Introduction
Over four years of full-scale war, Ukraine has undergone a significant structural transformation. From a country with an underdeveloped domestic defence industrial base - one that relied on imports even for basic components at the outset of the conflict - Ukraine has evolved into a substantial centre of military innovation and defence technology development within Europe.
This transformation has been driven by both government policy and private sector initiative, responding directly to the operational demands of an active frontline. The result is a defence manufacturing ecosystem that is technically modern, battle-tested, and increasingly oriented toward international partnership.
Context and Key Figures
At the time of Russia's full-scale invasion in February 2022, Ukraine's defence industrial complex was largely dormant and its armed forces were mid-reform. External allied assistance - notably from the United States, Estonia, and Poland in the earliest phase - was a critical factor in Ukraine's ability to stabilise the front.
In parallel, Ukraine's private sector responded rapidly to frontline requirements. At the start of the invasion, fewer than 100 defence companies were operational in Ukraine. By end-2022, that figure had grown to approximately 300 (around 100 state-owned and 200 private). By end-2025, it had reached approximately 1,000 companies.
According to the Office of the President of Ukraine, by end-2025 Ukraine was independently meeting approximately half of front-line requirements across key categories. The dominant output consists of unmanned systems, both reconnaissance and interceptor UAVs, as well as medium- and long-range strike drones.
A notable feature of this environment is the pace of iteration. Ukrainian manufacturers gain a competitive edge through constant information exchange with active frontline units, enabling rapid product development cycles. Equipment that was considered state-of-the-art weeks earlier may require revision shortly thereafter; the operational environment imposes a standard of relevance that peacetime production cannot replicate.
Despite this technical capacity, Ukrainian manufacturers are, on average, operating at approximately 40% of their production potential, some as low as 20-30%. The primary constraint is not manufacturing infrastructure but insufficient order volume and funding. Although Ukraine allocates over 1/3 of its annual state budget to defence, this remains not enough to bring production to full capacity, creating a structural gap that international partnerships could help address.
A Fundamental Policy Shift
One of the most consequential changes in Ukraine's defence industrial policy has been the shift from a near-total prohibition on defence exports - in place through 2022 - to a framework of regulated export and active international engagement by 2026.
This transition reflects both economic and strategic logic. International orders allow Ukrainian manufacturers to increase production volumes and revenues, while the state benefits from associated tax receipts. For partner countries, access to battle-proven technology and expertise represents a complementary rationale for engagement.
What Ukraine Offers: The Investment Case
Ukraine has moved from being a recipient of aid to becoming an active commercially engaged participant in the international defence and military technology market. Two principal modalities exist for foreign companies and investors wishing to engage with Ukraine's defence sector: direct investment into Ukraine (Build in Ukraine) and cooperation with Ukrainian manufacturers with production located outside Ukraine (Build with Ukraine).
Build in Ukraine
Establishing a defence business in Ukraine may offer opportunities both to existing defence sector participants seeking to expand operations and to new market entrants. A number of major international defence companies have already established subsidiary operations in Ukraine, including Rheinmetall, KNDS Deutschland, BAE Systems, Thales, and Indra Group, among others.
Entry may be structured through the incorporation of a Ukrainian subsidiary or representative office, or through a joint venture with an existing Ukrainian manufacturer. Each structure carries different implications for regulatory compliance, IP ownership, and tax treatment, and appropriate legal and tax advice should be sought at the outset.
Ukraine has introduced a dedicated legal regime for qualifying defence companies known as Defence City. Resident status is available to companies whose total revenue for the previous calendar year consists of at least 75% of qualifying income - that is, income derived from the sale of military goods, services, or works.
The benefits available to Defence City residents are essential and include: exemption from corporate income tax (where profits are fully reinvested in business development); exemption from land tax, real property tax, and environmental levies; a simplified export procedure for military goods manufactured in Ukraine; removal of company information from public registers for security purposes; and certain relaxations on foreign currency transactions.
A further significant benefit is the right to exempt 100% of employees from mobilisation (a military service duty) - an important consideration for attracting and retaining skilled technical personnel in the current environment.
As of end-May 2026, the Defence City regime had 31 resident enterprises, including manufacturers of unmanned systems and missile armaments. The aggregate qualifying revenue of residents from defence product sales had reached UAH 89.7 billion (approximately USD 2.16 billion), as reported by the Ministry of Defence.
A further practical consideration for companies evaluating production localisation in Ukraine is the cost structure. Production costs are estimated to be 30-50% lower than equivalent operations in Western Europe, and the cost of employing qualified engineers and technical specialists is approximately 3-5 times lower. These differentials may be relevant to investors' financial modelling, though they should be assessed alongside the risk factors discussed below.
Build with Ukraine
The alternative model involves partnering with existing Ukrainian enterprises to establish joint venture structures with production located outside Ukraine. Examples of such partnerships in operation include General Cherry (Ukraine) and Wilcox Industries (USA), Frontline Robotics (Ukraine) and Quantum Systems (Germany), TAF Industries (Ukraine) and THYRA (Germany), and Auterion (Germany) with Airlogix (Ukraine).
The underlying premise of this model is the combination of Ukrainian combat expertise and product iteration capability with a partner's manufacturing scale, supply chain, and logistics infrastructure. This structure, however, may require compliance with Ukraine’s export control regulations.
