Aivaras Abromavicius, the new director general of defense production giant UkrOboronProm, smiles as he holds a framed portrait photo of former President Petro Poroshenko.
He has just pulled it out of a small back room to show where it is now stored. A bare nail sticks out of the wall above Abromavicius’ desk. Until recently, the portrait hung on that nail — and such portraits were nearly obligatory for any official’s office.
“I never had it in my office,” Abromavicius laughs. “Even when I was minister of economy (in 2014–2016).”
Ukraine’s old top leadership has been swept away by the “electoral revolution” of 2019. So was the top management of the UkrOboronProm group of companies, infamous for its expansive corruption, inefficiency and rapid decay. Two previous managers serving under Poroshenko — Roman Romanov and Pavlo Bukin — failed to change things for the better.
But with a new team at the helm, things just got real, Abromavicius says. President Volodymyr Zelensky has given them free rein to launch all the necessary changes to heal this rusty industrial monster.
And Abromavicius has prescribed a painful therapy for the defense giant. All of its necrotic tissue will be relentlessly excised to save the vitality of its healthy enterprises. For now, its whole body is being scrutinized under the microscope of international audits and inspections.
If the treatment is successful, UkrOboronProm will turn into a prosperous corporation producing modern weapons and attracting the most skilled workforce. Otherwise, it will quickly die and be pushed off the global arms market.
“I told my employees I have come to this company for a long time,” Abromavicius told the Kyiv Post on Sept. 11 in his first interview as the company’s director general.
“I am assuming responsibility for this company because the president gave me a mandate for changes, and he wants me to personally deal with (UkrOboronProm).”
In dire condition
Zelensky initially appointed Abromavicius to chair UkrOboronProm’s five-member supervisory board on July 11. But less than two months later, on Aug. 30, the president issued a decree appointing him as the group of company’s director general.
At least seven candidates for this post were considered before Abromavicius — but none of them were selected due to their backgrounds, ties with big business, or lack of certain expertise.
According to Abromavicius, Zelensky asked him “to come in and study things, create a new team, tackle acute issues, and then hire a new top manager.”
UkrOboronProm is in disastrous condition: Of more than 130 enterprises controlled by the concern, only 96 are actually working. Only 69 are profitable. The rest are failing.
A strong case study is the once-glorious Burevestnik plant in Kyiv, which used to produce maritime equipment for the whole Soviet fleet. Now, it has no employees and its giant premises have had no electricity or water supplies for four years, according to Abromavicius. The dead enterprise has debts of Hr 108 million ($4.3 million).
Another example is the near-dead Mykolaiv Shipbuilding Plant, with salaries in arrears and the rusty cruiser Ukraina, which has sat unfinished and moored in the plant’s dockyard since 1990.
Many giant Soviet-era workshops meant to produce thousands of tanks annually for a potential World War III simply became unnecessary in today’s world.
UkrOboronProm is plagued by extremely low productivity — its average yield is only $16,000 per employee, while the global average in this industry stands at $365,000, almost 23 times more.
Due to low wages, young people are not coming to work at UkrOboronProm and, at many enterprises, the average worker’s age is over 65, “which makes any development a problem,” Abromavicius said.
But at the same time, there are enterprises that are still a success. The best example of that is the Luch design bureau based in Kyiv, which over the last few years has launched the production of Neptune and Vilkha missiles, as well as anti-tank guided weapons.
Enterprises like Luch offer brilliant prospects, Abromavicius said, but “that might unfortunately vanish if (UkrOboronProm) is not drastically transformed.”
Aivaras Abromavicius, the new director general of the UkrOboronProm defense production concern, show the photo portrait of former President Petro Poroshenko at his office on Sept. 11, 2019. (Volodymyr Petrov)
Cutting waste
The only way to avoid this is to get rid of all that is not generating value. Some of the concern’s dead or dying enterprises will be liquidated.
The management is now continuing with the process of triage — deciding which enterprises should be spearheading the concern’s development, which require help, and which are hopeless.
Many of them will be sacrificed to generate at least some money for further development. For a full-fledged resurrection of defense production, Ukraine needs “hundreds of millions of dollars of investment each year.”
“There can be no miracles,” Abromavicius says. “We will never create a good product in the wake of total investment hunger. So I believe giant financial resources must be streamed into improving the condition of our defense industry. If these funds are not available in the state budget, we must find an internal resource — through optimizing available manufacturing capacities.”
In Kyiv alone, UkrOboronProm operates nearly 30 enterprises, and many of them have a considerable amount of surplus premises. In a typical situation for Ukraine, barely alive defense enterprises often rent their premises for a nearly symbolic price.
The ghost plant Burevestnik alone has a territory of 24 hectares hosting nearly 75,000 brownfield accommodations — and it is a total financial loss, according to the Abromavicius.
“As a result, those premises must be realized,” he said. “At UkrOboronProm, we must not be developing real estate projects. The money we raise must be directed not to the (state) budget only to be eaten away, but rather spent on developing out defense industry. I want to stress this point — all that is valuable at UkrOboronProm must stay at UkrOboronProm. Otherwise, our enterprises won’t survive and we won’t revitalize aircraft production and other legendary factories.”
