Europe is changing the vector of its military support to Ukraine: Investments into production are slowly replacing donation weapons from Nato stockpiles.

It has to change as Europe has not invested into expanding its military production and after two and half years of war are scraping the bottom of the barrel as their own stockpiles run low.

The US doesn’t have this problem but has already for a year started scaling down its supplies to Ukraine from its own stocks as it wants to maintain its strategic reserves in case it gets pulled into a war in the Middle East or clashes with an increasingly aggressive China – or both. All of the ten F-16s supplied to Ukraine this summer came from Europe. Part of the $61bn aid package agreed on April 20 included more Patriots, not from the US stockpile, but in the form of money to place orders with US arms manufacturers to make new ones. The same conditions were placed on missiles promised to Ukraine as part of the most recent additional $8bn package donated by the US this month.

Europe has replaced the US as the main supplier of weapons but increasingly Ukraine is looking to produce its own munitions. The idea was first floated at a conference last year, when Ukrainian President Volodymyr Zelenskiy proposed to make Ukraine a military production hub.

Since then, the Ukrainian Military Industry has increased cooperation with Western companies. During the second international Defence Industries Forum (DFNC2) this month, members of the Ukrainian defence industry signed cooperation agreements with four companies from the US, France and Poland in the fields of ammunition and special chemicals, unmanned systems, radio-electronic intelligence and combat.

At the same time, the Ukrainian Armoured Vehicles company signed cooperation agreements with a Czech holding, Czechoslovak Group, which supplies components for ammunition production. The project will launch in early 2025, producing about 100,000 rounds of ammunition and more than 300,000 in 2026.

British arms manufacturing company BAE System was also at the event and plans to transfer M777 maintenance to Ukraine in cooperation with a Ukrainian company. American company AeroVironment signed an agreement with a Ukrainian company regarding the gradual localisation of Switchblade 600 kamikaze drone production.

The Ministry of Defence of Ukraine has already invested $4bn in the domestic defence industry this year and expects to attract even more in investment from Ukraine's international partners, who are already pledging specific amounts to support the growth of the military industrial complex.

Ukraine’s defence sector

The EU has provided a lot more military aid this year, the most recent being German Chancellor Olaf Scholz’s new €1.4bn package, but increasingly the aid is directed at building factories, not providing missiles. The EU signed off on a new grant of €440mn this year specifically to support the expansion of Ukraine’s defence sector.

The EU's recent decision to allocate $440mn to Ukraine to support its defence industry indicates a sharp turnaround in the bloc's approach to Russia's war. Denmark gave $190mn to develop Ukraine’s defence industry this month and part of the profits earned from Russia's frozen $300bn of assets will also be used. France, the UK, Italy and Germany have also announced their increased investment in the Ukrainian defence industry, as well as Estonia, which is interested in purchasing Ukrainian-made long-range missiles.

One EU diplomat noted: "Europe realises that it cannot produce the weapons that Ukraine needs, and the easiest way to fill the deficit is for the Ukrainians to do it themselves."

As reported by bne IntelliNews, it is not so much that Europe can’t supply Ukraine; more that it didn’t want to sign off on the longer procurement contracts with private arms producers needed for these companies to make the investments needed to massively expand their production. The issue was highlighted when EU foreign policy chief Josep Borrell promised to produce and deliver over one million shells to Ukraine by March of this year, but when the deadline came the EU sent less than 200,000 at a time when Russia was firing 10 shells to everyone Ukraine fired back.

The Western allies are now planning for a long war where Ukraine becomes more dependent on its own resources. In a broader sense, it is about Ukraine's gradual integration into the Western defence industry's supply chains. Zelenskiy is clear that he wants Ukraine to become a major European weapons maker by upgrading the state owned defence company Ukroboronprom, which has recently rebranded as the Ukrainian Defence Industry (UDI). as well as continuing investment into things like Ukraine’s drone production.

UDI has been the subject of reforms in recent years but has become the backbone of Ukraine’s defence industry, increasing its production and repair volume by 408% in the last year. Over the first three quarters of the current year, the UDI increased its revenue to UAH83bn from UAH55bn a year earlier. The company's net profit increased by 37.2% to UAH8.74bn.

There is a debate in the Rada on lifting the arms export ban imposed in March 2022 to allow companies like UDI to find international customers and so generate more resources to expand the domestic military industrial complex. Experts estimate that Ukraine is already capable of producing $20bn worth of drones alone each year, according to Oleksandr Marikovsky, chairman of the parliament's economic subcommittee, but is limited by the government’s $6bn a year of annual military spending, which is throttling investment. Some Ukrainian manufacturers, such as Ukrspecsystems, have already started producing drones abroad to circumvent export restrictions.

The German Marshall Fund believes investment in the Ukrainian military industry "ensures greater flexibility" and "provides greater potential in the short term." However, it will not replace the supply of Western-made weapons entirely.

The funds will go toward production of missiles, drones and other long-range weapons.

Partners and projects

The German defence sector giant Rheinmetall is probably Ukraine’s best corporate friend in Europe. The company has taken the lead and invested into expanding its production to meet Ukraine’s needs before deals were signed or governmental investment commitments were received. More recently, it has begun to actively invest into new factories in Ukraine itself.

