On April 14, the Cabinet of Ministers approved the Strategy for Defence Industry Development. However, so far it lacks an Annex defining further reform of the state conglomerate Ukroboronprom. The Strategy defines the priorities of the state’s defence industry policy, and the goals and expected results of defence industry reform. Within the last year, the document was drafted in three different versions. In September, the Ministry of Economy published its version of the Strategy, which was developed transparently engaging a wide range of stakeholders. However, Vice Prime Minister Oleh Urusky asked that it be removed from public display. The next two versions were developed solely and exclusively by the Ministry of Strategic Industries (Minstrategprom), without the involvement of Ukraine’s international partners and civil society representatives.
Clash of Philosophies Continues
Having analyzed the last version of the Strategy, NAKO (the Independent Defence Anti-Corruption Commission) has revealed a number of inconsistencies between the Euro-Atlantic principles and “international practices” declared by the Minstrategprom, and Soviet approaches enshrined in the strategic documents.
The key progressive moment is that the Strategy stipulates transforming defence state-owned enterprises into business entities and forming science and production associations according to industry principles. The document also confirms that the state defence conglomerate Ukroboronprom will cease to exist, as it will be transformed together with the member companies in its vertically-integrated structure.
However, simultaneously with these plans to modernize Ukraine’s defence industry, the Strategy includes excessive functions for the Minstrategprom that were common to Soviet ministries, which were policymakers and, at the same time, controlled enterprises as owners.
At yesterday’s government session, Vice Prime Minister for European and Euro-Atlantic integration Olha Stefanishyna, in an emergency effort, managed to bring the draft Strategy closer to Euro-Atlantic standards.
Stefanishyna incorporated an amendment into the main body of the Strategy to minimize the Minstrategprom’s conflict of interest. She suggested dividing the functions of owner and policy-maker in the list of key directions for defence industry policy. Stefanishyna’s suggested amendments considerably improved the Strategy from the point of view of meeting the Organization for Economic Cooperation and Development (OECD) corporate governance principles, which are the best world practices for managing state-owned enterprises.
One of the key OECD principles (III, A) states that there should be a clear division between the function of state ownership and other state functions that can influence the activity of state-owned enterprises. Namely, it refers to regulating the market. The Minstrategprom already forms and implements the state’s defence industry policy. If it also had owner organization functions, it would create a clear conflict of interest and corruption risks.
Also due to Stefanishyna’s amendment, the Strategy anchors corporate governance according to OECD principles as one of the directions of the state’s defence industry policy. This is a crucial advantage, as it establishes a baseline for the government officials who will carry out the reform, and it will minimize their opportunity to decide with sole discretion what is better for Ukraine’s defence industry: international standards or Soviet ones.
The issues raised by Stefanishyna’s amendments for OECD corporate governance standards and removing Minstrategprom’s conflict of interest not only represent the expectations of our partners from the EU and NATO countries, but are also a condition of U.S. security assistance, which amounts to $250 million this year.
How to combine something that cannot be combined
“It is absolutely unacceptable to combine regulatory functions, policy-making functions, and economic functions in one structure,” Oleh Urusky, in his interview to LB.ua, July 20, 2020.
Indeed, excessive concentration of powers within one governmental body is unacceptable. But in practice, it is exactly what the Ministry of Strategic Industries’ Charter and the Strategy for the Defence Industry anchor at the legislative level.
The main idea of the Strategy is “a combination of centralised public administration with modern market mechanisms.” That is pretty hard to imagine, as in the real world there are either market mechanisms or a centralised government. In the first version of the document, the Minstrategprom emphasized that excessive centralisation was one of the reasons why Ukraine’s defence industry is in such poor condition. In the new edition, the authors of the Strategy no longer think that excessive centralisation has a destructive effect.