Ukrainian defense firms get creative to try and break through export restrictions

WASHINGTON — Ukraine recorded its largest presence ever at AUSA this year, with 14 companies attending as part of the stand-alone Ukrainian defense pavilion. This marked the country’s first return to the show since 2017, before Russia launched its full-scale invasion.

But despite the presence of these firms at America’s largest defense conference, a longstanding challenge remains: exporting weapon systems from Ukraine is inherently complicated.

“For Ukrainian defense companies, bringing our innovations to international markets is a pretty complex regulatory environment,” Yurii Hundych, chief commercial officer at Meta Bureau, told Breaking Defense on the sidelines of the show.

In April, in a long-awaited move, Ukrainian President Volodymyr Zelenskyy announced that the war-torn country would change its current export regime, which since 2022 has prohibited the transfer of military goods to other countries, to partially allow the sale of some domestically produced weapons to allies deemed non-cooperative with Russia.

At the time, the head of state stated in an X post that Ukrainian companies would receive “a real opportunity to enter partner countries’ markets,” provided that the country’s armed forces were entitled to obtain the required amount of weapons first and “only what companies can produce beyond state orders will be exported.”

However, six months later, Ukrainian firms tell Breaking Defense that a simple path forward has yet to materialize.

“There is a significant gap between the formal procedure and its practical implementation,” a spokesperson for Phantom Defense, who wished to remain anonymous for security reasons, told Breaking Defense in Lviv last month. “The industry is still gaining practical experience with the new export licensing process, and companies are exploring ways to navigate it. … But the licensing procedure can be a bottleneck for companies looking to start exporting.”

Instead, companies are left to pursue a variety of bureaucratic options, with no clear understanding of what will work or what won’t at any given time.

“While obtaining a traditional export license is a challenging process, we are exploring new innovative opportunities for international cooperation,” Hundych said during AUSA.

The Export Options

So how are companies trying to get around these obstacles? Industry officials say there are a number of ways. 

Denys Nikolayenko, CEO and co-founder of Oko Camera, a Ukrainian manufacturer of thermal and infrared cameras for drones and unmanned ground vehicles on the frontline, highlighted that the rules are different for dual-source companies such as his. He explained that since the company is registered and classified as a dual-use company, it has been exporting to European and non-European customers with much greater ease than his contemporaries, who are pure defense companies.

“For other defense companies, the [export] license process has been more complex to navigate and is essentially stuck. In fact, there is currently no working export [procedure] for Ukrainian defense tech: draft laws that will form policies on this matter are still pending,” Nikolayenko told Breaking Defense. “As a result, some Ukrainian producers are either not operating at full-capacity or reducing their production volumes, as government contracts currently do not cover all production of Ukrainian companies.”

Of course, pure military firms can’t simply claim to be dual-use and get around current restrictions, which leaves them looking for other solutions, including trying to get selected for defense efforts abroad.

For Meta Bureau, which claims over 30 Ukrainian brigades use its AI-powered drones, that includes participating in the US Department of Defense’s Drone Dominance program. “We see DDP as a promising way to build partnerships and expand our international presence,” Hundych said. (Hundych didn’t explain further how joining DDP would change exportability, but Kyiv, always eager to deepen ties with Washington, would likely allow Ukrainian drones selected by the Pentagon to move abroad.)

Another model that Ukrainian manufacturers have at their disposal are international partnership agreements signed with other allies.

Ukrainian firms have sought to sign cooperation agreements with foreign companies. Phantom Defense appears to be one such company, being present this week for the first time at the AUSA conference in Washington, promoting some of its counter-drone and electronic warfare systems abroad.

But, the spokesperson said, few of these agreements have actually resulted in sales: “According to analytical studies, there are more than 180 international partnerships in the Ukrainian defense industry, but more than 20 [percent] are still at the MoU stage and have not yet moved into practical implementation,” he said.

Other avenues for international cooperation that companies can consider, he added, include localizing production, where foreign government funding supports collaboration between a Ukrainian producer and an industrial partner outside Ukraine, and the “Danish model,” where another country funds Ukrainian firms to produce weapons which are then used both by Ukraine and sold back to the partner country.  

“The Danish model — direct procurement of Ukrainian systems financed by foreign governments — based on publicly available information, this one has provided a practical mechanism for authorities abroad to procure Ukrainian defense systems,” the Phantom representative said.

Unfortunately for these companies and others, an easy path forward doesn’t appear to be coming anytime soon.

According to Impact Law, a Ukrainian law firm, on July 8, the country’s Cabinet of Ministers formally adopted Resolution No. 875, dubbed “Certain Matters of International Transfer of Goods for the Duration of Martial Law in Ukraine,” covering both military and dual-use goods. Specifically, the resolution addressed the Drone Deal format, a separate, long-term partnership between Ukraine and allies focused on joint production or supply agreements in the field of unmanned systems.

In a report, the law firm explained that this new resolution “does not repeal the general export control procedures for military and dual-use goods” and that, to qualify for these exports, the State Service for Export Control must issue a license. The manufacturer must submit an application, along with other supporting documents, and the review period may not exceed 30 calendar days.