Rheinmetall is establishing a joint venture with Ukraine to produce a large volume of vital and sorely needed 155mm artillery shells – the workhorse shell in the ongoing artillery duel. Rheinmetall, in partnership with Ukraine's defence conglomerate Ukroboronprom, has opened a facility focused on the repair and production of armoured vehicles. This plant, operational since June 2024, aims to maintain and produce various military vehicles, speeding up repair processes for Nato equipment damaged on the frontlines​ that currently have to be sent abroad to be fixed.

Still in the works, Rheinmetall plans to build several factories in Ukraine, focusing on manufacturing not just ammunition, but also military vehicles, gunpowder and anti-aircraft weapons.

Early in the war Ukraine was buying Turkish Bayraktar TB2 drones, which were so effective in Azerbaijan’s short war with Armenia. Bayraktar had promised to set up a factory in Ukraine, but the drones’ technology was quickly overtaken by Russian innovation and in the meantime, Ukraine has developed its own vibrant domestic drone production.

Ukraine outpaces Russia in the drone arms race now and expects to produce 4mn small strike drones in 2024 – nearly three times more than Russia’s 1.4mn. Ukraine's defence economy is proving to be more innovative, resilient, and adaptable, despite Russia’s larger size and imposed damage.

Ukraine has developed and improved on its own anti-ship Neptune missile that has sunk dozens of Russian ships, including the Black Sea fleet’s flagship, and driven the Russian navy out of its bases in the Crimea.

More recently, Zelenskiy also announced last month that Ukraine has developed and tested its own cruise missile, Palyanytsia. It was first deployed in August, and it has a range of approximately 600-700 km, allowing it to target Russian military airfields and Bankova doesn’t need US permission to use it. The Palyanytsia is a hybrid between a missile and a drone, which makes it unique and hard for Russian defences to counter. However, it is clear that Ukraine still doesn’t not have the capacity to produce a lot of these missiles quickly.

Drone manufacturers have been proliferating in the last two years as their FVP weapon has become a core part of Ukraine’s defences. However, with state grant support, many private manufacturers of heavy weapons and equipment have launched as well and for the first time in Ukraine's history, the private sector is engaged in missile production, Deputy Minister of Industry Hanna Hvozdyar said at the Defence Tech Valley forum.

Other initiatives include the launch of the joint production of mine clearance vehicles with Slovakia, localised in Ukraine, according to Prime Minister of Ukraine Denys Shmyhal. And Ukraine has deregulated its explosives market and is preparing to issue grants to construct gunpowder factories, which will start appearing next year, according to Minister of Digital Transformation Mykhailo Fedorov, who also spoke at the Defence Tech Valley summit.

Denmark is setting up an investment fund for Ukraine’s defence industry and to accelerate weapons production. Investors will receive an ownership share, access to information, and the opportunity to create joint ventures with Ukrainian manufacturers.

In turn, Slovakia will expand its military equipment repair operations on the border with Ukraine, which began operating last year. The facility, located in Slovakia, near the city of Michalovce, repairs damaged German military equipment used by the Armed Forces of Ukraine. The German company Krauss-Maffei Wegmann carries out repairs at the plant.

Also, by the end of the year Ukraine will receive additional AS90 artillery systems from the UK, the remaining 500,000 shells promised through the Czech initiative, and almost 5,000 Lithuanian combat drones, costing €5mn.

The Netherlands has reserved a total of €10.4bn for Ukrainian military aid, of which more than €6bn remains unspent. Moreover, British authorities are considering sending military instructors to Ukraine for joint training.

EU defence sector reforms

Belatedly, Europe is finally starting to invest into its own defence industry and received an added impetus by the Draghi report, which highlighted the lack of investment as a structural failing of EU planning and holding back Europe’s competitiveness.

Borrell has called Russia’s aggression against Ukraine an existential threat to the EU and for investment in defence technologies this week. Therefore, the determination of joint borrowing to finance Ukrainian military support should be carried out quickly while simultaneously strengthening Europe's competitiveness in critical sectors of the defence industry, which the report from former Italian Prime Minister and ex-European Central Bank boss Mario Draghi also highlighted as a key sector in need of investment.

Currently the EU spends €14.4bn annually on research and development in the military sphere, while the US allots €130bn. European investments are fragmented and distributed among countries, with only 18% of European defence equipment ordered jointly.

To remedy this, the EU has begun to combine its defensive production efforts. The European Defence Fund provides €8bn over seven years for defence research. Borrell added that the war in Ukraine demonstrates that using unmanned systems, artificial intelligence, space capabilities and other innovative technologies will be decisive in future hostilities.

Despite the progress in developing Ukraine’s defence sector, the unanswered question is will it be too little too late? The Armed Forces of Russia (AFR) are closing in on the key logistics hub of Pokrovsk in the Donbas, which is expected to fall in the coming months. That would be a major strategic blow for Ukraine and could allow the Russian forces to rapidly expand their territory right up to the Dnipro river that cuts the country in half.

With Ukraine fatigue amongst Ukraine’s Western allies growing palpable, Bankova (Ukraine’s equivalent of the Kremlin) continues to run out of men, money and materiel, making the war increasingly difficult to perpetrate. Zelenskiy may be forced into a second peace summit sometime this autumn where serious ceasefire talks may begin. With a fully functioning defence industry still several years away, he would go into those talks in a very weak position.