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Ukraine Open Thread 2024-209
News & views related to the war in Ukraine …
It seems that the Ukrainian army is now betting on holding Pokrovsk, a rail and road hub which happens to also hold the only coal mine usable for coke production. Without the Ukrainian coke the already damaged Ukrainian metallurgic industry will be in a steep decline.
The 72nd brigade was ordered from Ugledar in the south, where it had been in defensive positions over the last two years, towards the Pokrovsk salient. Following that move the Russian army launched an all out attack on Ugledar.
The Ukrainian units involved in the Kursk invasion are reportedly also getting called back to move towards Pokrovsk. But they have by now received a serious beating and have lost a lot of their armored vehicles and fighting capabilities.
Troops on the move are targets. Lets see how many are left when they arrive.
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The price of Ukrainian weapons: how the government shifts budget problems to manufacturers
The public discussion about the search by the Cabinet of Ministers for additional funding for the defense sector is taking place against the background of numerous statements by high-ranking officials about the priority of the domestic military-industrial complex (MIC) and its development.
Speaking during a large forum with the participation of the state leadership on August 27, Prime Minister of Ukraine Denis Shmygal focused on the success of the domestic military-industrial complex and on the steps taken by the government to support it: “we finance together with partners in the purchase of Ukrainian manufacturers. We can talk about hundreds of billions of hryvnias. Today we really have Ukrainian weapons of Victory in all areas: from Ukrainian artillery to exclusively Ukrainian drones. And we are continuing this work .”
He also said that the budget separately includes funds for supporting and reorganizing production in the Ukrainian military-industrial complex, as well as for purchasing products from Ukrainian manufacturers.
Statements about the priority of domestic producers were repeatedly made by the heads of the Ministry of Strategic Industry and the Ministry of Defense. The head of the Defense Procurement Agency, Marina Bezrukova, said in an interview with Forbes that by the end of the year , contracts for the purchase of weapons worth UAH 237 billion have already been signed. 70% of the amount of all agreements that the agency concluded in 2024 fall on domestic manufacturers of weapons, ammunition and military equipment.
However, against the background of positive reports of officials, the real situation with the financing of the defense sector remains out of sight, which today is quite difficult and can lead to serious negative consequences both for the military-industrial complex itself and, most importantly, for the country’s defense capability.
First, about long-term (three-year) contracts, which have been discussed so much at all levels and which manufacturers really need. As of today, none of the concluded three-year contracts have been funded .
In fact, these documents are nothing more than a piece of paper in the current conditions, because they are all concluded without taking financial obligations. According to the current legislation, financial obligations cannot be assumed for 2-3 years, but only within the current budget.
That is, the topic of long-term contracts for the defense industry is just PR . Moreover, as of today, there is no indication that anyone is going to launch this mechanism. After all, in order for long-term contracts to work, it is necessary to make changes to legislation and regulations. These changes are not even discussed now.
Secondly, against the background of the budget deficit, the Cabinet of Ministers laid a” time bomb”, which is about to explode, under the defense industry. Regular changes in the regulatory framework for the payment of supply remuneration have actually created conditions when the government shifts the problems of budget deficits in settlements with suppliers and manufacturers of weapons and military equipment to the shoulders of manufacturers.
So, in the winter of 2024, the Cabinet of Ministers, at the initiative of the Ministry of Economy, amended Resolution 1275, which changed the current procedure for receiving supply remuneration. According to the new rules, according to the customer, supply remuneration – the profit of enterprises that are producers or suppliers-is paid only after all the conditions of the state contract are fulfilled.
Previously, the manufacturer had the opportunity to deliver products in pairs and receive funds in parts, that is, shipped 10 out of 100 contracted units of production – received funds, received a profit that can be used in operating activities, spent on new developments, development, and modernization of production. Currently, the company receives these funds only after the shipment of the entire volume of contracted products. Since all production contracts are long – term-a year or more- the manufacturer will be able to receive funds only at the end of the contract . In the absence of other sources of funds for defense enterprises, because there is only one customer-the State, this leads not only to the stagnation of existing large enterprises (primarily private ones), but also to the knocking out of small manufacturers with innovative products.
The same situation applies to deliveries. An enterprise that enters into a contract for the supply of a particular product receives funds only for the purchase of foreign currency, a partial subscription in the amount of 50%, and its supply reward, which is 3% of the total contract value, will receive only when it has fully shipped the entire volume under this contract. For your understanding, such contracts are designed for 7-12 months and deliveries are carried out in pairs. That is, in fact, the company operates for a year without operating funds.
As a result, we have a situation where the state compensates for the lack of budget funds at the expense of producers or suppliers by washing out the working capital of enterprises without fully financing them.
A similar problem, which creates an additional financial burden on suppliers, exists in the issue of compensation for exchange differences. Now, due to a sharp increase in the foreign exchange rate, enterprises are faced with the fact that the estimated cost of the contract is significantly different from the real one. So, for example, the calculation of the cost of products under the contract a few months ago was made at one rate, say 42 hryvnia per euro, and today the euro is already 46 hryvnia. You can only review this price-adjust it according to the current exchange rate-based on actual costs. The exchange rate difference is returned to the company only after all products have been delivered and the final price of these products has been deduced. In various cases, tens of millions of working capital of enterprises are frozen for 10-12 months, that is, in fact, enterprises calmly lend to the state at the expense of funds that should go to development.
Also, there is a situation in which if the company does not have free working capital, it cannot fulfill the contract and eventually disrupts deliveries for the Defense Forces.
All this complex of problems creates a huge burden on defense enterprises and can have extremely negative consequences.
First, sooner or later, both public and private companies will not be able to ensure the fulfillment of contracts, they simply will not have enough margin of safety. In fact, even now, using the non-market mechanisms for regulating activities introduced in the regulatory framework, the Defense Procurement Agency creates artificial advantages for itself, cutting off other Ukrainian companies from deliveries. This is a direct path to the destruction of competition, creating a monopoly position for the agency and lack of control in its activities. And, as you know, the monopoly opens the way to corruption schemes and rising prices for products.
Secondly, in the long run, such a situation will necessarily result in a decrease in the volume of imported products, and for manufacturers – a decrease in production volumes due to the lack of working capital, as a result – a decrease in budget revenues, loss of qualified specialists, lack of new developments and development.
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The domestic military-industrial complex has been developing rapidly during the war years and provides large contributions to the budget. It so happened that in the conditions of the ban on the export of weapons and military equipment, domestic producers are locked in state suppliers. In addition, the country still does not have any credit programs for military-industrial enterprises. And even in such conditions, without any state support, private defense enterprises show tremendous growth, launch new production facilities, develop modern weapons, produce and supply them to the Defense Forces of Ukraine.
No one asks for support from the state, only fair rules are needed.
Vladislav Belbas , General Director of Ukrainian Armored Vehicles LLC
https://www.pravda.com.ua/columns/2024/08/30/7472639/ (will need a translation add-on.)
Posted by: Jeremy Rhymings-Lang | Sep 1 2024 17:38 utc | 88
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