Former Kherson Oblast governor Yuriy Husyev became on Dec. 3 the third official managing Ukraine’s state-run defense production giant UkrOboronProm in the last four months.
In an unpleasant surprise for many, the previous top manager, Ihor Fomenko, part of the corporation’s pro-reform team, was dismissed after just two months after his appointment.
Husyev’s out-of-the-blue appointment seemed a major victory of Oleh Uruskiy, the controversial deputy prime minister fiercely criticized for allegedly torpedoing the industry’s reforms and who had been in an acute conflict with UkrOboronProm’s leadership for months.
But, against expectations, the new top manager has already produced some results.
As one of his first steps in the office, Husyev signed on Dec. 21 an order to immediately initiate UkrOboronProm’s transformation into a new holding company managed under modern corporate rules, as it had been sought for years.
Now it looks like Husyev has been given a chance to book a place in history books for himself and finally complete the life-saving therapy of Ukraine’s once-glorious defense production sector devastated by endemic corruption and horrible productivity.
Time will tell if he makes use of this chance.
But in a Jan. 5 interview with the Kyiv Post, the new director-general vowed to get his mission accomplished.
“In 2021, UkrObornProm will be eliminated as it is today,” he said, noting that President Volodymyr Zelensky has given him only six months to complete the task.
“We have already started the process of UkrOboronProm’s corporatization.”
State defense concern UkrOboronProm’s director general Yuriy Husyev talks with the Kyiv Post in the company’s main office in Kyiv on Jan. 5, 2021. (Kostyantyn Chernichkin)
Plan still in force
UkrOboronProm is still a highly-centralized association that manages 137 defense production enterprises, 21 of which located on Russia-occupied territories.
It is responsible for covering nearly 36% of the country’s annual military procurement plans. In late 2020, it reported 100% of its government contracts completed, with the total amount of manufactured products worth Hr 30.2 billion ($1.08 billion), which is 102% of the amount produced in 2019.
Nonetheless, the arms corporation is in a horrible financial situation.
According to Husyev, the top 28 enterprises generate 98% of UkrOboronProm’s annual revenue, with nearly 100 others barely surviving or even being totally defunct.
The corporatization reform is expected to save the day for the struggling industry.
It seems that the ultimate plan has been finally settled on reorganizing UkrOboronProm into a state-run holding company Defense Systems of Ukraine that would manage 65 enterprises divided into six specialized clusters: armored vehicles, radar systems, maritime systems, special chemistry and ordnance, highly-precise weapons, and aircraft repairs.
There will also be another holding company, Aerospace Systems of Ukraine, to manage predominantly aircraft, engine and space vehicle manufacturing.
Both holding companies and their subordinates are going to have their own supervisory boards, corporate management and a stock of shares, 100% of which will be owned by the government.
The whole reorganized industry is to be regulated by the recently-created Ministry of Strategic Industries headed by Uruskiy, who was accused by previous UkrOboronProm leadership of derailing the reform and trying to assume personal control over the country’s most important defense enterprises.
State defense concern UkrOboronProm’s director general Yuriy Husyev talks with the Kyiv Post in the company’s main office in Kyiv on Jan. 5, 2021. (Kostyantyn Chernichkin)
Annihilation in 2021
UkrOboronProm, as a highly-centralized concern created in 2010 under then-President Viktor Yanukovych to extract benefits from the country’s extensive network of defense production enterprises, is expected to be eliminated forever.
Hopefully, this will be the long-expected end of the behemoth that has been sucking out life from the country’s defense industry amid the war with Russia.
Husyev reassured that this was exactly what is envisaged in the reform’s ultimate roadmap, which had recently been filed for approval by the country’s National Security and Defense Council.
And even though the transformation process has formally been initiated, everybody is still waiting for the approval of bill No. 3822, the holy grail of Ukraine’s defense reform advocates, which is basically meant to provide the complete legal basis for UkrOboronProm’s corporatization.