In general, Abromavicius will take stock over 20,000 premises belonging to UkrOboronProm and decide their fates.
Abromavicius is aware that that selling assets will almost certainly trigger blowback in society. But he insists that UkrOboronProm will be totally transparent in terms of the cuts and will be carefully explaining why certain dead assets should be auctioned off for the sake of supporting promising enterprises.
“Transparency is a reformer’s only friend,” Abromavicius said.
Another source of vitality for UkrOboronProm is making more money by increasing its export income, he added. Today, the concern exports no more than $400 million worth of weapons a year, so Abromavicius says he has set a goal to increase annual exports fivefold to $2 billion within next few years.
International inspections
Another pillar of the reform is the long-awaited financial audit of UkrOboronProm, which was given new life just recently after years of stagnation, despite bold promises from Poroshenko and his entourage.
A tender on the ProZorro e-procurement system on Sept. 5 eventually resulted in the Baker Tilly Ukraine accounting firm winning the Hr 32.5 million ($1.3 million) contract to conduct a comprehensive audit.
A technician inspects a T-64 tank turret at a Kyiv Tank Factory workshop on Nov. 15, 2018. (UNIAN)
According to Abromavicius, the contract is expected to be signed on Sept. 23–24. The audit covering the period of 2018–2019 will most probably be launched closer to the end of the year and will last up to 12 months.
However, he noted that this accounting check-up is not exactly what Ukrainian society expects: an instrument for exposing all corrupt schemes and practices in the ill-fated company.
Rather, a “financial audit evaluates a venture’s financial condition,” he said. “Because in the world of investment, no one trusts non-audited reports. So when an audit is conducted through internal expertise, it has no credibility. So it needs external expertise… and this is the kind of audit we procured.”
Such a report would prove the company’s financial situation and demonstrate how reliable it is, Abromavicius explained. This will be of great importance when UkrOboronProm seeks to create joint enterprises with global and domestic arms manufacturers.
The audit’s results will be made publicly available and could be cause for new criminal cases, he added.
Abromavicius also promised another major inquiry.
“During the next Supervisory Board meeting… as early as at the end of this month, we will advance a proposal to announce a tender on the so-called forensic (audit),” Abromavicius said.
“Forensic auditors are a kind of detective… specially trained to detect areas of high risk where inefficiency and corruption risks and all other things occur.”
“This is what the society is waiting for: In which areas — such as exports, aircraft manufacturing, armored production, procurement, or other areas — the biggest (graft) schemes potentially are.”
If, as planned, the Supervisory Board will approve the decision, then another tender to procure a forensic investigation will be announced in early October and an international contractor will be selected in early December, he said.
Aivaras Abromavicius, the new director general of the UkrOboronProm defense production concern, talks to the Kyiv Post at his office on Sept. 11, 2019. (Volodymyr Petrov)
Reform’s results
At the end of the day, UkrOboronProm should be transformed into a centralized holding company with full ownership over its enterprises and the ability to effectively manage them. A strong corporate core would help improve the company’s financial condition and exports.
It would also optimize and modernize acquisitions, making them much more transparent, the official added.
Abromavicius has also endorsed lifting the cloak of total secrecy that almost completely hides state defense production from public scrutiny. This immense secrecy is a boon for corruption.
And he has set a deadline to measure the results of his crisis therapy for the group of companies: 12 months after his appointment. At that point, UkrOboronProm should be “unrecognizable,” Abromavicius said.
In the more distant perspective, Ukraine’s defense production market may transform into something common for the United States, where major arms manufacturers such as Northrop Grumman, Raytheon, or General Dynamics are fiercely competing for government defense contracts.
“In the mid-run, after we get on our feet and processes and culture are transformed, when certain companies are strong financially, UkrOboronProm as a holding company might not be necessary,” he said. “When there are strong tank, aircraft, or missile production divisions. But we have a long way to go (to make that a reality).”
Some of the latest decisions regarding UkrOboronProm, however, have left Abromavicius not so enthusiastic. In particular, on Sept. 8, the chairman of Ukraine’s National Security and Defense Council, Oleksandr Danilyuk, advanced a controversial decision to reallocate UkrOboronProm to the Ministry of Defense rather than the Cabinet of Ministers.
“The ultimate decision, as far as I understand, has not yet been made,” Abromavicius said.
“And we will continue discussing it. The Ministry of Defense has already had enterprises we don’t know much about because they are in really bad condition. (It) has not yet demonstrated itself as a good owner. So one needs to be meticulous about this initiative — because they are the contract givers (in defense procurement).
“And in the future, if the private sector is competing for some contracts, there will be some form of conflict of interests. So let them keep contract-giving and policymaking. And let (UkrOboronProm) enterprises be subordinated to the Cabinet of Ministers or — what actually has been happening since spring 2019 — to the Ministry of Economy.”
Most probably, this issue should be reconsidered, Abromavicius added, for the sake of avoiding steps “that would contradict the letter and the spirit of corporate management.”
