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10 June, 2021
Ukraine’s defence industry reform: How to create investment opportunities instead of corruption risks?
During the Zero Corruption Conference, the Independent Defence Anti-Corruption Commission (NAKO) held the panel “Ukraine’s defence industry reform: How to create investment opportunities instead of corruption risks?” Ukrainian and international speakers discussed the progress of reforming the state defence conglomerate Ukroboronprom, particularly the implementation of corporate governance standards. 

The international conference ‘Democracy in Action: Zero Corruption Conference’, focusing on the hybrid challenges to democracy (including disinformation, corruption, and legal wars), was organized by the Anti-corruption Action Center with the support of international partners in Kyiv on June 7-8, 2021.  The Head of the NATO Representation to Ukraine, Alexander Vinnikov, underlined that “modernization of the defence industry is a complex and long process where there is no one-for-all solution, and each of the NATO countries has its own way of managing the defence industry.” He stressed the importance of common principles, practices, and norms for a successful defence industry: open competition, parliamentary oversight, and effective public-private partnerships.

In the context of draft law #3822 “On the reform of state defence enterprises” and its preparation for the second reading, the speakers discussed how the state conglomerate Ukroboronprom (UOP) would be transformed, how to create effective supervisory boards of joint stock companies after corporatization, and how to prevent corruption in the process of property and land alienation. Oleh Urusky, Vice Prime Minister, Minister for Strategic Industries of Ukraine (MSI), promised that “the Ministry of Strategic Industries will not interfere in the economic activity of joint-stock companies that will be created; it will be the task of Supervisory Boards that will form the companies’ management." Urusky noted that, in the latest version, draft law #3822 stipulates that the majority of Supervisory Board members will not be independent, as the state will appoint them upon MSI request. At the same time, he spoke about the importance of civil society’s participation in selecting supervisory boards. Urusky added that “a Public Council under the MSI is being actively formed; it will take part in selecting Supervisory Board representatives. The Supervisory Board members must have an impeccable reputation and experience in this field. It is currently being discussed if foreign representatives can be members of the Supervisory Boards, at least those who speak the Ukrainian language.

Yuriy Husiev, CEO of Ukroboronprom, noted that “UOP’s corporatization is aimed at attracting, not alienating: attracting technologies, partners, investments, and, of course, part of this path is transferring some enterprises to the State Property Fund of Ukraine.” He also added that it will now be possible to lease or sell property that has not been used for years for the needs of Ukraine’s defence and security sector. At the same time, Husiev stressed the importance of control over the process of property alienation to prevent potential corruption.

A number of international speakers joined the discussion online. They focused on how to make defence companies attractive for investment. Donald Winter, U.S. Strategic Advisor on Defence Industry Reform, stressed the importance of minimizing the risks that currently exist for investors interested in Ukraine's defence industry. According to him, “one of the key risks is the stability and viability of counterparties, which may affect the stability of the corporation’s supply chain.” He also added that the real challenges are related to the rule of law and corruption risks in Ukraine. “The rule of law is the key, it provides reliability and the ability to protect legal contracts.”

These reflections were reconfirmed by another speaker, Canada’s High Level Strategic Adviser Jill Sinclair. She clarified that “many important and necessary reforms have already taken place, but they are not enough. It is necessary to keep on track and ensure systemic reforms.” Sinclair also pointed out that there should be clear rules in both the private sector and the defence sector. She explained that it is important to establish effective civilian control and accountability of the Armed Forces of Ukraine according to NATO standards. Fausto Di Fant, Leonardo’s Subsidiaries Business Compliance Officer, joined the session to share his experience. The Italian company Leonardo has become the world leader in transparency and integrity according to Transparency International’s ranking of the world’s most transparent defence companies, Defence Companies Index 2020. Di Fant stressed, among other things, the importance of compliance control for companies, including “compliance in trade and business, creation of anti-corruption departments, ethics and integrity.”

Taking into account the key messages voiced by the speakers during this panel, NAKO emphasizes the importance of adhering to the principles of transparency and accountability in the future process of UOP transformation. We call for including representatives of Ukraine’s civil society and international partners on the Nomination Committee that will select and appoint Supervisory Boards for corporatized joint-stock companies. We also call on UOP to ensure the maximum possible transparency of and public access to the process of property alienation after the expected adoption of draft law #3822. We thank the Embassies of the United Kingdom and France in Ukraine for their financial support of the event.