How Ukraine's Weapons Innovation Model Keeps It Competing With Larger Russia

The Ukrainian government has encouraged free market innovation as a means of defending itself. This model has succeeded so well that it not only has kept Ukraine competitive with much larger Russia, but has spawned a new technology-based industry that may provide growth for the future. JL

Ian Lovett and Nikita Nikolaienko report in the Wall Street Journal:

Facing an invasion by an enemy with four times its population and an economy 10 times larger, Ukraine has built up its weapons production by embracing a hyper-capitalist model. Encouraged by tax cuts, deregulation and government grants, more than 200 new munitions companies have sprung up since the start of the invasion in 2022. They make everything from ammunition to gunpowder, though most produce drones. "We rely on entrepreneurs and innovation." This month, the country has produced 200,000 drones, more than double a year ago. “If you take the long-term view that Ukraine will survive as a free country, it’s a very compelling opportunity…The risk is built into the valuation.” 

When Andriy Bondarenko, a tech entrepreneur, began making drones, he had no experience with weapons. Working with a friend, it took him one month to develop a prototype, which they paid for with their own money.

A month later, their first explosive land drones were at the front, crossing muddy terrain to strike against Russian trenches. No government contracts or approvals were required. 

Just over a year later, Bondarenko’s company, Ark Robotics, has raised more than $1 million from investors, released 20 updated versions of its original drone, and is working on a communications system that lets pilots control drones from farther away.

Facing an invasion by an enemy with four times its population and an economy 10 times larger, Ukraine has tried to build up its weapons production by embracing a hyper-capitalist model. 

Encouraged by tax cuts, deregulation and government grants, more than 200 new munitions companies have sprung up since the start of the full-scale invasion in 2022, according to Ukrainian officials. Though they make everything from ammunition to gunpowder, most, like Ark Robotics, primarily produce drones. 

The open market in Ukraine stands in contrast to war production in Russia, where the government has bankrolled mass production of weaponry at state-owned factories. Kyiv cannot match Moscow’s output and remains heavily dependent on the West for supplies, especially long-range weapons. Once President-elect Donald Trump takes office in January, the flow of weapons from the U.S. could dwindle—which would only increase Ukraine’s reliance on its defense-technology startups to at least mitigate Russia’s advantage.

“In order to defeat Russia, we can’t just do what they do,” said Mykhailo Fedorov, the minister of digital transformation, who helped establish Ukraine’s drone industry. “They will always have more money. They will be able to build more factories. So we have to rely on entrepreneurs and innovation.”

Ark Robotics has raised more than $1 million from investors and released 20 updated versions of its original drone.

Ukraine is betting that defense-technology startups like Ark Robotics can help it overcome its far larger foe.

In modern warfare, weapons production often has played as crucial a role as anything on the battlefield. During World War II, the U.S. effectively stopped producing civilian cars, and auto factories began churning out guns, trucks, tanks and aircraft engines. Women stepped in to fill factory jobs that had previously been reserved for men. And by the end of the war, the U.S. was producing as much military materiel as the rest of the world combined.

It would have taken Ukraine years—and billions of dollars—to build a weapons industry on that scale. Kyiv is relying on smaller outfits to fill in. 

This month, according to Ukraine’s defense minister, the country has produced some 200,000 drones, more than double as many as a year ago. Ukrainian President Volodymyr Zelensky has said he hopes to produce at least 30,000 long-range drones next year, which Kyiv has already been using to hit fuel depots and other targets hundreds of miles inside Russia.  With 60 employees, Ark Robotics retains the flexibility of a startup. On a recent morning at one of its Kyiv facilities, engineers were outfitting half a dozen different machines—a few land drones, a Canadian-made amphibious drone, and a beat-up green Honda Civic—with the company’s remote piloting system, which lets one pilot control several vehicles at once. 

The old Civic could be used to deliver supplies to the front or evacuate wounded soldiers. Or, it could be loaded with explosives and driven at a Russian position, the company said.

“We have to get creative,” said Andriy Udovychenko, an operations lead for Ark. But while the war has helped smooth the path for developing new weapon systems, it has made mass producing them a nightmare. 

