Defence Industry’s Export-Limbo

For nearly a year now, Ukrainian arms manufacturers—primarily drone producers—have been waiting for the lifting of restrictions on exports. The issue lies in the fact that the production capacity of the defence sector significantly exceeds the government’s ability to contract their products, while the state remains practically the only buyer for the domestic defence industry.

In 2021, according to the Stockholm International Peace Research Institute (SIPRI), Ukraine ranked 12th in the world in terms of arms exports, holding 0.9% of the global market. However, after the full-scale invasion began in February 2022, defence industry enterprises shifted entirely to the domestic market to meet the needs of the front.

Still, production volumes have grown significantly. According to State Statistics data, in 2024, revenues from arms and ammunition sales reached ₴59.7 billion, compared to ₴21.7 billion in 2023 and ₴5.5 billion in 2022. The military sector alone contributed a third of Ukraine’s GDP growth in 2024.

This year, the state budget allocated a record ₴739 billion (approx. $17.6 billion) for weapons production and procurement. However, only part of this amount will go to the domestic market. As a result, the sector has hit a ceiling, leading top industry associations to raise concerns.

Interestingly, arms exports are not legally prohibited. There is a specific procedure: a company must submit an application to the State Export Control Service (SECS), which coordinates it with security services and the Ministry of Defence. In practice, however, these applications are denied for various reasons, despite the state’s lack of funds to purchase defence products. In essence, there is an unofficial moratorium on exports.

In May, media reports suggested that a compromise on arms exports had finally been reached in the President’s Office. Three scenarios for potential exports were even outlined. But nothing has moved forward since.

Recently, newly appointed Defence Minister Denys Shmyhal told the BBC Ukraine that the government would not lift the ban on exporting Ukrainian-made weapons during wartime.

"Arms export is a political decision—always and in any country. During wartime, if our defenders on the frontline lack a specific type of weapon, it is impossible to export it until our armed forces are fully supplied—100% and beyond," he explained.

Shmyhal added that the state must find ways to fund additional purchases from domestic arms producers.

"We are looking for additional funds to place orders for everything the country can produce. But under wartime conditions, direct export is inconceivable," he emphasized.

The minister noted that funding could be attracted through joint projects with partners:

"There could be partnership projects where some of the products are stored in partner warehouses. Strong arms-exchange chains can be created with allies. But not direct export."

Weapons manufacturers reacted to Shmyhal’s comments without much enthusiasm but remain hopeful that a solution will eventually be found. BusinessCensor spoke with producers about their views on the export situation and potential prospects.

This material was published as part of the special project "Drone Industry" on Censor.NET. The editorial team is open to cooperation with manufacturers and operators of unmanned aerial vehicles. If you have something to share, write to: [email protected].

Even a Flawed Export Mechanism is Better Than None

"A policy of restrictions and bans is not what Ukrainian manufacturers expect from the state. Ukrainian weapons producers are, above all, skilled professionals and technologies, jobs, and taxes, working and developing under constant shelling. We hope the state will soon propose a clear, unified mechanism focused on preserving and expanding domestic weapons production. Closer ties with defence industries of partner countries also strengthen Ukrainian producers. Western funding programs should prioritize procurement of Ukrainian weapons for the Armed Forces of Ukraine," said the press service of DEVIRO, a company that has been designing and producing UAVs and software since 2014.

The National Association of Ukraine’s Defence Industry (NAUDI) argues that artificially blocking exports weakens—not strengthens—national defence capabilities. The state budget loses billions in potential tax revenues, which could go toward defence spending. Enterprise efficiency also declines.

"If production capacity is utilized at only 20–30%, the unit cost of products increases because fixed production costs are spread over fewer units. So, by artificially limiting factory workloads through an export block, and being unable to fund them domestically, we’re holding back production volumes and efficiency," explained NAUDI Executive Director Serhiy Honcharov.

Ultimately, this leads to Ukrainian enterprises relocating abroad.

"And those become foreign technologies, not Ukrainian ones—technologies our government proudly purchases under foreign contracts, draining currency and missing out on added tax revenue," the expert noted.

Ihor Fedirko, Executive Director of the Ukrainian Arms Manufacturers Council, says the market has been requesting any kind of export mechanism—even limited ones.

"Only 35–40% of production is currently purchased within the country. A small percentage goes through direct contracts (e.g., the Danish model). That’s it. We could offer about 50% of our capacity elsewhere, but exports are blocked. The market is willing to work within restrictions—selling only to countries with security agreements with Ukraine, for example. Even a bad mechanism is better than none at all," he told BusinessCensor.

