of the expediency of implementing this reform, of the correctness of the chosen path.
Question: What is the mood in labor collectives? Do people perceive the forthcoming reform? Which of their problems need to be solved beforehand so as to make them interested in the results of a future update?
Answer: I have already visited more than 20 Ukroboronprom enterprises in Kharkiv, Zaporizhia, Mykolaiv, Kherson, Cherkasy, Zhytomyr, Lviv, and Rivne regions. He visited repair crews of military equipment in the area of the Joint Forces Operation - Kramatorsk, Toretsk, Kostiantynivka, Sievierodonetsk, Lysychansk... We are pleasantly impressed by the developments, indicators and plans of some enterprises. Some others need extra attention. For example, Kharkiv Aircraft Plant needs state assistance for financial recovery. Regarding this enterprise, we have prepared a separate bill, which has already been sent to the Cabinet of Ministers. We are convinced that the approval of the document will give a "second breath" to the plant, which, unfortunately, has not produced such important high-tech products for the country for many years.
And this is not an isolated case. We have a whole list of state-owned enterprises, part of the conglomerate, that need to recover and overcome crisis phenomena that have accumulated over the past few years. The corporatization of Ukroboronprom will provide new opportunities for this. I am convinced that the transformation of Ukroboronprom will become a driver of industrial and economic development of the state.
Oksana Polishchuk/Vladyslav Obukh, Kyiv