Ukraine’s Defence Industry Reborn: Becoming Europe’s Centre for Defence Innovation

The war has transformed Ukraine’s defence industrial complex more radically than decades of reform efforts ever did. Once chronically underfunded and dependent on Soviet-era legacy, it has now become one of the key drivers of the transformation of Europe’s defence industry. Aequo’s lawyers do not merely observe the development of the defence sector but have been actively involved in its transformation since the very beginning of the full-scale invasion.

1991–2014: an underfunded and imbalanced defence industry

The problems of Ukraine’s post-Soviet defence industrial complex were well known and evident to society. Even after the transition to a market economy, the state retained control over design bureaus, key plants and arsenals, keeping 85–90% of production capacities within its orbit. Defence enterprises remained hostages to inefficient management and chronic public-sector problems — political pressure, bureaucracy, corruption risks and overall economic weakness — which deprived them of stable orders and investment.

Despite three defence industry development programmes (2002, 2006 and 2010) and a number of related initiatives, the government failed to launch genuine modernisation. The establishment of Ukroboronprom in 2010 as an “umbrella” holding uniting more than 130 enterprises was intended to improve governance and eliminate duplication of functions. However, the reform did not deliver results: excessive centralisation reduced flexibility, dependence on Russian components persisted, as did opaque financial flows. In practice, the state left defence enterprises with almost no resources for development: until 2016, Ukroboronprom and other state-owned producers were required to transfer 75% of their net profit to the state budget. The private sector accounted for only 10–15% of the defence industry and was mostly involved as a subcontractor.

As a result, the overall situation remained unfavourable. Due to the lack of investment, technologies rapidly became obsolete — equipment wear and tear at Ukroboronprom enterprises reached 60–80%. The defence industry remained dependent on Russian components and, even more so, on exports: 65–75% of production was shipped abroad. International contracts were both the main source of revenue and a catalyst for technological development. At the same time, part of Ukraine’s competitive advantage in foreign markets was based on expertise in modernising Soviet-era systems.

Key “point innovations” were largely concentrated in aircraft and naval engineering, as well as in optics and radar technologies. Ukraine also began work on its own unmanned aerial vehicles, initially in the format of experimental projects. These early efforts later became the technical foundation for the full-scale development of drone systems after 2014.

2014–2022: between forced transformation and structural inertia

With the onset of Russian aggression, Ukraine’s defence industry faced a shock-driven restructuring. The needs of the Armed Forces grew rapidly, and the changes concerned not only volumes of weapons, but also fundamentally new quality requirements. The frontline needed modern communications, electro-optical systems, real-time reconnaissance, new types of ammunition and digital solutions. This marked the beginning of qualitative transformation, but it coincided with a deep capacity crisis: 12 Ukroboronprom enterprises were lost in the ATO zone, and production declined due to the loss of access to components from Russia. In 2015, domestic production covered only about 30% of the Armed Forces’ needs.

Real, rather than declarative, reform became a matter of survival. First and foremost, the defence procurement system had to be overhauled to eliminate inefficient and corruption-prone processes. In 2015–2016, the Ministry of Defence integrated procurement into the ProZorro system and established a dedicated department, which allowed for centralised processes, improved needs planning and, for the first time, opened access to state defence orders for the private sector. The 2020 Law “On Defence Procurement” replaced the opaque model with a competitive one, introduced a transition to NATO standards and created an institutional framework for expedited procurement. However, overall state policy remained ineffective. No comprehensive rearmament or defence industry development programme was implemented, and investment in Ukroboronprom modernisation did not exceed USD 1 million per year.

Nevertheless, state-owned defence enterprises managed to deliver a number of important technological breakthroughs that later became the foundation for success after the full-scale invasion. These included the development of the Neptune anti-ship missile system, which destroyed the cruiser Moskva and disrupted Russia’s naval offensive plans; the launch of serial production of the Stugna-P anti-tank guided missile system, one of the most effective means of countering Russian armoured vehicles; modernisation of multiple-launch rocket systems; upgrades of several radar stations; and the restoration of equipment from reserves by armoured vehicle and repair plants.

In many areas, however, state-owned plants had little to offer the Armed Forces, and this vacuum was quickly filled by the private sector. After 2014, private companies became the main drivers of innovation, operating under a fundamentally different logic: prototypes and first production batches appeared within weeks, while rapid feedback from the frontline enabled real-time product improvement. Free from excessive bureaucracy, they could experiment quickly with materials and algorithms. Private manufacturers also had access to alternative financing — from volunteers and donors.

