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22 January, 2021
Ministry of Scandals or Reforms: What did the Ministry for Strategic Industries remember for six months of its work?

The Ministry for Strategic Industries was established on July 22, 2020 to more effectively manage Ukraine’s defence industry.  However, did the defence industry really become more effective with its formation? Six months later, NAKO decided to summarize the main results of the institution.

The Ministry of Conflict of Interest

The Ministry for Strategic Industries is the main body of power that forms and implements the state military-industrial policy. It is entrusted with many tasks not only in the defence industry, but also in the aircraft and space industry.

The functionality of the Ministry provides for the formation of the state defence order, but, at the same time, also determines the priorities of scientific and technological developments.  Such powers create a certain conflict of interests and, consequently, a number of risks of misuse.

In addition, the Ministry has a fairly broad authority to manage state-owned enterprises in the defence industry, namely the appointment and dismissal of managers of these enterprises. As the Statute of the Ministry for Strategic Industries does not oblige to continue the reform of corporate governance in accordance with OECD standards, such a concentration of power without any protector against misuse may in fact threaten the establishment of manual management on state-owned enterprises.

Later, real attempts to interfere in the economic activities of enterprises were reported by Ukroboronprom. According to the management of the state defence conglomerate, in autumn they regularly received requirements and recommendations from the Ministry regarding the appointment of certain persons to the position of directors of selected member companies. And although the Ministry for Strategic Industries called such a statement a “demarche” of Ukroboronprom’s management, later a public conflict between the parties was settled.

When the Ministry revealed its intention to corporatize a number of Ukroboronprom’s enterprises bypassing the Draft Law №3822, the risk of manual control was publicly discussed at the level of the specialized parliamentary committee. The need to subordinate the six most profitable enterprises, including Antonov and KB Progress, was explained by the Minstrategprom with an extremely tense situation and the need for a quick action to prevent the escalation of the conflict. Currently, the fate of these enterprises is still unknown. Policy-makers are planning to make a decision at the level of the National Security and Defence Council.

The Ministry of Delays

Back in summer 2020, NAKO warned that the full establishment of a new ministry would require significant time, as its effective operation needs regulatory support, resources, and quite a lot of employees. Despite this, recruitment began only in November and by end of 2020, the Ministry’s team had just over 70 employees whereas it could hire up to 333.

As Ukraine’s security and defence sector requires systemic changes, any delays in reforming the defence sector would not accelerate the process. Indeed, with the formation of the Ministry, reforms have slowed down. Despite the lack of its own premises, a sufficient number of employees and a top-secret department required to work with the state defence order, Minstrategprom quickly took over the main tasks in the industry. As expected, this negatively affected the course of reforms and the quality of implementation of the set tasks.  For example, back in September 2020, the Ministry of Economy prepared a draft of the Strategy for the Defence Industry – a “road map” for reforms in the industry. However, almost five months later, these documents are still not approved, as the Ministry for Strategic Industries is developing its own Strategy.

A similar situation is happening with the implementation of the Law on Defence Procurement.  Due to the lack of coordinated action between the Ministry for Strategic Industries and the Ministry of Defence, 2021 began with the threat of disruption of the state defence order within the deadline. The reason is that the two governmental bodies failed to prepare the regulations necessary for the full functioning of the new defence procurement system. Such significant delays directly affect not only the pace of reform in the defence industry and Ukroboronprom in particular, but also significantly complicate the provision of the Armed Forces of Ukraine with the necessary goods and services.

The Ministry of Closed Doors

The Ministry for Strategic Industries is not a very public and transparent agency.

Lack of contact with the public significantly hindered our monitoring of its activities. In the first months after the Ministry was created, we could get to know about the developments around employing the staff and other organizational changes only from the orders of the Cabinet of Ministers and rare media reports. Only in November did the Ministry launched a Facebook page, while there is still no official website. For example, the Ministry of Digital Transformation established in September 2019 had its own communication channels within a month after it had been formed.

The Ministry is also not very open to cooperation with civil society. Unlike the Ministry of Economy, which developed the draft of Strategy for Development of the Military-Industrial Complex in close consultations with Ukraine’s international partners and civil society, Minstrategprom has no particular desire to involve the public in this process and even asked to remove it from the public discussion. In addition, independent experts were unable to join the working groups to finalize the draft law on Ukroboronprom’s transformation and implementation of the Law on Defence Procurement.

The Ministry of Scandals

A flow of scandals has accompanied the Ministry for several months, even before it was officially created. The non-transparent selection for the post of the head of the future Ministry was closely monitored by the civil society as much as possible. Then, we had warned about the possible corruption and reputational risks of the ministerial candidates.

Subsequently, selected MPs accused the newly appointed Deputy Prime Minister of the possible involvement in the land corruption scheme in Kyiv’s downtown. Later, Oleh Urusky was accused of secret meetings with influential businessmen.

The Ministry got involved in a procurement scandal when announced a tender to purchase three cars worth UAH 3 million, and later replacing this tender with a slightly less demanding one. Ironically, one of these cars got in scandal again. Some months later Deputy Minister Vitaliy Nemilostivy was driving this car being absolutely drunk when he was stopped by patrol police. It is worth noting that the Ministry and the Minister himself quickly reacted to the case. The next day after the video was published in social media Nemilostivy was fired.

The Ministry of Reforms?

Despite extremely controversial activities within the first six months of its work, the Ministry of Strategy and Industry still did not deviate from the course set by the President of Ukraine.  Despite the allegations, the Ministry seems to be determined to reform Ukraine’s defence industry and Ukroboronprom in particular. At least that’s what the Ministry declares.

In 2021 policymakers plan to corporatize state-owned enterprises of the military-industrial complex and transform them into 2 state holdings, “Defence Systems of Ukraine” and “Aerospace Systems of Ukraine”. The first stage of the reform already started: 16 Ukroboronprom’s member companies were transferred for privatization. These companies didn’t execute the state defence order for a long time and didn’t produce anything.

In addition, the revised draft law №3822 which will mark the beginning of Ukroboronprom’s full-fledged transformation, was supported by members of the parliamentary committee and recommended to be adopted in the first reading.

Therefore, we hope that the Ministry, despite a number of accusations, will not become a spoiler of this important reform for the Ukrainian defence industry. In the meantime, NAKO will continue to monitor the activities of the Minstrategprom and other developments in the sector.

The author is NAKO’s Content Assistant Victoria Vyshnivska. The original text was published on Censor.Net.