29 March 2021

Reforming the governance of Ukraine’s defence industry is a national security priority matter which is crucial for Ukraine’s ability to protect its democracy and to move towards Euro-Atlantic integration. It is expected that in 2021 the State Concern Ukroboronprom (UOP) will be transformed according to the best practices in order to increase the global competitiveness of Ukraine’s defence industry and build more efficient enterprises that will be able to supply the Ukrainian army with high-quality equipment. Today Ukroboronprom governs more than 100 state-owned enterprises (SOEs) in 5 major defence industry sectors and employs over 67,000 people. The planned corporatization of the UOP will streamline the legal restructuring of state-owned enterprises into JSCs and LLCs. The restructured branch holdings led by a corporate center are expected to be governed in line with the Organization for Economic Cooperation and Development (OECD) standards for SOEs.

This brief analyzes the history of UOP corporate governance reform and the current state of affairs in the defence industry in terms of the corporate governance, transparency and anti-corruption standards.

The need to reform Ukraine’s state-owned enterprises has been in discussion for almost 30 years so far, as these enterprises have accumulated significant resources which are not always used effectively, or with sufficient transparency and accountability. However, until recently state-owned enterprises in the defence sector were entirely excluded from this discourse. In this brief, we analyse how the UOP was able to slip through the net in 2016 when the law that introduced corporate governance standards for Ukrainian SOEs was being adopted. At the time Ukrainian President Petro Poroshenko introduced an amendment to exclude the UOP from the scope of that legislation, arguing that it was impossible to use a model of corporate governance for defence enterprises because it could harm national defence and security interests.

Only since 2019, Ukraine moved ahead towards the corporate governance reform of these defence SOEs.

At the end of 2020, Ukroboronprom officially initiated the corporatization process of the Concern by the relevant order of the Director General.

In January 2021, the Verkhovna Rada supported the draft law #3822 on Ukroboronprom’s transformation in the first reading. In order to ensure that the UOP reform not only addresses legal restructuring but also focuses on the introduction of the corporate governance standards, it is necessary to supplement this draft law with provisions that meet OECD standards before it is adopted. In particular, in this brief we argue for concrete amendments to the draft law #3822 before its adoption, such as designating the Cabinet of Ministers of the sole management authority, functioning as the owner of defence SOEs, and formalizing guarantees of the boards’ independence and powers. NAKO also recommends establishing additional mechanisms to ensure transparency during the transformation process through mandatory publication of Ukroboronprom or JSC decisions on free-of-charge transfer of property or replacement of encumbered property.

Even though Ukroboronprom has made progress in corporate governance, in increasing transparency and in introducing anti-corruption policies since 2019, those positive changes only demonstrate the beginning of the movement in the right direction. As of date they have not yet brought Ukroboronprom in line with OECD corporate governance and anti-corruption standards for SOEs. This brief provides the overview of the existing governance gaps that can be addressed both before the legislative change and after the law on UOP corporatization is adopted.

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