It was the private sector that created the first modern Ukrainian UAVs, thermal imaging devices, communications equipment and a range of tactical technologies. Volunteer procurement efforts formed a new market around these developments, which evolved into a full-fledged defence innovation sector. By 2017, the shares of private and state contractors in state defence orders had equalised at 50/50, and a year later reached 60–70%. This was an unprecedented result for a system in which the private sector had long remained on the periphery.

2022–present: the most dynamic military-tech player in the world

The full-scale war, with its dramatically increased demands, exposed a critical weakness of Ukraine’s defence industry — domestic production covered only about 10% of frontline needs — and triggered a radical transformation of the sector. Demand grew hundreds of times over, and, most importantly, it ceased to follow Soviet-era logic. The military needed fundamentally new solutions: strike and reconnaissance UAVs, FPV swarms, long-range drones, secure communications, battlefield management systems, electronic warfare and robotics.

At this point, the private sector became the decisive driver of development. Hundreds of companies entered the defence industry, creating what is already described as the most dynamic military-tech environment of the 21st century. A mixed model of defence production emerged in Ukraine, in which state-owned and private actors operate in competitive cooperation. State enterprises — despite the loss of part of their capacity — once again became the backbone of heavy weaponry and strategic segments with long production cycles. Meanwhile, the private sector experienced an unprecedented technological leap and became the main source of rapid innovation.

Critical dependence on international supplies forced the state to harmonise standards with allies within extremely short timeframes, establish transparent supply coordination procedures and integrate domestic manufacturers into international planning and logistics systems. The Defence Procurement Agency was created, and cooperation with the NATO Support and Procurement Agency and multinational coalitions in air defence, artillery, drones and missile capabilities became systemic.

In parallel, the state introduced regulatory and tax incentives to rapidly scale production — primarily in the UAV and high-tech segments. VAT and customs duties on UAV components were abolished, the approval of new weapons for service was simplified, and profit margins on state contracts were increased. As a result, R&D and scaling of the private military-tech sector accelerated sharply. In 2025, a special legal regime, Defence City, was also launched to stimulate exports, innovation integration and production localisation, although it is still in the early stages and it is too soon to assess its effectiveness.

As a result, Ukraine has developed one of the most dynamic defence technology ecosystems in Europe. It includes around 900 enterprises (approximately 100 state-owned and 800 private) and nearly 1,000 engineering and R&D teams working on new solutions — from drones and electronic warfare to optics, software and robotics. Large IT companies, industrial groups, R&D clusters and fully-fledged private design bureaus have entered the sector.

Government officials estimate Ukraine’s defence industry capacity at around USD 35 billion in 2025, with potential growth to USD 60 billion in 2026 under favourable conditions. Although Ukraine remains the world’s largest importer of weapons, more than 40% of weapons used at the frontline are already produced domestically, and the President has announced plans to increase this share to 50%.

All of this naturally brings Ukraine to the issue of exports as the next stage of defence industry development. The benefits are obvious: additional funding for defence, utilisation of production capacity (median utilisation in 2024 stood at 55%), and reduced unit costs of weapons. In November, the government planned to take practical steps toward a “controlled export” model — designed to preserve priority for the Armed Forces while managing the full spectrum of risks. At present, this concerns the export of surplus systems, primarily UAVs. Experts estimate Ukraine’s current export capacity at USD 1–2 billion per year with growth potential, and, according to industry representatives, more than 100 companies from 25 countries have already expressed interest in Ukrainian products.

Military-tech as Ukraine’s new economic niche in Europe

Ukraine’s military-tech complex has developed a unique set of competitive advantages: ultra-fast innovation cycles; continuous testing of solutions in combat conditions; a frontline-driven R&D culture with direct interaction between developers and the military; a strong private sector capable of rapid production scaling; a preserved technological base of state enterprises producing high-tech systems; and a unique human capital base.

Within this tragic reality for our nation, there is another dimension: Ukraine has become the only European country whose technologies are shaped literally on a daily basis and fully meet the requirements of modern warfare, while combining high effectiveness with affordability, making them viable in high-intensity conflicts.

Ukraine has already turned into one of the key hubs for innovation and investment in the new European defence technology cluster — a centre of gravity for leading global defence companies that are already present in Ukraine in various formats, including localisation projects ranging from repair hubs to future production lines. These companies are attracted by access to the fastest-growing segments: UAVs, electronic warfare, robotics, tactical software solutions and the modernisation of heavy weaponry.

Driven by an unprecedented war, Ukraine has formed a new type of defence industry — one capable of fighting, scaling production and creating innovative solutions simultaneously. Ukrainian military-tech is no longer merely a response to war. It is becoming a growing economic sector integrated into Europe’s security industry. And it is precisely here, at the intersection of innovation, frontline needs and global interest, that Ukraine is finding its new economic niche.