Defence industry associations urge government to revise defence export resolution: key issues

The Ukrainian Council of Defence Industry, Tech Force in UA, NAUDI, and several other defence manufacturer associations have called for the Cabinet of Ministers to revise its defence export resolution. The document in question is Resolution No. 875, which came into force on 1 July, but has produced almost no results in more than two months.

Defender obtained a list of issues that need to be addressed from the Ukrainian Council of Defence Industry and also reached out to manufacturers for comment.

Advance payment for an export licence

Manufacturers name the excessively high export licence fee as the key concern. Under Resolution No. 875, a company must pay 20% of the value of finished goods or 30% of the value of the components it sells.

TFUA says the additional payment undermines the competitiveness of Ukrainian products and gives foreign competitors a price advantage. The associations therefore propose setting the rate at zero. Ahead of setting any non-zero rate, they recommend modelling the economic effects of scenarios at 0%, 5%, 10% and 20%.

At the same time, the manufacturer must pay for the licence before exporting the goods. Mykhailo Diachenko, CBDO of TAF Industries, says this approach creates additional financial burden and risk for the manufacturer.

‘If the contract is not fulfilled for reasons beyond the manufacturer’s control, funds paid in advance may not correspond to the actual results,’ he explains.

The Ukrainian Council of Defence Industry instead proposes collecting the payment after the contract has actually been fulfilled, or at the very least after the manufacturer has received payment under it. If the contract ultimately does not go ahead for reasons beyond the company’s control, a clear mechanism for refunding the amount paid must apply.

Transparent notification on critical goods

Another problem with the current model is that the contract can fall through if the state develops an intention to purchase the goods. In this case, the export licence may be refused or suspended. ‘The resolution does not clearly define which document confirms such an intention, within what timeframe it must be formalised into a procurement, or what happens if the procurement does not take place,’ the associations say.

The document currently states that the Ministry of Defence or another state customer that has announced its intention to purchase the goods must, within 30 calendar days, ‘take measures to conclude a state procurement contract with the entity’.

If the contract is ultimately not signed, the manufacturer may reapply for an export licence. On the second occasion, it cannot be refused for the same reason. The Ukrainian Council of Defence Industry is also calling for a transparent mechanism for informing about the list of critical goods that are not subject to export.

This list is currently approved by the Ministry of Defence quarterly, taking into account proposals from the General Staff, the Security Service of Ukraine and others. It is then submitted to the Interagency Commission on Export Control for approval.

In addition, the defence industry associations are calling for the minimum contract value to be reduced from UAH 15m. According to them, this creates a barrier for test and demonstration deliveries, which often mark the start of work with a new customer. At the same time, the resolution states that this restriction does not apply to components of goods.