The crucial bill was submitted to the Verkhovna Rada in early July, but it is still a subject of bureaucratic ping-pong, particularly due to numerous questionable amendments and delays by Uruskiy’s Strategic Industries Ministry.
However, following consultations with the parliament’s security committee, Husyev expects the bill to be passed in the first reading in late February and “we will be asking the president to get it signed” as soon as possible, he said.
“So that, within six months of 2021, we could complete the transformation of UkrOboronProm into more effective holding companies practicing modern corporate management, which would complete contacts from clients, the Defense Ministry, and which would become a more effective partner to our international colleagues.”
According to the official, the sector’s complete transformation will take another “several years,” though.
Financial healing
After months of conflict between the corporation and Uruskiy, new top manager Husyev claims to be on the same page with the minister’s vision of the reform.
At a bit closer look, however, it appears that there’s still a silent battle going on for one of the most delicious pieces of UkrOboronProm’s legacy — the six special exporting companies.
Having a monopoly right on arms deals in foreign markets, these UkrOboronProm affiliates normally generate nearly 70% of the corporation’s annual revenue, in many ways helping finance its management apparatus and other enterprises.
The problem is that minister Uruskiy wants to assume control of the special exporters during a “transitional period.” Husyev does not like Uruskiy’s plan.
“From my perspective, special exporters must remain with the Defense Systems of Ukraine — until its specialized branches get licensed and start operating in foreign markets.
“Special exporters have expertise in markets and contracts and partnership relations with other nations. And we need them to help our enterprises earn contracts and start working effectively in foreign markets too.”
In the future, he added, defense production companies should have a choice between acting in foreign markets on their own — or adhering to the expertise and contracts of special exporters.
The official said he hoped to increase export revenue to $700 million in 2021.
The corporation is indeed in grave need of financial inflow to survive — to the extent, it has to get rid of many of its hopeless entities.
Recently, UkrOboronProm has given up on its 17 companies and put them for sale, looking for private investors.
Husiyev also said he hopes to keep the money from the sale for the corporation.
“It is important to understand that a range of enterprises that are crucial to the defense production industry now require financial recovery,” he said.
“In particular, we’re working on providing the Kharkiv State Aircraft Manufacturing Company with such (financial) assistance. It’s an enterprise that used to uphold serial production of the Antonov family aircraft. Now, it is in a very complicated financial situation and amendments to current laws are required (to get it improved).”
Visitors watch an Antonov An-26 transport aircraft take off at the Hostomel airfield outside Kyiv on Oct. 18, 2019. (Kostyantyn Chernichkin)
Fresh start
Husyev’s first weeks in the office gave some more reasons for cautious optimism.
In the very last hours of the year 2020, UkrOboronProm and the Defense Ministry, amid enormous public pressure, finally signed long-awaited contracts to provide Ukraine’s Armed Forces with three Antonov An‑178 aircraft and a division of Neptune cruise missiles.
Besides, Husyev promised to finally present by the end of January the results of an in-depth independent audit into UkrOboronProm’s activities in the year 2018, which is expected to reveal many vile things done at the corruption-riddled corporation.
He vowed also to keep things stiff regarding graft — the previous leadership team created by Aivaras Abromavicius, former economy minister, was praised in the expert community for the absence of corruption scandals.
The official said he intends to stay in close touch with anti-graft watchdogs like Kyiv-based State Watch.
“Last year, UkrOboronProm also signed a memorandum with Ukraine’s National Anti-Corruption Bureau,” Husyev said.
“We count on fruitful cooperation with anti-graft agencies to prevent (corruption) and also penalize anyone who abuses power at UkrOboronProm’s enterprises.”
Besides, he added, under his leadership, the corporation is going to keep with its recently-introduced rule of examining all top managers with lie detectors — and make even medium-level officials subjects to examination.
“For instance, my own press secretary has undergone lie detector questioning as she was preparing to hold her position,” he said.
