Conflict of interest in Ukroboronprom’ functions
State Concern Ukroboronprom has conflict of interests in arms’ export and import. Ukroboronprom has big preferences in export and import of arms and military equipment, and at the same time Concern gives approvals for other companies to act in this area. Concern is a state-owned business entity, but acts as state executive body – it fulfills regulatory functions in defense industry what ultimately leads to a conflict of interests. Such situation has to be changed through amendments to existing legal acts.
The system of export control in Ukraine is regulated by the The Law of Ukraine «On the State Control over International Transfers of Military and Dual-Use Commodities”. It determines the central executive body that implements state policy in export control system (State Service of Export Control), as well as ministries and other central executive bodies authorized by the law to carry out functions in state export control.
At the same time, together with those indicated executive authorities, Cabinet of Ministers also given to Ukroboronprom the right to participate in export control system, despite that Concern is business entity and cannot fulfill duties of state authority.
In accordance with the requirements of Government Decrees No.1228 from 12 July 1999 and No.838 from June 8, 1998, special exporters (authorized operators that have rights for international transfers of military and dual-use goods) must carry out marketing procedures and establish prices only having approvals of Concern. And the process for such approvals determined by the corresponding internal documents of Ukroboronprom.
For example, item #2. of CMU Decree N.1228 states that “company have to carry out marketing procedures and set external prices in agreement with Ukroboronprom”. CMU Decree N.838 states that “in order to obtain rights to export and import arms and military equipment any business entity have to provide to State Service of Export Control special approval from Ukroboronprom”. This approval contains information “about tactical and technical characteristics of arms and military equipment, as well as R&D data about creation (modernization) of weapons and military equipment, which may be the subject of discussion during negotiations with foreign business entities”. All companies can preliminary negotiate terms of supply of their own products with foreign customers and provide approximate price of such products, but only with pre-agreement with Ukroboronprom. Also they obliged to coordinate their activity (in terms of carrying out operations with military goods) with the Ukroboronprom, and establish external prices for military goods in agreement with Concern”.
Worth to note that many defense enterprises in Ukraine have authorization for economic activity connected with international transfers of military and dual-use goods, including their own products. However, more than half of these enterprises belong to Ukroboronprom.
According to the Law of Ukraine “On Foreign Economic Activity” the appointment of authorized economic entities that may carry out export-import operations can be done only by the Cabinet of Ministers of Ukraine. This law also proclaims that all business entities have to be equal, and no one company can control another business entity. The control over their activities is carried out by the State Service of Export Control and other authorized executive authorities (not by Concern). Such excessive unnatural functions of Ukroboronprom can lead to anti-competitive actions according to the Law of Ukraine “On Protection of Economic Competition”.
Thus, today we have two Government Decrees that contradict to above-mentioned laws of Ukraine and give preferences to one economic entity (Ukroboronprom) over other economic entities. At the same time, these preferences relate to such important aspects of economic activity as: 1) conduction negotiations with foreign companies 2) conclusion of foreign economic contracts for the sale (purchase) of military and dual-use goods, and 3) establishment of external prices in such contracts (including for own-produced products).
According to report of RAND Corp. “Security Sector Reform in Ukraine», Ukroboronprom has a conflict of interest. Its subsidiaries manufacture equipment for the Ukrainian military. Consequently, it has a disincentive to import items that might be supplied by its subsidiaries. Ukroboronprom has a reputation for excessively marking up import costs by 5–20 percent or more. By making it more difficult to import items Ukroboronprom may hope to develop Ukraine’s own defense industry. While this may be an understandable if not strategically optimal prioritization during peacetime, during wartime it prevents Ukraine from acquiring needed equipment.
All issues related to export control system should be carried out exclusively by the state authorities (ministry, agency or state service). If such state agency is not efficient, it is impossible to transfer its functions to economic entities. In this case it is necessary to reform the existing system of executive bodies, or put appropriate functions on a new central executive body.
The second option seems more attractive. And it fully fits into the general concept of reforming the Ukrainian military-industrial complex – creation of central executive body that ensures the formation and implements state military-industrial policy (in accordance with the Concept for the development of the security and defense sector of Ukraine and the draft Law of Ukraine “On the National Security of Ukraine“).
Thus, we need to make changes to the existing Government regulations in order to a) bring the norms of the existing Government Decrees (N.1228 and N.838) in line with Law of Ukraine “On the State Control over International Transfers of Military and Dual-Use Commodities”, b) simplify for business entities to be registered as special exporters and c) eliminate of potential conflicts of interest in export control system.
Such Draft of Government Decree is ready for consideration by the relevant Governmental Committee. Full text you can find following these links: