The crisis in Ukraine has put defense-industrial cooperation between Moscow and Kyiv at risk. An abrupt loss of defense-industrial ties with Russia would cause more damage to Ukraine’s economy, particularly in eastern Ukraine, which has already suffered greatly in the ongoing conflict. The Ukrainian defense industry includes enterprises crucial to the economic survival of some of the biggest cities there.

However, the damage would likely be felt well beyond the borders of Ukraine, due to the proliferation risks should Ukrainian defense factories lose Russia as a customer. Ukraine’s defense industry, which is second in size only to that of Russia in the former Soviet Union, is home to many scientists and engineers with critical expertise in sensitive areas that pose grave proliferation risks—nuclear and missile technology, to name just two at the top of the list. A breakdown in Russian-Ukrainian cooperation would leave these experts out of work and could expose their crucial know-how to rogue regimes and proliferators.

Eugene Rumer
Rumer, a former national intelligence officer for Russia and Eurasia at the U.S. National Intelligence Council, is a senior fellow and the director of Carnegie’s Russia and Eurasia Program.

Preventing such a loss of high-level knowledge is a task that cannot wait until the conflict between Russia and Ukraine is settled. The government of Ukraine needs help now to secure the most critical resources in its defense industry and to comply with its international nonproliferation commitments. The two countries best placed to support Kyiv in those endeavors, having provided similar assistance in the past, are the United States and Russia.

As of mid-2014, the idea of U.S.-Russian cooperation on anything to do with Ukraine seems impossible. However, considering the Ukrainian, U.S., and Russian interests at stake, such cooperation is urgently needed. Unless Moscow and Washington agree to fence off defense-industrial cooperation from the rest of their relationship and offer a helping hand to Ukraine now, all parties will have to contend with the consequences of their inaction later.

A Vast, Export-Driven Empire

Defense-industrial relations between Moscow and Kyiv have a long history. When the Soviet Union dissolved in 1991, Ukraine was left with about 30 percent of the Soviet defense industry on its territory, including about 750 factories and 140 scientific and technical institutions. At the time of the breakup of the Soviet Union, these institutions employed over 1 million people. In the early 1990s, a number of efforts were made to convert Ukrainian defense industries to civilian production, but they were soon abandoned.

In the two decades after the Soviet Union collapsed, Soviet-era technology was losing its competitiveness in world markets. Ukraine experienced a severe economic contraction and did not have a large enough military to sustain its oversized defense industry. As a result, companies that managed to survive became increasingly dependent on contracts from Russia.

Presently, 300 enterprises, institutions, and organizations employing over 250,000 people are licensed to produce arms and military equipment in Ukraine. Of those outfits, 75 are registered as manufacturers of defense products and services subject to state secrecy, including rocket and missile technology. The state holding company Ukroboronprom, established in 2010, oversees 134 Ukrainian state-owned defense industry enterprises that employ 120,000 workers.

However, Ukraine lacks a single center of control over its entire defense industry. As a result, regulatory, licensing, and export control functions are scattered across several government agencies and ministries. This fragmented regulatory system is further challenged by the present conflict with Russia and by uncertain governance, especially in eastern Ukraine.

Ukraine’s sprawling defense industry is sustained primarily by exports. The Ukrainian market, which includes fifteen government departments that are customers for domestic defense products, currently absorbs less than 30 percent of the country’s defense industry output. Ukraine exports the rest, in the amount of $1.3 billion worth of arms annually, which made Ukraine the eighth-largest arms exporter in the world between 2009 and 2013, according to a study by the Stockholm International Peace Research Institute (SIPRI).

Ukraine worked hard to enter the international arms bazaar in the 1990s and has managed to secure positions in some Asian and African countries, including in gray and black arms markets. Ukrainian arms exports cover the fields of aviation, shipbuilding, and missile technology. The consolidation of much of the Ukrainian state-owned arms industry into Ukroboronprom—whose sales reached $1.79 billion in 2013, an increase of 17 percent on the previous year—put the conglomerate on SIPRI’s list of Top 100 Arms Producers for 2011 and 2012. Though the arms industry has been used for revenue generation, little of the income was reinvested in the sector.

Close Ties to Russia

Of the foreign countries that support Ukraine’s export-driven defense industry, one stands out. Russia was the third-largest buyer of Ukrainian defense-related products from 2009 to 2013 after China and Pakistan. There are, however, parts and services that Russia currently imports only from Ukraine. Russia’s military depends on Motor Sich in the southeastern Ukrainian city of Zaporizhia for helicopter engines and on the Russian company Antonov’s plant in Kyiv for transport planes. Most importantly, the Russian army relies on the Southern Machine Building Plant Association, known as Yuzhmash, in the southeastern Ukrainian city of Dnipropetrovsk, which designs, manufactures, and services rockets and missiles.

Some of the most important ties between the two countries’ military industries relate to Russia’s strategic nuclear forces. More than half of the components of Russia’s ground-based intercontinental ballistic missiles come from Ukraine. Ukrainian specialists carry out regular inspections of Russia’s strategic missiles to certify them for service as well as supplying essential missile components including targeting and control systems for the RS-20 Voyevoda missile (known by NATO as the SS-18 Satan). At the same time that they rely on exports to Russia, many Ukrainian enterprises that manufacture defense products are also dependent on imported parts and materials—primarily from Russia.

The relationship between the Ukrainian and Russian defense industries had been bolstered by Russia’s ambitious military modernization program, on which Moscow plans to spend $720 billion by 2020. Russia’s defense spending has nearly doubled in nominal terms since 2007, and in 2014 alone it will grow by 18.4 percent. Russian enterprises, which were originally intended to fill all of the government’s equipment orders, are so “overworked,” as Russian Deputy Prime Minister Dmitry Rogozin said in December 2013, that the modernization program also relies on the Ukrainian defense industry.

The Impacts of the Ukraine Crisis

When political relations between Moscow and Kyiv deteriorated in early 2014, defense-industrial ties suffered too—at a time when Ukraine’s economy was already floundering due to years of economic mismanagement. Following Russia’s annexation of Crimea in March, Ukroboronprom decided to halt all exports of weaponry and military equipment to Russia. Yuriy Tereshchenko, then head of the company, announced that “with its act of aggression, Russia has broken the regular order of life. There are some types of weapons that Russia cannot make without Ukraine’s components. This is a long list, not one, two, or three items.” On June 17, Ukrainian President Petro Poroshenko imposed a ban on all military-technological cooperation with Russia.

However, Russian contracts are essential to the survival of Ukraine’s arms industry, and Russian media have reported that some companies like Yuzhmash continue to fulfill existing agreements. Russian Industry Minister Denis Manturov has valued the outstanding orders from Ukraine in the civilian and defense sectors at more than $15 billion and noted that breaking these contracts would adversely affect 79 Ukrainian and 859 Russian defense firms.

Despite these potential losses, Russian officials have been downplaying the impact that severing military and defense relations would have on both the modernization efforts and the current state of the Russian military. According to the Russian Defense Ministry, Russia has extended the service life of its RS-20 Voyevoda/SS-18 Satan missiles until 2019 to give the Russian defense industry enough time to develop the country’s domestically produced Sarmat missile system. As for other products, Russian President Vladimir Putin has stated that Russia will be able to replace defense-related imports from Ukraine within two and a half years.

Still, although Ukrainian exports represent only a small fraction—between 4 and 7 percent—of Russia’s overall military imports, many branches of the Russian military would suffer without these parts and systems. The defense industry would experience shortages of essential components, and weapon systems integral to Russia’s strategic nuclear forces could be compromised without regular Ukrainian servicing.

For Ukraine, a permanent loss of military manufacturing ties with Russia would be devastating in the short term. Ukraine makes few complete weapons systems other than T-84 tanks, some Soviet-era air-defense missiles and space satellites, and Antonov planes. Kyiv would struggle to find alternative markets for its mainstay production of Russian military hardware components.

The effective termination of contracts with Russia could lead to the collapse of some of Ukraine’s defense companies, which are a major source of employment, particularly in southern and eastern Ukraine. Such a collapse would likely result in unemployment levels in the defense industry not seen since the breakup of the Soviet Union.

Renewed Proliferation Concerns

The cutoff of defense-industrial ties between Russia and Ukraine is bound to exacerbate the economic crisis already afflicting Ukraine, especially in the east of the country, which is now suffering from a military conflict as well. Perhaps more worryingly, the crisis will also increase proliferation risks of dual-use, nuclear, and ballistic missile technology and expertise abroad.

This is not the first time that proliferation concerns have arisen in Ukraine. After the breakup of the Soviet Union, Ukraine had the largest proliferation potential after Russia in the form of scientists and specialists who found themselves out of work. In 1991, the United States launched a pioneering series of programs designed to ensure that the scientific and engineering talent of the former Soviet defense-industrial complex did not fall prey to rogue regimes and international proliferators.

The Nunn-Lugar Cooperative Threat Reduction (CTR) program, created by then U.S. senators Sam Nunn and Richard Lugar, sought to secure the Soviet Union’s nuclear legacy. Under the auspices of the initiative, U.S. government funding provided peaceful employment opportunities for tens of thousands of scientists and engineers in the former Soviet Union who otherwise would have been unemployed and left without means of survival in their own homeland.

The Nunn-Lugar CTR program was a resounding success and was recognized as such by the governments of both Russia and Ukraine. Between 1995 and 2012, the scheme invested more than $1.3 billion in Ukraine to remove old weapons systems, improve Ukraine’s border security, and help nuclear scientists, engineers, and specialists find alternative forms of employment. In 2012, the Russian government felt it no longer needed assistance from the United States, and an abridged successor arrangement was negotiated between the United States and Russia to continue their joint efforts in the area of nonproliferation.

Although the United States has suspended its cooperation with Russia in many areas following the annexation of Crimea by Russia, some cooperation on nonproliferation has continued. That cooperation must be maintained if the international community wants to help Kyiv protect its most sensitive defense-industrial expertise.

The importance of reducing the risk of proliferation should not be underestimated. The number of possible buyers of Ukraine’s nuclear and ballistic missile technologies is fairly small but includes China, North Korea, Syria, and Iran. Chinese and North Korean agents have on several occasions been caught attempting to break into Yuzhmash and acquire long-range ballistic missile technology. In 2012, two North Koreans were arrested for spying after they tried to steal classified missile technology from a Dnipropetrovsk-based designer of satellites and rockets. There also exists well-documented reporting of uncontrolled flows of small arms and light weapons into Syria through a group of Ukraine-based individuals and logistics companies known as the Odessa Network.

The risks of proliferation have worsened in recent months. The current political, economic, and military crisis in Ukraine has eroded the government’s capacity to enforce an effective nonproliferation regime. Despite the potential dangers of military and nuclear equipment falling into the wrong hands, Kyiv’s attention has been absorbed by more pressing concerns of restoring basic stability. The location of major Ukrainian defense industry enterprises in the east of the country, where government control is at its weakest, underscores the severity of the problem.

The government of Ukraine recently adopted new legislation on dual-use defense products that can be used in the production of missile weapons and enhanced export control over international transactions in the field of rocket technology. On paper, that brings Ukraine closer to fulfilling its international obligations under the Missile Technology Control Regime, an informal nonproliferation partnership it joined in 1998. However, in reality, implementing this legislation will be an additional challenge for a government besieged by many other more immediate challenges.

A Need for International Solutions

Both the United States and Russia have an interest in keeping Ukraine’s defense industry from collapsing. Along with supporting reforms aimed at curbing corruption and the enactment of necessary legislation, Washington and Moscow should begin discussions with Kyiv about funding efforts to ensure an orderly and gradual transformation of Ukraine’s defense industry. Those talks should take place bilaterally, trilaterally, or under the auspices of an international organization such as the Organization for Security and Cooperation in Europe, the International Atomic Energy Agency, or the European Bank for Reconstruction and Development.

The huge industrial complexes in eastern and southern Ukraine are in urgent need of restructuring and modernization. These factories still provide hundreds of thousands of jobs. The possibility of their collapse is fraught with dangerous consequences for Ukraine as well as for Russia and for U.S. security interests. The only viable solution is the gradual restructuring and/or winding down of these complexes. That will likely result in a major downsizing, which will in turn necessitate a program to retrain and employ scientists, engineers, and defense specialists to reduce the risk of proliferation.

Ukraine needs help. The United States and Russia can and should lead international efforts to save Ukraine’s defense industry. As difficult as this task may seem at present, the alternatives are worse. With so much at stake, if Washington and Moscow cannot find a way to work together now to address this urgent problem, the United States and Europe should spearhead the process toward developing a solution. Otherwise, the international community may face an even more dire situation in years to come.

Alexandra McLees is a junior fellow in the Carnegie Russia and Eurasia Program. Follow her on Twitter: @OlaMcLees