One concern behind the export block is the risk of fulfilling government contracts. But manufacturers insist there’s no such risk.

"If surplus output isn’t covered by government or charitable organization contracts—and the latter is a major buyer—then it can be safely exported to partner countries," said Honcharov.

Exports: A Taboo Topic

Our sources say that arms export remains a taboo subject, viewed as sensitive by both society and government. There's fear of appearing to profit from war—or sending the wrong signal to international partners while simultaneously requesting weapons.

"The market is ready to work. We can involve international partners in dialogue to understand their actual stance. Another approach—let our security agencies define which weapons are no longer critical to our needs but are still relevant to allies. Everything can be resolved through dialogue, but that dialogue needs to begin," said Fedirko.

A relevant example is the Stugna-P anti-tank missile, which was critical in early 2022 but has since been partly replaced by FPV drones. Demand has declined, but Middle Eastern buyers are interested. Yet Ukraine cannot sell it, even though production lines still run—though at reduced capacity.

Or take the Vulkan-M (a.k.a. "Malyuk") automatic rifle—Ukraine no longer buys it.

"The government tries to contract all critically needed items. But some items simply can’t be produced in greater volumes," noted Honcharov.

Fears About Technology Transfer Are Overblown

Another argument often heard is the risk of Ukrainian technologies ending up in Russian hands. But Honcharov dismisses this as absurd—exports are discussed only with friendly countries.

"The U.S. doesn’t treat selling F-35s to Belgium as risky. No one claims Belgium might hand them over to China, Iran, North Korea, or Russia. This isn’t potato trading—export control mechanisms exist for a reason," he said.

How to Fix the Export Problem

Again, arms exports in Ukraine are not legally banned—they just don’t function. However, the Defence City legislative package (already passed in the first reading in parliament) at least signals that the state no longer sees exports as a total taboo, says Honcharov.

"The problem with these laws is that they aim to create an exclusive group of companies allowed to export. The defence industry insists: don’t do it for a select few. If you’re planning development, do it for the entire sector," he emphasized.

Defence City is part of the broader Build with Ukraine initiative, which promotes exporting Ukrainian military technologies and establishing foreign production lines—especially for drones, missiles, and artillery in partner countries.

According to Fedirko, the market views Build with Ukraine positively.

"It’s a sign that negotiations are underway. Maybe this mechanism will expand. Ukrainian manufacturers with foreign ties are even asking their partners to lobby their own governments to negotiate directly with Kyiv."

Honcharov adds that arms exports are heavily regulated everywhere. Even hunting powder requires multiple control agency clearances to ensure it won’t be used for terrorism.

"It takes months to get the paperwork. This is a standard global process. Ukraine had such a mechanism pre-2022 and still has it. It’s complex, slow, and bureaucratic—but functional. And currently blocked," he said.

He believes Defence City at least opens the door for discussion. And that’s progress.

What If Export Remains Blocked?

"I’m not that pessimistic. I think export will eventually be permitted," says Fedirko.

Still, Honcharov doesn’t rule out a continued informal moratorium.

"The industry has survived under these conditions—but neither it nor Ukraine’s economy benefits."

If no export permissions are granted, Ukrainian firms will likely relocate and change jurisdictions.

"There’s limited purchasing power in Ukraine, constant pressure from law enforcement, and no shortage of regulators. But foreign partners are eager to host Ukrainian companies producing arms and military equipment—for local use and export. Ukraine is probably the only country that chooses foreign over domestic options. Somehow, a Ukrainian entrepreneur is treated as a problem," he noted.

Countries like the U.S. and EU support local manufacturers. Defence City was intended to do the same. But if the moratorium continues, it will all be undermined, says Fedirko.

"For example, 5% interest loans for defence manufacturers sound good. But if no one buys your product, why expand? You don’t see a future. If you have a contract for only 3–4 months, what are you supposed to do for the remaining eight? There’s no predictability. And export could solve problems like these. We understand that, for example, our drone would sell for much more in Europe than in Ukraine. That revenue could go toward expanding our own production. No matter what the government says now, the market knows that otherwise it will collapse. Many will simply have to shut down or merge," explains Fedirko.

According to him, this process has already begun: companies are forming consortiums to be more efficient under limited government orders.

"There are even proposals to introduce a special duty on arms exports. That would make us the only country in the world to impose a duty on exports—on expansion. But the market is even willing to accept that, just to get started. So we wait, we hope, but we’re also applying moderate pressure," concludes Ihor Fedirko.