“In today's conditions, Ukraine demonstrates positive dynamics in the development of the defense industry”: the NISS expert took part in the International Conference on Corporate Governance

The NISS expert from the Department of Economic Strategy of the Center for Economic and Social Studies Lyudmyla Shemayeva, Dr.Sc. (Economics), Professor, was included as a program committee member of the International Conference on Corporate Governance (Таllin, Еstоnia) that was held on 3-5 December, 2020, with the report «Features of ensuring financial security of enterprises of the defense industry of Ukraine».

The conference was organized by the Scientific Center of Innovative Researches OÜ, Estonia. To the membership of the consultative committee of the conference were invited: Liudmila Akimova (National University of Water and Environmental Engineering, Ukraine); Dr. Mykola Denysenko (Kyiv National University of Technologies and Design, Ukraine); Dr. Jolanta Góral-Półrola (Staropolska Szkoła Wyżcza W Kielcach, Poland); Dr. Olha Chyrva (Ukraine); Dr. Waldemar Gayda (Poland); Dr. Volodymyr Panchenko (Ukraine); Dr. Vasily Moskov (Czech Republic); Marta Karpa (Vasyl Stefanyk Precarpathian National University, Ukraine); Marta Kopytko (Lviv State University of Internal Affairs, Ukraine).

To the membership of the program committee of the conference were invited: Dr. Lyudmyla G. Shemayeva (National Institute for Strategic Studies, Ukraine); Dmytro Melnychuk (Zhytomyr Polytechnic State University, Ukraine); Dr. Vira Shepeliuk (Ukraine); Yana Koval (KROK University, Ukraine); Natalia Mospan (Poland); Svitlana Greben (Ukraine).

Presentation of the report “ Features for Providing Financial Security of the Ukraine’s Defense Industry Companies”

Defense industry companies that produce military products cannot exist in a sustainable manner and grow without certainty in the prospects for the demand in these products at both domestic and foreign arms markets. This is a necessary condition for the rational of a state military-technical policy, directly related to the development of the armament system of the armed forces, and other state military formations, scientific, technical, production-technological base of the defense industry, as well as improvement of military-technical cooperation with foreign states.

In the context of the continuation of the armed conflict in the Eastern Ukraine and the transformation of the state policy of development of the defense-industrial complex due to foreign policy factors, the model of a defense industry management is undergoing significant changes. The need to adapt to radical changes in the definition of domestic production and export-import policy has led to the use of – since 2014 – tools of crisis management of the defense industry and situational settlement of problematic issues related to its development and functioning.

In today's conditions, Ukraine demonstrates positive dynamics in the development of the defense industry. From 2015 to 2019, funding for the development, production, repair and modernization of armaments and military equipment was significantly increased, international cooperation was established through defense institutions, and sustainable development of the defense industry was identified in the state strategic and program documents as one of the priority areas. The documents aim at systematic transformation of the Ukrainian defense industry.

Though, there is a main (primary) objective contradiction between the development strategy of enterprises, including their operational activities, and the possibilities to financially support their development. The effect of this contradiction is the engine for financial security of the enterprise.

Certain features of the defense industry enterprises activity and, accordingly, risks and threats to their financial security, affect the nature of their financial activities. The modern structure of the defense industry of Ukraine consists of state-owned concern "UkrOboronProm" and other state defense enterprises, a special exporter "UkrSpetsExport", as well as private sector companies of the defense industry.

The analysis of the defense sector enterprises’ financial activities results of in Ukraine allowed to determine the specifics of ensuring the financial security of the enterprises and organizations, which is manifested in the following:

  • continue keeping a significant share of state ownership in the defense industry enterprises due to their strategic importance for the national security of the country with the gradual process of their corporatization;
  • rapid development of the private sector of the defense industry, which currently fulfills up to 60% of the state defense consumption, which increases the competition among governmental producers of defense products;
  • maintaining the monopoly role of the government as a key customer of defense products in the country, due to the fact that the state defense order (hereinafter referred to as – SDO) for the development and production of weapons and military equipment has an advantage over chaotic supply initiatives of enterprises and organizations;
  • high export potential of products created by defense industry enterprises of Ukraine in terms of liberalization of their foreign economic activity while maintaining the order of coordination of their marketing policy with the state in the face of state middle-man company "UkrSpetsExport";
  • special requirements for the quality of production, its know-how and manufacturability, long-term perspectives and capital intensity of the majority of investment projects implemented by enterprises of the defense industry;
  • long-lasting, mostly closed production cycle of defense products, the rupture of production ties with Russia, which requires increased import substitution of the components and spare parts;
  • high level of specialization and monopolization of producers, which determines the nature of pricing for manufactured products;
  • the main source of financial resources of defense industry enterprises comes from budget funding for the development and production of armaments and military equipment within the SDO, which has increased in recent years to 20-25% of the country's defense budget in accordance with NATO standards;
  • in Ukraine there is a practice of specific state advance payment (up to 80% of the cost of future products for up to 1.5 years) for the production of defense products within the SDO; while practicing non-advance financing of enterprises for the production of defense products for export;
  • special information conditions for the operation of defense enterprises, due to the requirements of secrecy, limiting cooperation and technology transfer;
  • lower, compared to civil production, speed of updating samples of products, the presence of a complex process of adopting the latest samples of products "in service" and putting it into serial production;
  • a significant level of depreciation of fixed assets of the government-owned defense industry enterprises (up to 80%), which requires a significant amount of investment resources for their technical rehabilitation;
  • need for significant amount of funding for fundamental and applied research and development of new perspective models of defense products with the actual limitation of their public funding within SDO;
  • presence of problems in the field of maintaining human resources at defense enterprises due to non-competitive wages, aging of highly qualified workers with experience, lack of vocational training programs and labor migration processes, etc.

These features provide a basis for clarifying the conceptual apparatus of the financial security of defense industry enterprises.

The authors offer a clarified meaning of the concept of "financial security of defense industry enterprises", which is as follows: this is such a financial condition, which forms resistance to internal, external, real and potential threats, as well as the ability to implement short-, medium- and long-term financial goals in accordance with the requirements of national security in the defense sphere on the basis of active promotion of the company's own economic interests, taking into account the interests of related subjects (stakeholders) of the external environment through a set of available resources, effective diagnostic tools and mechanisms, technologies for developing a set of preventive measures.

The full text of the report