Ukraine's army remains poor as military export boom continues

While Ukraine’s Defense Ministry is struggling to feed its soldiers, the nation’s military hardware exporters are raking in record revenues, revealing a stark gap between the military-industrial complex and its poorly financed armed forces.

The government’s paltry financing of the armed forces in 2008 – Hr 9.9 billion or roughly $2 billion – amounted to about one percent of the gross domestic product, the defense minister complained, while the Russian Federation earmarked seven percent of GDP for its military and Turkey set aside five percent.

Defense Minister Yuriy Yekhanurov raised public alarm in early September when he said the army lacked funds to feed soldiers after November. He said he would draw from the armaments budget to pay for food in a ploy to draw attention to the military’s problems.

Meanwhile, Ukrainian military exporters, the majority of which are state-owned enterprises, generated an unprecedented $1 billion in revenues in 2007, according to Mykhailo Samus, assistant director of the Center for Army Conversion and Disarmament Research in Kyiv, a think tank.

The record sales, increasing about 20 percent year-on-year, preserved Ukraine’s position as a top ten world arms exporter.

The biggest arms exporter, UkrSpetsExport, reported record export sales of $300 million in the same period, the company said. Figures on profits are not publicized, Samus said.

Most revenues come from the export of Soviet-era hardware, ranging from finished rockets to helicopter engines, to former Soviet states, as well as governments in Africa, Asia and Latin America. Ukrainian factories also repair and update military equipment.

Azerbaijan is among the biggest clients for armaments such as artillery and aircraft. China consistently buys the most missiles and launch systems, while the Russian Federation’s helicopters exclusively use Ukrainian chopper engines.

The gap between prospering exporters (state-owned businesses that act as intermediaries) and the suffering military has formed because the entrepreneurs have no financial obligations to the armed forces, experts said.

The Hr 100 million ($20 million) that UkrSpetsExport paid in taxes last year funded the state budget, without being earmarked for the defense ministry, Samus said.

Although Ukrainian legislation requires financing the defense ministry with three percent of the gross domestic product (GDP), or about Hr 32 billion ($6.4 billion) for 2008, no government has even approached two percent of GDP, Samus said.

The Hr 9.9 billion allocated in this year’s budget by the government of former Prime Minister Victor Yanukovych is “the lowest rate in the years of independence,” Yekhanurov complained. “There hasn’t been a worse rate in relation to GDP.”

Yulia Tymoshenko, who took over as prime minister late last year, outdid her predecessor when unveiling the 2009 budget on Sept. 16, in which the military budget was boosted to Hr 17 billion (Hr $3.4 billion) but its percentage of GDP decreasing even further to 0.85 percent.

Although President Victor Yushchenko also suggested Hr 17 billion in military spending for the 2008 budget, he has criticized Tymoshenko’s offer, using the under-funded military as the latest round in attacks on his political rival.

Visiting a military training base on Sept. 18, the president said only $7 to $8 per day was allocated for feeding each Ukrainian servicemen - a quarter of what Russia spends. Meanwhile, “contract” volunteers in the army earned the equivalent of $175 per month – a fifth of what many Kyiv taxi drivers take home.

“My question to the government is: When will we at long last treat our own soldiers with respect?” Yushchenko said, threatening to veto the 2009 budget if defense spending didn’t increase.

Some analysts have said that Yushchenko’s attack against Tymoshenko on the military funding issue unfair, suggesting budget funding is simply too scarce year after year. Moreover, the president blocked attempts by the Tymoshenko government this year to boost state revenues by privatizing state-owned factories and firms, potentially raising $5 billion in fresh revenue that could have helped boost defense spending and help the nation’s broke healthcare system among other things.

Regardless of which government is in charge and who gets the blame, the consistent result is that Ukraine’s defense ministry can only buy three to five percent of the military hardware produced by the nation’s 300-plus military hardware factories, most of which are state-owned.

“We call that an inverted pyramid,” Samus said. “Russia has a square, buying 50 percent of its military production, and the U.S. has a pyramid, buying 95 percent.”

About a quarter of Ukrainian military hardware is bought by the Russian armed forces, experts said, all of which are parts, such as Motor Sich helicopter and airplane engines.

Ukrainians needn’t be concerned that their spare parts will be eventually used against them, Samus said, because Russia in turn exports much of its finished hardware.

But accusations from Russia that Ukraine supported the Georgian army are also unfounded, as UkrSpetsExport figures revealed that 6 percent of Ukrainian military exports are shipped to Georgia, or $60 million, equal to $13 per Georgian citizen. In comparison, the Ukrainian armed forces bought about $180 million in arms from its own factories in 2008, or $3.90 per Ukrainian.

Only the Ukrainian government is to blame for so much being exported, Samus said.

“The state is supposed to provide for the appropriate level of financing for the Defense Ministry, not the exporters,” Samus added.