Ukraine's export control framework remains valid and should be understood clearly by prospective partners. The State Service for Export Control of Ukraine (SSECU) is the competent authority for export licensing. At the III Investment Forum of the Association of Ukrainian Lawyers on 24 April 2026, the Acting Head of SSECU, Oleh Tsilvyk, articulated the framework within which export approvals are structured: product transfer, integration, training, and post-delivery support. Outright, unconditional technology transfer is unlikely to receive authorisation. Where, however, the structure preserves Ukrainian intellectual property ownership and involves ongoing Ukrainian participation, including, ideally, a commitment to supply a portion of jointly produced items to the Ukrainian Armed Forces, export authorisation is feasible and already has been granted in a number of cases.
In this regard, prospective partners are recommended to engage a legal counsel with experience in Ukrainian export control matters at an early stage of structuring any cooperation arrangement, before commercial terms are agreed.
Drone Deal: The State Cooperation Programme
Drone Deal is a Ukrainian state programme providing a structured framework for the international transfer of Ukrainian defence expertise and technology, with the potential for joint production arrangements. It operates as a multi-year international cooperation programme, integrating Ukrainian combat experience, supply chains, and defence industrial capacity.
The programme covers a wide range of project types tailored to the specific needs of each partner country, including air defence capability development, drone technology scaling, training programmes, and defence industrial manufacturing. The ten-year agreement structure is designed to provide a stable framework for sustained cooperation financing.
According to Ukraine's National Security and Defence Council, as of late April 2026, the first ten-year agreements had been concluded with the UAE, Saudi Arabia, and Qatar, with requests received from eleven further countries. Negotiations are ongoing with a number of European states, including Germany, Norway, Italy, the Netherlands, Sweden, the United Kingdom, and France.
The programme's structure - government-to-government at the framework level, with the potential for private sector participation in specific projects - means that foreign companies should monitor the progress of negotiations in their home countries negotiations and consider engaging relevant government counterparts to understand the terms of future bilateral arrangements.
Risk Considerations
Engagement with Ukraine's defence sector involves a distinct risk profile that prospective investors and partners should assess carefully and with appropriate professional advice.
Operational and security risk is inherent. Ukraine is an active conflict zone, and any investment or production activity within Ukrainian territory carries physical and business continuity risk that does not apply in peacetime environments. Insurance, force majeure provisions, and operational contingency planning require particular attention.
Regulatory and sanctions complexity is significant. Defence-related transactions involving Ukraine may engage export control regimes in multiple jurisdictions, including those of the EU, US, and UK. Transactions should be reviewed for compliance before execution.
Rule of law and contract enforcement, while improving, remain areas where Ukraine's institutional development is ongoing. IP protection, enforcement of commercial contracts, and administrative predictability should be evaluated as part of due diligence.
These risks do not preclude possibility of investing, but they demand the same careful approach as any investment in emerging markets, taking into account additional factors related to the ongoing conflict.
Engaging with Ukraine: Practical Steps
Access to Ukraine's defence sector is primarily relationship-driven. The majority of private Ukrainian defence companies are actively seeking international partners and are oriented toward export markets. This creates a market dynamic in which the principal barriers to entry are informational factors (such as identifying a suitable counterparty) rather than substantive ones.
A structured approach to market entry would typically involve the following steps:
1. Market analysis and sector mapping. Investors should begin by identifying the sub-sectors - unmanned systems, electronic warfare, counter-drone technology, ammunition, air defence - that are most relevant to their existing capabilities or strategic interests. Sector-specific consulting firms operating within the Ukrainian defence market can provide initial orientation.
2. Partner identification and due diligence. Ukrainian defence companies vary significantly in scale, technical maturity, export readiness, and ownership structure. Thorough due diligence, covering corporate structure, beneficial ownership, IP ownership and licensing, existing government contracts and exclusivity obligations, export authorisation history, and sanctions screening, is essential before any commitment is made.
3. Structure and documentation. The appropriate legal structure will depend on the chosen modality (Build in Ukraine vs Build with Ukraine), the parties' respective contributions, IP allocation, and export control requirements. Joint venture agreements, technology licensing arrangements, and supply agreements are among the most common tools. Ukrainian legal counsel with defence sector experience should be engaged alongside advisers in the investor's home jurisdiction.
4. Government engagement. Key Ukrainian government counterparts include the Ministry of Defence, the Ministry of Strategic Industries, and SSECU. Early engagement with these bodies, and with Ukrainian government representatives in the investor's home country where available, can assist in navigating the regulatory and licensing process.
5. Participation in sector forums and exhibitions. Dedicated defence industry events in Ukraine and internationally remain an effective channel for establishing direct contact and gaining market visibility.
Conclusion
Ukraine's defence sector has undergone a structural transformation in four years of conflict that would, under normal circumstances, take decades. The country now hosts a substantial and technically sophisticated defence manufacturing base, a supportive regulatory framework for foreign participation, and an active state-level programme for international cooperation.
For companies and investors with an existing presence in the defence sector, or those considering entry, Ukraine deserves significant attention. The combination of cost-competitive production, frontline-validated technology, and state incentives for foreign participation creates a commercially coherent proposition, one that is, in a number of respects, differentiated from what is available elsewhere in Europe.
Engagement requires careful structuring, thorough due diligence, and specialist legal and regulatory advice. Those who approach the market with appropriate preparation stand a good chance of capitalizing on one of the most lucrative investment opportunities in the European defence sector.