The electricity frequently cuts out and running generators adds significant costs. Many landlords don’t want to rent to drone companies, afraid they’ll become a target for Russian attacks. Bondarenko, the Ark CEO, said that he would only put his employees into workspaces with bomb shelters large enough to accommodate everyone—something few warehouses have.

The government has waived customs duties for aerial drones, shells, or other ammunition—and this month extended the benefit to land and sea drones as well, a boon for Bondarenko. Still, he is considering moving production to Poland.

 

“The government is doing everything they can to keep manufacturing in Ukraine,” Bondarenko said. “But there’s only so much they can do. They can’t just go build 100 new manufacturing facilities.” 

The Russians also are making their own drone army. Though Ukrainian forces have driven the innovation for most of the war, the Russians now quickly adopt the latest Ukrainian innovations—and are able to mass produce them, giving them an advantage along some parts of the front line, according to soldiers. Along with superior manpower and greater output of traditional munitions, the mass production of drones has helped Moscow seize more Ukrainian territory than at any point since the first weeks of the war. 

The Ukrainian government has also poured millions into a program to develop long-range missiles and other traditional weapons but has yet to use them in combat. 

Meanwhile, Ukrainian officials have tried to help its own companies scale up. Fedorov, the minister, said the government has doled out hundreds of millions in grants to defense-tech startups, plus spent far more purchasing drones, though he declined to release exact figures. (Fedorov, who helped build the drone army, recently had drone procurement removed from his portfolio, a move several drone company executives said they found concerning.) In addition, Kyiv last year launched a platform, called Brave1, to help connect defense-tech companies to foreign investors, including monthly conferences to showcase the latest new products. So far, Ukrainian defense-tech companies have drawn more than $40 million in foreign investment, according to Artem Moroz, who runs investor relations for Brave1. 

Still, the number of Western investors willing to risk putting money into Ukrainian defense companies is limited. 

Perry Boyle, an American investor, joined with two Ukrainians to found Mits Capital after the full-scale invasion began. He has since invested in 13 Ukrainian defense companies, with plans to add at least 10 more to its portfolio next year. He said most funds investing in the industry are small firms with some connection to Ukraine. 

 

At a recent Brave1 conference, out of 1,000 people in the audience, only four raised their hands when asked if they had written a check to a Ukrainian defense company. 

 

“There are a lot of shoppers, not a lot of investors yet,” Boyle said. “If you take the long-term view that Ukraine will survive as a free country, then it’s a very compelling opportunity…The risk is built into the valuation.” 

Unable to find investors, Oleksiy Babenko began making aerial drones in 2022 with his own money and testing them with soldiers at the front line. When his company, Vyriy Drone, was incorporated in spring 2023, they were making just 10 drones a month, which they sold directly to military units.

Today Vyriy has grown into a company with operating costs of $5 million a month that produces 10,000 drones a month, and recently signed its first contracts with the government. Though the contracts offer the company more financial stability, Babenko said, they also came with a set of more onerous requirements and regulations. 

 

“A lot of the processes are from the Soviet times,” he said. “Selling to soldiers, it’s simple. Either they want your drone or they don’t.” He still visits the front line every few months to test his equipment. During one recent trip, he spent 22 hours in the fields east of Chasiv Yar, a city currently under Russian assault, where he and an engineer tested the communications system between the pilots and drones, identifying a series of problems. Once they got back to Kyiv, they redesigned the antenna. 

“The Russians have started to produce a lot of jammers,” he said. “We make new frequencies, then they make new jammers. The frequency of change is getting faster and faster.”

All contracts with the military last only a year—a reflection of how quickly the demand for different types of drones changes. 

In addition, several months ago, the military introduced a new system to reward the most effective drone units. Each recorded strike is awarded a number of points based on what is hit. Those points can then be traded in for additional drones of the unit’s choosing.

As the government sees what drones they pick, it helps them know what is working best—and what to order more of, said Fedorov, the digital transformation minister. 

“Six months ago, one copter drone was the most popular—all the brigades asked for it. Today, it’s completely different, because they couldn’t keep up with the speed of change,” Fedorov said. “This is a race, and not many companies can keep up with the pace of change. That’s why I think it was right to bet on the open market.”