Political Risks and the Realities of War Stimulate the Movement Towards Self-Sufficiency of the Ukrainian Defense Industry
Transparency reforms, new financing models, and cooperation with the alliance are transforming Ukraine into a potential European leader in cheap and effective armaments
The defense sector of Ukraine underwent cardinal changes after Russia's full-scale invasion in 2022, transforming from an inefficient industry of Soviet times into a dynamic, innovation-oriented sector. This includes the production of cost-competitive drones and artillery, the volume of production of which reached 1.5 million drones in 2024, and in 2025, it is planned to release 4 million.
Key reforms involve transforming state conglomerates, such as "Ukroboronprom," into more transparent structures, creating procurement agencies to reduce corruption, and creating incentives to attract the private sector. Economic models are based on the experience of NATO partners, with an emphasis on joint ventures and direct financing to utilize Ukraine's lower costs.
The planned transition to self-financing includes the allocation of internal budgetary funds (for example, 51 billion UAH in 2024 for defense) and attracting private capital, although external support remains crucial for increasing the production of drones and artillery.
What Are the Expected Consequences for NATO and the USA
For NATO, Ukraine offers affordable production capacities; the advantages for the USA include revitalization of the domestic industry through aid models, with simultaneous learning from the example of Ukraine's rapid adaptation.
The defense industry of Ukraine is at a decisive stage of development, transforming from a relic of Soviet centralized planning into a flexible, globally competitive force under the pressure of the ongoing conflict. This transformation highlights broader themes in international security: the interaction between national sovereignty, alliance dynamics, and economic resilience.
While NATO partners struggle with financial constraints and geopolitical threats, Ukraine's aspiration for self-sufficiency in the production of drones and artillery serves as an example of adaptive reforms, innovative financing, and cross-border cooperation. Relying on diverse sources, including analytical studies, government initiatives, and industry insights, Ukraine is developing economic models adapted for integration into NATO, mechanisms for transitioning to internal financing, and practical lessons for US investments. Although progress is evident, such challenges as corruption risks, dependence on supply chains, and wartime vulnerability remain relevant and require a balanced approach from all stakeholders.
Historical Context Stimulates the Transition to Production Self-Sufficiency in the Defense Sector
Ukraine inherited from the Soviet Union a significant defense industrial base, which once accounted for about 30% of the USSR's military production and employed over a million workers. However, after gaining independence, inefficiency—outdated technologies, corruption, and low levels of state orders—led to a reduction in exports and underutilization of capacities.
Russia's invasion in 2022 became a catalyst for revival: the sector grew by 350%, and investments increased by 900% from 35-50 million dollars in 2023-2024. Today, over 500 private companies dominate the market, producing 96% of drones domestically and surpassing NATO in the volumes of artillery shell production. This self-sufficiency is not absolute—Ukraine still imports components—but the trend reflects a strategic shift towards reducing dependence on aid, strengthening national resilience, and positioning the country as a key player in European security.
The necessity of this stems from the realities of combat operations: drones account for 80% of losses on the front line, and a shortage of artillery hampers operations. Among the production targets are 1.5 million drones in 2024 and 4 million in 2025, including 30,000 long-range drones and 3,000 missile drones. As for artillery, the Bohdana 2S22 howitzer is produced at a rate of ~16 units per month (~200 per year) at a price of 2.3 million euros each, which is cheaper than Russian or Chinese analogs. These achievements underscore Ukraine's advantage in economic efficiency, as FPV drones cost ~500 dollars per unit, while some Western analogs cost 78,000 dollars.
Political Reforms Require Ensuring Transparency and Alignment with NATO
Political reforms played an important role in this evolution, focusing on management, combating corruption, and international integration. The restructuring of "Ukroboronprom" into the joint-stock company "Ukrainian Defense Industry" (UDI) in June 2023 aimed to increase transparency and efficiency, as well as to change leadership to combat corruption and increase production. The Ministry of Strategic Industries, established in 2020, oversees these efforts, while the Defense Procurement Agency (DPA), launched in January 2024, centralizes procurement with the goal of minimizing intermediaries and reducing prices.
Anti-corruption measures include the work of independent supervisory boards (for compliance with NATO standards) and the implementation of a strategy to combat opaque practices. Such initiatives as Brave1 provide grants (over 30 million dollars for 1500 companies) and connect innovators with investors, while Defense City offers tax incentives and accelerated customs clearance. These reforms align with NATO priorities outlined in the G7/EU joint declaration at the Vilnius summit in 2023, which expressed commitments to transferring equipment, training, and industrial development in exchange for Ukraine's progress in transparency.
