Defence technologies and prospects for reserving people from mobilisation

Axon Partners Nadiia Denysiuk and Oksana Zadniprovska in their op-ed for AIN explain how the law sees the same technology in different ways, what is important to know when planning a booking and why not every contract may not be suitable.

If we look at the various historical changes in the development of technology, wars have been perhaps the biggest and most powerful catalysts. The first mentions of the use of unmanned aerial vehicles date back to the wars of the nineteenth century. However, russia’s current war against Ukraine is unprecedented in terms of the diversification and number of technologies involved, as well as the ways in which they are used: from people who have never done this kind of thing to tech giants. And they are all united by a competitive market and the absence of direct government intervention compared to previous world wars (except for the country that comes up with a new ban on the export of UAV components every year). Accordingly, each manufacturer is working to retain and develop its team, product, and expand supply options.

But whether it’s as simple as the supply of defence technologies directly affects the likelihood of retaining a team and production, and why the type of product and supply agreements are interdependent, we will discuss further.

How do I keep my team? Only reservation?

In a situation where your employees are liable for military service and have no other legal grounds for postponement, the only way to keep your team is to book such employees. When we talk about the defence, technology and development sector, this is possible in 99.9% of cases if your company is designated as “critical”. The law stipulates that it can be critical both for defence and for the national economy. Which criterion is right for you depends on the type of product and the way it is supplied.

If I produce a product that is useful for the army, does it matter what its status is?

There is a difference, because not manufacturing or supplying all goods may mean that your company qualifies for criticality status. There is also a separate request to export a product, and in this case, there are completely different criteria, categories and approaches that can be the subject of a separate article.

For the sake of simplicity, we will refer to the categories of goods we analyse as “defence goods”. But this is indeed a very simplistic approach. The terminology in the legislation is extremely diverse: there are defence, military and dual-use goods, weapons and military equipment, goods to meet the needs of the Defence Forces, and there are also separate services and works and even technologies related to these goods.

For example, one of the criteria includes both defence goods and goods to meet the needs of the Defence Forces. And you might rightly ask: “What goods do I have?”

Since no regulation on procurement contains a definition of these goods, we resort to legal approaches and look for the source of these definitions. Thus, defence goods are defined by the Law of Ukraine “On Defence Procurement”, and they include: weapons, military and special equipment, weapons and ammunition, special technical means, intelligence, technical and cryptographic information protection, special communications, personal protection (e.g. bulletproof vests), computer, optical, measuring and other equipment.

In other words, the list is wide, but exhaustive.

Goods to supply the Defence Forces lead us on an even bigger quest. And we will not bore you with details, but we will clarify that it is important to determine the role of your product in meeting the needs of security and defence.

In addition, the general order of reservation (order 650) stipulates that the MoD should have its own list of enterprises, which includes those that, in particular, produce goods necessary to meet the needs of the Armed Forces. At the same time, special criteria for who should be included are yet to be developed by the MoD. Therefore, it is still a little difficult to say what is or will be included in this category of goods.

The recent criteria of the Ministry of Defence relate, among other things, to entities engaged in charitable activities. In short, the charitable sector is also critical for defence, as long as it systematically and extensively supports the Defence Forces, and in this case, the status of the goods will not matter at all, as they can be either weapons or humanitarian aid.

Works and services, and what about them?

If you have read the previous paragraphs carefully, you know the answer. Companies that provide services or perform work can also be recognised as critical.

Different criteria define different types of services and works. For example, the Ministry of Strategic Industries clearly defines services and works only in relation to the development, manufacture, repair, modernisation and disposal of weapons, military and special equipment, ammunition and their components. So, we are once again running into the status of a commodity.

And let’s not forget that the ‘specialised’ law on defence procurement has its own definition of ‘defence-related works and services’. They are, in particular, mentioned in the Ministry of Strategic Industry criteria.

The MoD’s approach to services can be described as far-sighted, if not progressive. After all, critical services and works are not only related to weapons and equipment, but also to training. For example, in July, the list of MoD criteria included organisations that train drone operators and electronic warfare specialists, as well as provide tactical medicine services.

We don’t want to confuse you even more, so we’ll just mention that a separate type of defence-related services and works is also included in the criteria from the Ministry of Digital Transformation for residents of Diia.City residents. They relate primarily to UAVs and various research and development activities, and are not directly related to the status of such facilities. Nevertheless, we are mentioning this area now because many technologies are related to UAVs and, under certain conditions, the path with the Ministry of Digital Transformation may be suitable for your product.

By the way, if you are thinking about exporting or setting up production abroad, forget everything mentioned above, well, almost everything. This game adds separate categories with different and multi-level regulation: dual-use and military goods, separate lists and international categories.

The status of goods is almost clear, but what about contracts?

Not all contracts are eligible for the criticality status, or almost all, but they need to be properly combined with the criteria and your products.

We have already mentioned the Law of Ukraine On Defence Procurement, which also contains definitions of different contracts and regulates their conclusion. It is more about direct and large-scale contracts with military formations for certain types of defence goods. At the same time, defence procurement can also be carried out under a simplified procedure, as provided for by Resolution 1275.

A supply method is always a document, contract or act. However, depending on the product, its specifics, the customer and the supplier, different delivery methods are suitable for different criticality criteria.

For example, the Ministry of Strategic Industries says that a company can have either government contracts (or be a co-executor of them) or contracts under a simplified procedure, as long as the fact of receipt by the end customer, the military, is confirmed. By the way, the method of such confirmation is also separately specified and further explained by the Ministry itself.

However, even after the clarification, many questions remain, including how to confirm the reporting on the fulfilment of contracts and the delivery of your goods to military units. Mostly, military units are the first customers of Miltech startups. It is also worth noting that there are situations when you have delivered goods and provided services or performed work that the customer (let’s say it is a military unit) has not formally accepted, because no one usually wants to put intangible assets on the balance sheet.

Another option is to conclude an agreement with a charitable foundation (another organisation that is willing to pay for your goods at its own expense) and/or a military unit.

Both the first and second options must be documented. But having a contractual basis is not enough. Contracts with foundations or third parties have additional requirements for additional documents (spoiler).

We have everything we need, can we apply?

So, you’ve figured out what type of defence product your product falls under, signed contracts and acts, and found out that you have a real chance of being booked. What’s next?

In addition to contracts and acts, you also need to take care of timely tax and other reporting. Again, in each case, this may be a different type of reporting. The main thing is that this reporting should help the company confirm that at least 50% of the products it manufactures and supplies are related to the defence sector.

Finally, it is important to make sure that employees are properly employed and that their data in the TCC and JV is properly updated. The booking process through Diia is not complicated. But the main thing is to ensure that all state registers actually have information about the company and the people to be booked. However, there are still cases where only paper-based bookings are being made, such as with beneficiaries.

Hopefully, it has become a little clearer. If not, you can always try to understand the primary sources in more detail: the order of the Ministry of Strategic Development, the explanation of the Ministry of Strategic Development regarding the order, and the Cabinet of Ministers’ Resolution No. 650, which is essential in booking issues. Or you can contact a lawyer and deal with more urgent matters.

Authors: Nadiia Denysiuk and Oksana Zadniprovska, partners at Axon Partners.