The Ukrainian Defense Industry

The Ukrainian Defense Industry — Market Opportunities, Entry Strategies, Analyses and Forecasts to 2016 offers the reader insights into the market opportunities and entry strategies adopted by foreign original equipment manufacturers (OEMs) to gain market share in the Ukrainian defense industry.

Due to Ukraine’s severe financial constraints, the country’s military forces have only modest capital expenditure, resulting in an export-oriented defense industry. From 2005 to 2010 (the review period), Ukraine’s was the world’s eleventh largest defense exporter, although, as it doesn’t possess the capability to produce advanced defense equipment, its exports are still based on Soviet-era designs and, consequently, its main export partners are developing countries in Africa and the Middle East. During the forecast period, Ukraine is expected to invest in a variety of defense and homeland security equipment, this investment is expected to be driven by military modernization plans, the growing tension between Russia and Ukraine, and the growing threat from the illegal drugs trade, cybercrime and human trafficking.

As a result of the global financial crisis, Ukrainian defense exports declined during the review period. With defense exports also declining in many other countries worldwide, the country was still the world’s eleventh-largest defense exporter during the review period. Key destinations for Ukrainian defense exports primarily include developing countries situated in Asia, the Middle East and Africa. The country inherited 30% of its defense industry from the former USSR in 1991, and its expertise includes land-based defense systems such as armored vehicles, battle tanks, and military transport aircraft.

During the review period, Ukraine’s homeland security expenditure recorded a CAGR of 19.01%, a growth expected to slow to a CAGR of 10.1% during the forecast period. Ukrainian homeland security expenditure is primarily driven by the growing threat of criminal activity, such as the illegal drugs trade and human trafficking. Over the forecast period, significant investment is anticipated in equipment that caters to border security, critical infrastructure protection and maritime security.

Russian advancements in missile defense systems have encouraged Ukraine to procure equipment capable of countering potential threats posed by Russian military hardware. Additionally, the ongoing tension in Crimea has led Ukraine to strengthen and improve its defense forces. Consequently, market opportunities are expected to emerge in areas such as:

  • Mechanized brigade
  • Artillery
  • Airmobile
  • Anti-aircraft missile complexes (AMC) used in ground to air, ground to ground and ship to ship anti-aircraft units

During the review period, the air force accounted for the largest share of the Ukrainian defense budget, with a 36% allocation. During the forecast period, the air force is expected to continue to account for the majority of total defense expenditure, with an identical expected average allocation, of 36%.

Ukrainian defense expenditure is closely linked to the country’s overall economic growth, with military expenditure reducing in accordance with a decrease in overall GDP and vice versa. Consequently, the country’s defense expenditure increased steadily from 2004 to 2008, before declining by 17.7% in 2009 as a result of the global financial crisis.

During the review period, Ukraine invested an average of 16% of its total defense budget into the development of its navy, an allocation expected to increase to an average of 17% over the forecast period. This expected increase is largely the result of the naval modernization program expected to be implemented during the forecast period, which includes the procurement of warships, submarines and corvettes.

In addition to the allocations for the country’s army, naval and air defense forces, Ukraine’s defense budget is also allocated to the DSU, a grouping that includes units that are directly subordinate to the Ukrainian Ministry of Defense, including the National Guard and Security Brigade. The expenditure on DSU, categorized as others in the tables and figures below, registered a CAGR of 7.90% during the review period and is expected to register a CAGR of 8.31% over the forecast period.

Comment related to the graph: In comparison with the world’s leading defense spenders, such as the US, China, Germany and France, the Ukrainian defense budget is relatively small. Although there are ongoing tensions with neighboring Russia, there is a large discrepancy between the sizes of the two countries’ defense budgets. Despite facing significant internal and external security threats, Ukraine has so far been unable to significantly increase its defense budget, and, as a result, continues to exercise only a limited presence in the international defense market. From 2011 to 2016 (the forecast period), Ukraine’s defense expenditure is expected to continue to remain relatively modest, the country hampered by a lack of economic resources. Consequently, Ukraine’s power in the global defense market is expected to remain limited during the forecast period.

Source: ASDReports - Market Research
Date: Jan 11, 2012