Ukraine’s burgeoning defense industry is a testament to its resilience, churning out thousands of artillery shells, armored vehicles, and an impressive array of drones. This rapid growth is widely celebrated as a critical factor in its resistance against the Russian invasion.
However, as billions of dollars flow from the Ukrainian military to domestic arms manufacturers, often bolstered by European funding, much of this expenditure remains hidden behind a veil of wartime secrecy. This lack of transparency has raised red flags among analysts and activists, who point to Ukraine’s persistent challenge in curbing deeply entrenched corruption within its military procurement system.
A significant area of concern for government auditors reviewing military spending is the Kyiv government’s unexplained practice of repeatedly awarding contracts to companies submitting higher bids than their competitors. Internal government audits, examined by The New York Times, detail dozens of such contracts over just a year, alongside instances of delayed or incomplete deliveries and advance payments for weapons that never materialized.
While awarding contracts to higher bidders doesn’t automatically imply corruption or wasteful spending, these audits underscore a critical dilemma for Ukraine. With wavering support from the US administration and limited European military capacity, Kyiv is shifting away from reliance on allied donations toward boosting domestic production and engaging with international arms markets, often through European-backed financing programs.
President Volodymyr Zelensky recently announced that Ukraine now produces nearly 60 percent of its own armaments. Its factories are producing lethal drones, ground robots, and a wide range of conventional weapons. Notably, Ukraine has also ingeniously adapted inexpensive consumer drones for military operations, saving substantial resources.
Zelensky emphasizes that domestically produced weapons will form the cornerstone of Ukraine’s future security, acting as a crucial deterrent once the conflict subsides. However, former officials and experts caution that realizing this vision demands overcoming Ukraine’s extensive history of corruption in military procurement.
Government auditors investigating purchases made by Ukraine’s Defense Procurement Agency from early 2024 to March of this year did not uncover outright theft or embezzlement, though they did forward some contracts to law enforcement for further scrutiny.
Nevertheless, their comprehensive 465-page review revealed that dozens of contracts for vital artillery shells, drones, and other weaponry were not awarded to the lowest bidder. The combined discrepancy between the lowest bids and the actual contract values awarded by the agency amounted to at least 5.4 billion hryvnia, or $129 million.
“They overpay for unknown reasons and without justification,” noted Tamerlan Vahabov, a former adviser to the Defense Ministry’s procurement agency. He lamented that amid the chaos of war, there’s “a lack of political will to do it the right way.”
Olena Tregub, executive director of the Independent Anti-Corruption Commission, a Ukrainian non-governmental organization, acknowledged that lower bids are sometimes bypassed for legitimate reasons. “That justification can be true, or it can be corruption,” she stated.
In response, Arsen Zhumadilov, the procurement agency’s director, clarified that lower bids might be rejected if they “do not meet the required standards of quality, delivery timelines, payment terms or other essential criteria.”
He affirmed that the agency has recently reformed its contracting procedures to ensure fairness and began phasing out contracts involving middleman companies, which typically added a 3 percent markup on sales, last year.
Following Russia’s full-scale invasion in 2022, Ukraine’s military acquired weapons and ammunition from two main sources: direct donations of equipment like Abrams tanks and M777 howitzers from Western nations, and purchases by the Defense Ministry from Ukraine’s once-mighty domestic industry and international markets.
The government established the procurement agency as an autonomous arm of the Defense Ministry in 2023. This move came after Ukrainian media reports exposed suspicious spending, including significant overpayments for basic soldier provisions like eggs and winter coats, leading to the resignation of then-Defense Minister Oleksii Reznikov.
Yet, the new agency soon encountered its own difficulties, with two directors being dismissed due to allegations of ineffective management.
This year, the procurement agency’s approximately $10 billion budget is primarily funded by Ukrainian tax revenues, but it has started receiving European financial assistance. Denmark, for instance, initiated a program under which European countries have collectively pledged over $1.6 billion to enable Ukraine to purchase weapons from its own manufacturers.
Ukraine is sourcing weapons from its previously dormant Soviet-era armaments factories, which once produced intercontinental ballistic missiles, tanks, and jets, as well as from hundreds of innovative Ukrainian defense technology start-ups.
Until at least last year, a vast majority of these purchases were facilitated by arms dealers, who typically charged a 3 percent markup. A separate audit from July last year indicated that the procurement agency utilized such middlemen for 83 percent of its contracts, rather than acquiring directly from suppliers.
Arms dealers became deeply embedded in Ukraine’s defense procurement system shortly after Russia’s invasion. Within roughly two months, Ukraine’s artillery ammunition reserves were depleted, a critical vulnerability kept under wraps at the time. In a desperate move, Kyiv turned to these arms dealers, who had previously exported Ukrainian weapons, to re-import vital supplies.
These dealers, known as special exporting companies, had a history of selling Ukrainian weapons to conflict-ridden nations in Africa and the Middle East. In 2022, they pivoted to importing from these regions and expanded their role to broker deals between the Defense Procurement Agency and Ukrainian manufacturers.
Ukraine is currently navigating a wartime experiment, procuring arms not from a few established defense contractors but from a dynamic network of over 2,000 weapons suppliers, ranging from cutting-edge defense tech startups to small, basement-based workshops.
Some of these companies have achieved remarkable success, such as a fleet of drone speedboats that has crippled about a third of Russia’s once-formidable Black Sea Fleet.
However, out of 35 types of surface or submarine drones developed by 26 Ukrainian companies, only three models have successfully sunk Russian ships, according to Oleksandr Kamyshin, an adviser to the president on the defense industry.
The audits also documented numerous contracts resulting in late or incomplete deliveries, and instances where advance payments were made but the promised weaponry was never delivered. Furthermore, contracts were identified that had been signed with companies without prior verification of their manufacturing capabilities or even the existence of suitable production facilities, such as basement workshops.
To address these issues, the defense procurement agency is exploring new procurement models. It has launched an online marketplace that allows army commanders to directly purchase drone weapons from suppliers with just a few clicks, bypassing military bureaucracy. Director Zhumadilov hails this initiative as “a game changer in military supply.”