Treating Ukraine as a de facto EU member in defense matters—an invitation to participate in programs such as the European Defense Fund, and the removal of export control barriers—can contribute to utilizing its potential for collective deterrence. NATO's innovative initiatives, such as DIANA and the 1 billion euro Innovation Fund, are increasingly involving Ukrainian technologies, including joint ventures like Rheinmetall in Kyiv for vehicle maintenance and Baykar investments in drones amounting to 100 million dollars.
Economically Efficient Cooperation with NATO Country Partners Contributes to the Emergence of Flexible Economic Models
Illustrative is the Danish model: NATO members pool funds (for example, from frozen Russian assets) for direct purchase of products from Ukrainian manufacturers, ensuring low prices and relevance for the front line. Payments are projected at 1.5 billion euros in 2025, which will contribute to expanding the use of drones and artillery. This contrasts with traditional aid, transitioning to investments in Ukraine's potential.
For NATO, such models as joint ventures (JV) in Europe under EU legislation reduce risks and encourage Western companies to partner with Ukrainian enterprises. Excellent examples are projects by Rheinmetall, Thales, and Diehl Defence, which allow transferring and expanding production after reforms. Ukraine's decentralized ecosystem—small workshops, crowdfunding, and direct procurement by brigades themselves—fosters innovations but requires standardization for interaction with NATO.
7 billion dollars received by Europe as profits from frozen Russian assets are directed towards mass production of drones, aligning with the aspiration to approach Ukraine's potential annual capacity of 8 million units. Exports to NATO markets, facilitated by policy changes by 2025, could bring 10-30 billion dollars, and Ukraine aims to become a European center for drone production.
The Transition to Internal Financing Emphasizes Drones and Artillery
Such changes involve transitioning from external aid to maximum utilization of internal resources, with defense expenditures in 2024 amounting to 51 billion UAH (1.4 billion US dollars), and allocations for drones at 43 billion UAH (1.2 billion US dollars). Private investments through such funds as Nezlamni and American companies (Green Flag Ventures, MITS Capital) support startups, while the DPA optimizes contracts.
As for drones, production has expanded from garage prototypes to swarms controlled by artificial intelligence, with 4.5 million FPV units annually and potential of 8-10 million. Internal financing includes 60 million dollars per month for combat units to procure drones and commitments from the Drone Coalition amounting to 2.75 billion euros for 1 million units in 2025. Changes in artillery production include licensed 155-mm shells (increasing production by 200%) and Bohdana howitzers, financed through internal budgets and the Danish model, with an additional 18 billion euros needed to achieve full capacity in 2025.
Among the challenges are a shortage of working capital and supply chain issues, which are planned to be overcome through multi-year commitments and export revenues. In this area as well, there are success stories that inspire: such manufacturers as Vyriy and Skyfall are transitioning to serial production with certification to NATO standards.
The Effect of American Investments is Tangible Both for Ukraine and for the USA
US investments can rely on the Ukrainian model of rapid innovations and cost optimization, as seen in the example of MITS Capital's focus on jam-resistant technologies and autonomous systems. Aid to Ukraine (totaling 113 billion dollars, with 68 billion dollars reinvested domestically) revitalizes the American defense industry, stimulating the production of ammunition and missiles in 37 states. Achievements include emulating direct feedback cycles between manufacturers and users, decentralizing some procurement to increase flexibility, and investments in joint ventures for access to inexpensive, battle-tested technologies.
However, such risks as intellectual property theft and corruption require preventive measures, such as joint ventures based in Europe and export controls. Ukraine's experience shows that American companies prioritize startups with verified combat data, as in the case of Green Flag investments in over 8 companies.
There are also more strategic consequences: support for Ukraine strengthens NATO, addressing the production shortage problem, but halting aid could undermine the deterrent effect. Ultimately, these lessons convince of the benefits of balanced, empathetic partnerships that recognize Ukraine's contribution while simultaneously reducing dependence.
Ukraine's path to self-sufficiency in the defense sector is an example of resilience and innovations that offers NATO partners economic efficiency, and the USA—strategic plans for future investments. ongoing reforms and financing will determine the long-term success of the chosen strategy.
Danylo Yershov, political scientist specializing in international relations, junior expert at the United Ukraine Think Tank